10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

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

For the transition period from                      to                     

Commission file number: 000-50230

FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.

(Exact name of Registrant as specified in its charter)

Virginia	54-1873198
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1001 Nineteenth Street North

Arlington, VA 22209

(Address of principal executive offices)

(Zip code)

(703) 312-9500

(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definitions of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer    x            Accelerated filer    ¨            Non-accelerated filer    ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):     Yes  ¨    No  x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

Title	Outstanding
Class A Common Stock	161,160,954 shares as of October 31, 2006
Class B Common Stock	13,225,249 shares as of October 31, 2006

FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2006

INDEX

		Page
Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements—(unaudited)
	Consolidated Balance Sheets—September 30, 2006 and December 31, 2005	3
	Consolidated Statements of Operations—Three Months Ended September 30, 2006 and 2005	4
	Consolidated Statements of Operations—Nine Months Ended September 30, 2006 and 2005	5
	Consolidated Statements of Changes in Shareholders’ Equity—Nine Months Ended September 30, 2006 and Year Ended December 31, 2005	6
	Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2006 and 2005	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48
Item 4.	Controls and Procedures	51
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	54
Item 6.	Exhibits	54
	Signatures	55

2

PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements and Notes—(unaudited)

FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

	September 30, 2006			December 31, 2005
ASSETS
Cash and cash equivalents	$	365,121		$	238,615
Restricted cash		4,081			6,101
Receivables:
Interest		66,671			83,614
Due from servicer		65,023			129,578
Securities sold		946,063			—
Other		99,822			46,327
Investments:
Mortgage-backed securities, at fair value		5,971,276			8,002,561
Loans held for investment, net		—			6,841,266
Loans held for sale, net		5,668,669			963,807
Long-term investments		242,111			347,644
Reverse repurchase agreements		120,103			283,824
Trading securities, at fair value		488,084			1,032,638
Due from clearing broker		154,570			71,065
Derivative assets, at fair value		55,229			70,636
Goodwill		162,765			162,765
Intangible assets, net		22,807			26,485
Furniture, equipment, software and leasehold improvements, net of accumulated depreciation and amortization of $33,317 and $24,295, respectively		44,614			46,382
Prepaid expenses and other assets		181,046			82,482
Total assets	$	14,658,055		$	18,435,790
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Trading account securities sold short but not yet purchased, at fair value	$	81,484		$	150,547
Commercial paper		3,720,804			6,996,950
Repurchase agreements		2,687,363			2,698,619
Securities purchased		1,358,462			—
Derivative liabilities, at fair value		60,354			31,952
Dividends payable		8,751			34,588
Interest payable		12,939			12,039
Accrued compensation and benefits		34,537			82,465
Accounts payable, accrued expenses and other liabilities		129,451			82,576
Temporary subordinated loan payable		—			75,000
Securitization financing		4,942,263			6,642,198
Long-term debt		324,447			324,686
Total liabilities		13,360,855			17,131,620
Minority Interest		133,519			—
Commitments and Contingencies (Note 10)
Shareholders’ equity:
Preferred Stock, $0.01 par value, 25,000,000 shares authorized, none issued and outstanding		—			—
Class A Common Stock, $0.01 par value, 450,000,000 shares authorized, 161,166,929 and 159,373,483 shares issued, respectively		1,612			1,594
Class B Common Stock, $0.01 par value, 100,000,000 shares authorized, 13,225,249 and 13,480,249 shares issued and outstanding, respectively		132			135
Additional paid-in capital		1,551,248			1,547,128
Employee stock loan receivable (9,600 and 551,342 shares)		(72	)		(4,018	)
Deferred Compensation, net		—			(15,602	)
Accumulated other comprehensive (loss) income, net of taxes		(17,691	)		(977	)
Accumulated deficit		(371,548	)		(224,090	)
Total shareholders’ equity		1,163,681			1,304,170
Total liabilities and shareholders’ equity	$	14,658,055		$	18,435,790

See notes to consolidated financial statements.

3

FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,
	2006			2005
Revenues:
Investment banking:
Capital raising	$	6,852		$	86,035
Advisory		5,826			3,026
Institutional brokerage:
Agency commissions and principal transactions		22,730			24,793
Mortgage trading interest		13,845			11,304
Mortgage trading net investment loss		(1,546	)		(2,401	)
Asset management:
Base management fees		4,880			7,914
Incentive allocations and fees		(31	)		832
Principal investment:
Interest		150,649			144,401
Net investment (loss) income		(170,621	)		4,866
Dividends		4,750			8,772
Mortgage banking:
Interest		22,476			27,280
Net investment income		16,092			17,600
Other		6,540			5,479
Total revenues		82,442			339,901
Interest expense		165,237			156,373
Provision for loan losses		—			4,890
Revenues, net of interest expense and provision for loan losses		(82,795	)		178,638
Non-Interest Expenses:
Compensation and benefits		69,405			88,348
Professional services		14,308			16,158
Business development		7,577			8,815
Clearing and brokerage fees		2,917			2,363
Occupancy and equipment		12,909			9,397
Communications		6,471			5,561
Other operating expenses		23,291			16,861
Total non-interest expenses		136,878			147,503
Operating (loss) income		(219,673	)		31,135
Other Income:
Gain on sale of subsidiary shares		121,511			—
Net (loss) income before income taxes and minority interest		(98,162	)		31,135
Income tax (benefit) provision		(26,062	)		8,090
Minority interest in loss of consolidated subsidiary		(4,708	)		—
Net (loss) income	$	(67,392	)	$	23,045
Basic (loss) earnings per share	$	(0.39	)	$	0.14
Diluted (loss) earnings per share	$	(0.39	)	$	0.14
Dividends declared per share	$	0.05		$	0.34
Weighted average shares outstanding:
Basic		172,091			169,745
Diluted		172,091			170,490

See notes to consolidated financial statements.

4

FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)

	Nine Months Ended September 30,
	2006			2005
Revenues:
Investment banking:
Capital raising	$	118,304		$	267,887
Advisory		14,976			10,344
Institutional brokerage:
Agency commissions and principal transactions		82,111			75,934
Mortgage trading interest		48,638			11,304
Mortgage trading net investment loss		(2,992	)		(2,401	)
Asset management:
Base management fees		15,042			24,195
Incentive allocations and fees		924			1,187
Principal investment:
Interest		413,388			360,021
Net investment (loss) income		(175,726	)		18,746
Dividends		12,508			20,583
Mortgage banking:
Interest		66,856			49,182
Net investment income		56,231			35,640
Other		16,992			17,138
Total revenues		667,252			889,760
Interest expense		446,909			334,920
Provision for loan losses		15,740			6,028
Revenues, net of interest expense and provision for loan losses		204,603			548,812
Non-Interest Expenses:
Compensation and benefits		224,634			244,162
Professional services		41,498			49,994
Business development		30,266			36,215
Clearing and brokerage fees		8,315			6,435
Occupancy and equipment		36,383			23,893
Communications		18,091			14,893
Other operating expenses		69,261			45,695
Total non-interest expenses		428,448			421,287
Operating (loss) income		(223,845	)		127,525
Other Income:
Gain on sale of subsidiary shares		121,511			—
Net (loss) income before income taxes and minority interest		(102,334	)		127,525
Income tax (benefit) provision		(26,541	)		26,825
Minority interest in loss of consolidated subsidiary		(4,708	)		—
Net (loss) income	$	(71,085	)	$	100,700
Basic (loss) earnings per share	$	(0.41	)	$	0.60
Diluted (loss) earnings per share	$	(0.41	)	$	0.59
Dividends declared per share	$	0.45		$	1.02
Weighted average shares outstanding:
Basic		171,376			169,166
Diluted		171,376			170,122

See notes to consolidated financial statements.

5

FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)

	Class A Number of Shares	Class A Amount		Class B Number of Shares		Class B Amount			Additional Paid-In Capital			Employee Stock Loan Receivable			Deferred Compensation, net			Accumulated Other Compre- hensive (Loss) Income			Retained Earnings (Accumulated Deficit)			Total			Compre- hensive (Loss) Income
Balances, December 31, 2004	143,967,205	$	1,440	24,929,599		$	249		$	1,483,640		$	(4,890	)	$	(16,863	)	$	(38,162	)	$	153,110		$	1,578,524
Net loss																						(170,910	)		(170,910	)	$	(170,910	)
Conversion of Class B shares to Class A shares	11,449,350		114	(11,449,350	)		(114	)																	—
Issuance of Class A common shares	3,956,928		40							63,211						1,261									64,512
Repayment of employee stock purchase and loan plan receivable													1,149												1,149
Interest on employee stock purchase and loan plan										277			(277	)											—
Other comprehensive income:
Net change in unrealized gain (loss) on available-for-sale investment securities, (net of taxes of $395)																			39,481						39,481			39,481
Net change in unrealized gain (loss) on cash flow hedges																			(2,296	)					(2,296	)		(2,296	)
Comprehensive loss																											$	(133,725	)
Dividends																						(206,290	)		(206,290	)
Balances, December 31, 2005	159,373,483	$	1,594	13,480,249		$	135		$	1,547,128		$	(4,018	)	$	(15,602	)	$	(977	)	$	(224,090	)	$	1,304,170
Net loss																						(71,085	)		(71,085	)	$	(71,085	)
Reclassification of deferred compensation to additional paid-in capital										(15,602	)					15,602									—
Conversion of Class B shares to Class A shares	255,000		3	(255,000	)		(3	)																	—
Issuance of Class A common shares	1,538,446		15							16,093															16,108
Repayment of employee stock purchase and loan plan receivable													4,143												4,143
Interest on employee stock purchase and loan plan										197			(197	)											—
Stock compensation expense for stock options and Employee Stock Purchase Plan										3,432															3,432
Other comprehensive income:
Net change in unrealized gain (loss) on available-for-sale investment securities, (net of taxes benefit of $481)																			20,628						20,628			20,628
Net change in unrealized gain (loss) on cash flow hedges																			(37,342	)					(37,342	)		(37,342	)
Comprehensive loss																											$	(87,799	)
Dividends																						(76,373	)		(76,373	)
Balances, September 30, 2006	161,166,929	$	1,612	13,225,249		$	132		$	1,551,248		$	(72	)	$	—		$	(17,691	)	$	(371,548	)	$	1,163,681

See notes to consolidated financial statements.

6

FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2006			2005
Cash flows from operating activities:
Net (loss) income	$	(71,085	)	$	100,700
Non-cash items included in earnings:
Gain on sale of subsidiary stock		(121,511	)		—
Lower of cost or market write-down for mortgage loans		146,823			—
Minority interest in loss of consolidated subsidiary		(4,708	)		—
Incentive allocations and fees and net investment income from long-term investments		41,781			(20,391	)
Premium amortization on mortgage-based securities and loans held for investment		33,623			58,077
Derivative contracts marked-to-market		3,245			(2,026	)
Depreciation and amortization		13,631			9,678
Amortization of premium on interest rate cap		14,130			—
Loan provisions		45,596			5,789
Other		9,405			7,919
Changes in operating assets:
Restricted cash		2,020			(14,420	)
Receivables:
Interest		16,944			(41,319	)
Due from servicer		64,555			(85,512	)
Other		(27,101	)		(17,615	)
Due from clearing broker		(83,506	)		(67,512	)
Trading securities		(1,071,208	)		(1,421,803	)
Originations and purchases of mortgage loans held for sale, net of fees		(5,468,764	)		(4,177,109	)
Cost basis on sale and principal repayment of loans held for sale		5,296,612			2,704,559
Prepaid expenses and other assets		(42,530	)		(49,083	)
Reverse repurchase agreements related to broker dealer activity		65,149			(167,376	)
Changes in operating liabilities:
Trading account securities sold but not yet purchased		(69,063	)		139,252
Repurchase agreements related to broker-dealer activities, net		(350,066	)		1,645,363
Accounts payable, accrued expenses and other liabilities		3,653			16,382
Accrued compensation and benefits		(45,148	)		(57,560	)
Net cash used in operating activities		(1,597,523	)		(1,434,007	)
Cash flows from investment activities:
Purchases of mortgage-backed securities		(4,328,615	)		(1,912,947	)
Receipt of principal payments on mortgage-backed securities		607,132			3,024,039
Proceeds from sales of mortgage-backed securities		7,768,245			998,296
Proceeds (purchases) of reverse repurchase agreements, net		98,570			(137,363	)
Purchases and origination of loans held for investment		(1,228	)		(6,851,467	)
Proceeds from sales of real estate owned		18,116			—
Receipt of principal repayment from loans held for investment, including loans reclassified to held for sale		1,676,650			279,458
Proceeds from sales of loans held for investment		351,662			—
Purchases of long-term investments		(38,733	)		(67,258	)
Proceeds from sales of long-term investments		133,784			78,274
Purchase of First NLC Financial Services, LLC, net cash		—			(62,672	)
Purchases of fixed assets		(8,571	)		(23,120	)
Net cash provided by (used in) investing activities		6,277,012			(4,674,760	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		—			155,000
Repayments of long-term debt		(970	)		(970	)
Proceeds from repurchase agreements, net		339,168			1,257,210
(Repayments of) proceeds from issuances of commercial paper, net		(3,276,146	)		919,886
Proceeds from temporary subordinated loan		—			200,000
Repayments of temporary subordinated loan		(75,000	)		(100,000	)
Proceeds from securitization financing		34,782			3,910,563
Repayments of securitization financing		(1,739,594	)		(100,699	)
Dividends paid		(102,453	)		(179,391	)
Proceeds from sale of subsidiary stock, net		259,738			—
Proceeds from issuance of common stock		3,349			3,483
Proceeds from repayments of employee stock loan receivable		4,143			848
Net cash (used in) provided by financing activities		(4,552,983	)		6,065,930
Net increase in cash and cash equivalents		126,506			(42,837	)
Cash and cash equivalents, beginning of period		238,615			224,371
Cash and cash equivalents, end of period	$	365,121		$	181,534
Supplemental Cash Flow Information:
Cash payments for interest	$	466,889		$	312,128
Cash payments for taxes	$	7,874		$	26,670

Note: A portion of the Company’s acquisition of First NLC Financial Services, LLC was a non-cash transaction see Note 3.

See notes to consolidated financial statements.

7

FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

1. Basis of Presentation:

The consolidated financial statements of Friedman, Billings, Ramsey Group, Inc. and subsidiaries (“FBR Group,” “FBR,” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Therefore, they do not include all information required by accounting principles generally accepted in the United States of America for complete financial statements. The interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for interim periods are not necessarily indicative of the results for the entire year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2005 included on Form 10-K filed by the Company under the Securities Exchange Act of 1934.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain amounts in the consolidated financial statements and notes for prior periods have been reclassified to conform to the current period presentation.

2. FBR Capital Markets Corporation Offering:

On July 20, 2006, the Company closed a private offering to institutional investors by its newly formed taxable REIT subsidiary, FBR Capital Markets Corporation (FBR Capital Markets), and a concurrent private placement by FBR Capital Markets to two affiliates of Crestview Partners. These transactions in the aggregate resulted in the sale of 18,000,000 shares of common equity for $270,000 by FBR Capital Markets. Cash proceeds to FBR Capital Markets, after deducting a placement fee payable to an affiliate of Crestview Partners with respect to the shares purchased by the Crestview affiliates and other costs, were $259,738. In connection with the transactions, the Company completed the contribution to FBR Capital Markets of the Company’s investment banking, institutional brokerage and research and asset management businesses, including the existing subsidiaries Friedman, Billings, Ramsey & Co., Inc. (FBR & Co.), Friedman, Billings, Ramsey International, Ltd. (FBRIL), FBR Investment Management, Inc. (FBRIM) and FBR Fund Advisors, Inc. (FBR Fund Advisors). As a result of these transactions, the Company retains a beneficial 71.9% ownership interest in FBR Capital Markets, and will continue to consolidate FBR Capital Markets for financial reporting purposes.

In addition, in connection with this private placement, pursuant to the guidance in Staff Accounting Bulletin No. 51, “Accounting for Sales of Stock of a Subsidiary,” the Company adopted an accounting policy to recognize gains and losses on issuances of subsidiary stock in the statement of operations. Accordingly, in July 2006, the Company recognized a net gain of $121,511 related to the sale of the FBR Capital Markets shares. The gain represents the increase in the value of the Company’s investment in FBR Capital Markets as a result of the share issuance and, based on the structure of the transaction, this gain was not taxable.

As part of these transactions, the Company and FBR Capital Markets entered into a series of agreements, including a contribution agreement, a corporate agreement, a services agreement, a management services

8

agreement, a trademark license agreement and a tax sharing agreement. In addition, FBR Capital Markets and the Company entered into a series of agreements with affiliates of Crestview Partners, including an investment agreement, a governance agreement, a voting agreement, a registration rights agreement, a professional services agreement and option agreements to purchase additional shares. Pursuant to the option agreements, affiliates of Crestview Partners may purchase up to 2,600,000 shares of FBR Capital Markets stock. Based on their terms and conditions, these options have been accounted for as permanent equity.

3. First NLC Financial Services, LLC Acquisition:

On February 16, 2005, the Company completed the acquisition of First NLC, a non-conforming residential mortgage loan originator located in Florida for a purchase price of $100,803 paid in a combination of cash and stock. First NLC currently operates in 45 states and originates loans through both wholesale and retail channels. First NLC is part of the Company’s mortgage banking segment and operates as a wholly-owned subsidiary. The Company expects that the acquisition of First NLC will assist in expanding and adding flexibility to the Company’s mortgage loan business by providing the ability to originate, price, portfolio and sell non-conforming mortgage loan assets based on market conditions.

The Company accounted for the acquisition of First NLC in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations” (SFAS 141) using the purchase method of accounting. Under the purchase method, net assets and results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. In addition, SFAS 141 provides that the cost of an acquired entity must be allocated to the assets acquired, including identifiable intangible assets and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of cost over the fair value of the net assets acquired must be recognized as goodwill.

The $100,803 purchase price included cash of $74,325, issuance of 1,297,746 shares of FBR Class A common stock at a price of $18.82 per share for a total of $24,420, and direct acquisition costs of $2,058. A summary of the fair values of the net assets acquired is as follows:

Cash	$	11,471
Interest receivable		1,107
Loans held for sale, net		508,443
Intangible asset		16,500
Other assets		10,029
Warehouse finance facilities		(483,164	)
Other liabilities		(18,335	)
Goodwill		54,752
Total purchase price, including acquisition costs	$	100,803

Identified intangible assets represent the fair value of First NLC’s broker relationships. Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), this intangible asset will be amortized over an estimated useful life of ten years based on the economic depletion of this asset. The expected pre-tax amortization expense for the remainder of 2006 and years ended December 31, 2007, 2008, 2009 and 2010, are estimated to be $691, $2,304, $1,925, $1,612, and $1,354 respectively. The total amount of goodwill represents the purchase price of First NLC in excess of the fair value of the net assets acquired. Under SFAS 142, goodwill is not amortized. Instead, this asset is required to be tested at least annually for impairment. Both the identified broker relationship intangible asset and the goodwill are deductible for tax purposes.

9

The following presents unaudited pro forma consolidated results for the nine months ended September 30, 2005, as though the acquisition had occurred as of January 1, 2005.

	Nine Months Ended September 30, 2005
Total revenues, as reported	$	889,760
Revenues, net of interest expense and provision for loan losses, as reported		548,812
Net income, as reported		100,700
Total revenues, pro forma		902,518
Revenues, net of interest expense and provision for loan losses, pro forma		558,868
Net income, pro forma		99,441
Earnings per common share:
Basic, as reported	$	0.60
Diluted, as reported	$	0.59
Basic, pro forma	$	0.59
Diluted, pro forma	$	0.58

4. Investments:

Institutional Brokerage Trading Securities

Trading securities owned and trading account securities sold but not yet purchased consisted of securities at fair values as of September 30, 2006 and December 31, 2005:

	September 30, 2006				December 31, 2005
	Owned		Sold But Not Yet Purchased		Owned		Sold But Not Yet Purchased
Government and agency-backed securities	$	472,320	$	81,044	$	922,378	$	150,369
Asset-backed securities		—		—		43,372		—
Corporate bond securities		380		2		1,299		—
Corporate equity securities		15,384		438		65,589		178
	$	488,084	$	81,484	$	1,032,638	$	150,547

The weighted average coupon for fixed income trading securities owned and for fixed income securities sold but not yet purchased were 5.74% and 4.62%, respectively, as of September 30, 2006. The Company funds investments in such trading securities owned primarily with repurchase agreement borrowings (see Note 5). As of September 30, 2006 and December 31, 2005, $471,303 and $963,772, respectively, of these securities were pledged as collateral for repurchase agreements.

In conjunction with its fixed income trading activity, the Company enters into reverse repurchase agreements with mortgage originators and other third parties that hold mortgage loans and mortgage securities. The outstanding balance of these transactions was $82,770 and the weighted average coupon was 4.91% as of September 30, 2006. The outstanding balance of these transactions was $147,918 and the weighted average coupon was 3.75% as of December 31, 2005.

The Company receives collateral under reverse repurchase agreements. In many instances, the Company is permitted to rehypothecate securities received as collateral. At September 30, 2006 and December 31, 2005, the Company had received securities as collateral that can be repledged, delivered or otherwise used with a fair value, including accrued interest, of $82,971 and $148,112, respectively. Of these securities received as collateral, those with a fair value of $81,044 and $147,502 were delivered or repledged, generally as collateral under repurchase agreements or to cover securities sold but not yet purchased positions as of September 30, 2006 and December 31, 2005, respectively.

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Trading account securities sold but not yet purchased represent obligations of the Company to deliver the specified security at the contracted price, and thereby, create a liability to purchase the security in the market at prevailing prices. These transactions result in off-balance-sheet risk as the Company’s ultimate obligation to satisfy the sale of securities sold but not yet purchased may exceed the current value recorded in the consolidated balance sheets.

Principal Investments

Mortgage-related and long-term investments consisted of the following as of the dates indicated:

	September 30, 2006		December 31, 2005
Mortgage-Related Investments:
Mortgage-backed securities available for sale:
Fannie Mae	$	2,655,079	$	5,825,114
Freddie Mac		1,405,676		1,645,293
Ginnie Mae		38,327		154,193
		4,099,082		7,624,600
Private-label mortgage-backed securities (1)		898,603		362,837
Total mortgage-backed securities available for sale (2)		4,997,685		7,987,437
Mortgage-backed trading securities:
Fannie Mae		715,993		15,124
Freddie Mac		257,598		—
Total mortgage-backed trading securities (3)		973,591		15,124
Total mortgage-backed securities		5,971,276		8,002,561
Mortgage Loans:
Loans held for investment, net (4)		—		6,841,266
Loans held for sale, net (5)		5,668,669		963,807
Total mortgage loans		5,668,669		7,805,073
Reverse repurchase agreements		120,103		283,824
Total mortgage-related investments		11,760,048		16,091,458
Long-term Investments
Merchant Banking:
Marketable equity securities		81,181		217,153
Non-public equity securities		75,267		54,388
Other		—		1,438
Preferred equity investment		2,500		5,000
Equity method investments		42,167		41,977
Residual interest in securitization		—		14,577
Cost method and other investments		5,707		6,301
Investment securities—marked to market		35,289		6,810
Total long-term investments		242,111		347,644
Total mortgage-related and long-term investments	$	12,002,159	$	16,439,102

(1) Private-label mortgage-backed securities (MBS) held by the Company as of September 30, 2006 and December 31, 2005 were primarily rated A or higher by Standard & Poors.

(2) The Company’s MBS portfolio is comprised primarily of adjustable-rate MBS, substantially all of which are Hybrid ARM securities in which the coupon is fixed for three or five years before adjusting. The weighted-average coupon of the available-for-sale portfolio at September 30, 2006 and December 31, 2005 was 6.04% and 4.04%, respectively.

(3) The weighted-average coupon of the trading portfolio at September 30, 2006 was 6.05%.

(4) The weighted-average coupon of the Company’s mortgage loan portfolio held for investment December 31, 2005 was 7.27%.

(5) The weighted-average coupon of the Company’s mortgage loan portfolio held for sale at September 30, 2006 and December 31, 2005 was 7.46% and 8.62%, respectively.

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Mortgage-Backed Securities and Long Term Investments

The Company’s long-term investments in available-for-sale and trading securities consist primarily of mortgage-backed securities and equity investments in publicly traded companies. In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” the securities designated as available for sale are carried at fair value with resulting unrealized gains and losses reflected as other comprehensive income or loss. The securities designated as trading are carried at fair value with resulting unrealized gains and losses reflected in income or loss in the statements of operations. Gross unrealized gains and losses on these securities as of September 30, 2006 and December 31, 2005 were:

	September 30, 2006
	Amortized Cost/Cost Basis		Unrealized
			Gains		Losses			Fair Value
Mortgage-backed securities (1):
Available-for-sale	$	4,992,572	$	14,871	$	(9,758	)	$	4,997,685
Trading		969,578		4,013		—			973,591
Marketable equity securities		80,155		3,357		(2,331	)		81,181
	$	6,042,305	$	22,241	$	(12,089	)	$	6,052,457

(1) The amortized cost of MBS includes unamortized net premium of $46,808 at September 30, 2006.

	December 31, 2005
	Amortized Cost/Cost Basis		Unrealized
			Gains		Losses			Fair Value
Mortgage-backed securities (2):
Available-for-sale	$	7,987,437	$	—	$	—		$	7,987,437
Trading		15,120		4		—			15,124
Marketable equity securities		215,349		15,958		(14,154	)		217,153
	$	8,217,906	$	15,962	$	(14,154	)	$	8,219,714

(2) The amortized cost of MBS includes unamortized discount of $77,531 at December 31, 2005.

The following table provides further information regarding the duration of unrealized losses as of September 30, 2006:

	Continuous Unrealized Loss Position for
	Less Than 12 Months							12 Months or More
	Amortized Cost/Cost Basis		Unrealized Losses			Fair Value		Amortized Cost/Cost Basis		Unrealized Losses		Fair Value
Mortgage-backed securities	$	1,648,615	$	(9,758	)	$	1,638,857	$	—	$	—	$	—
Marketable equity securities		38,683		(2,331	)		36,352		—		—		—
	$	1,687,298	$	(12,089	)	$	1,675,209	$	—	$	—	$	—

The Company has evaluated its portfolio of mortgage-backed securities for impairment. Based on its evaluation, the Company determined that the unrealized losses on mortgage-backed securities are due to interest rate increases and are not related to credit quality issues. All of the mortgage-backed securities held by the Company with unrealized losses are either guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae or have an investment grade rating by Standard & Poors. The Company does not deem these investments to be other-than-temporarily impaired because of the limited severity and duration of the impairments, and because the decline in market value is attributable to interest rate increases, and the Company has the intent and ability to hold these investments until a recovery of fair value occurs, which may be maturity.

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The Company also has evaluated its portfolio of marketable equity securities for impairment as of September 30, 2006. For each of the securities, the Company reviewed the underlying causes for the impairments, as well as the severity and durations of the impairments. The Company evaluated the near term prospects for each of the investments in unrealized loss positions in relation to the severity and duration of the impairment. Based on the severity and duration of certain of these unrealized losses, the Company recognized impairment losses on these investments because they are considered other-than-temporarily impaired. During the three months ended September 30, 2006, the Company recorded $10,117 of other-than-temporary losses in the statements of operations relating to marketable equity securities. During the nine months ended September 30, 2006, the Company recorded $52,009 of other-than-temporary losses. There were no such other-than-temporary losses recorded during the three and nine months ended September 30, 2005. Regarding the remaining marketable equity securities in unrealized loss positions as of September 30, 2006, based on the Company’s evaluation and its ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value to the Company’s cost basis, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2006. We will continue to evaluate these investments at each reporting period end. If we determine at a future date that an impairment is other-than-temporary, the applicable unrealized loss will be reclassified from accumulated other comprehensive loss and recognized as a loss in the statement of operations at the time the determination is made.

For investments in equity securities carried at cost and other cost method investments, except as noted in the following sentence, the Company did not identify any events or changes in circumstances that may have had a significant adverse affect on the fair value of these investments. During the three and nine months ended September 30, 2006, the Company recorded impairment losses of $9,786 and $10,413, respectively, in the statements of operations reflecting the Company’s evaluation of the estimated fair value of three private equity investments. There were no such impairment losses recorded during the three and nine months ended September 30, 2005.

During the three months ended September 30, 2006, the Company received $758,019 from sales of mortgage-backed securities resulting in gross gains and losses of $10,826 and $-0-, respectively, and received $23,826 from sales of marketable equity securities resulting in gross gains and losses of $4,380 and $-0- respectively. Included in mortgage-backed securities sold and the related gains and losses are $447,614 of mortgage-backed securities purchased and classified as trading during the three months ended September 30, 2006. The Company recognized net realized gain of $9,339 on these trading securities during the three months ended September 30, 2006. During the three months ended September 30, 2005, the Company received $218,237 from sales of mortgage-backed securities with gross gains and losses of $-0- and $(812), respectively, and received $12,354 from sales of marketable equity securities resulting in gross gains and losses of $4,591 and $-0-, respectively. Included in mortgage-backed securities sold and the related gains and losses are $182,969 of mortgage-backed securities purchased and classified as trading during the three months ended September 30, 2005. The Company recognized net realized losses of $(722) on these trading securities during the three months ended September 30, 2005.

During the nine months ended September 30, 2006, the Company received $8,586,096 from sales of mortgage-backed securities resulting in gross gains and losses of $26,784 and $(8,476), respectively, and received $114,306 from sales of marketable equity securities resulting in gross gains and losses of $20,970 and $(6) respectively. Included in mortgage-backed securities sold and the related gains and losses are $817,804 of mortgage-backed securities purchased and classified as trading during the nine months ended September 30, 2006. The Company recognized net realized gain of $9,291 on these trading securities during the nine months ended September 30, 2006. During the nine months ended September 30, 2005, the Company received $1,061,360 from sales of mortgage-backed securities with gross gains and losses of $704 and $(2,781), respectively, and received $52,970 from sales of marketable equity securities with gross gains and losses of $19,523 and $(124), respectively Included in mortgage-backed securities sold and the related gains and losses are $411,107 of mortgage-back securities purchased and classified as trading during the nine months ended September 30, 2005. The Company recognized net realized losses of $(1,197) on these trading securities during the nine months ended September 30, 2005.

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As of September 30, 2006 and December 31, 2005, $5,252,016 and $7,864,567 (each representing fair value excluding principal receivable), respectively, of the mortgage-backed securities were pledged as collateral for repurchase agreements and commercial paper borrowings. In addition, $36,814 and $68,890, respectively, of principal and interest receivables related to the securities collateralizing commercial paper borrowings have also been pledged as collateral for those borrowings.

Mortgage Loans

As of September 30, 2006, the Company made a determination in evaluating its investment strategy and its intent related to its held-for-investment mortgage loan portfolio that it no longer intends to hold this portfolio for investment. Accordingly, as of September 30, 2006, these loans were reclassified to held for sale. As a result of this change, in accordance with SFAS No. 65, “Accounting for Certain Mortgage Banking Activities,” the Company recorded its investment in this loan portfolio at the lower of cost or market as of September 30, 2006 and recognized a $146,823 write-down in the value of these loans.

In determining the lower-of-cost or market value of these loans, the Company considered various factors effecting the overall value of the portfolio, including but not limited, to factors such as prepayment speeds, default rates, loss assumptions, geographic locations, collateral values, and mortgage insurance coverage. The Company utilized the present value of expected cash flows considering the specific characteristics of each individual loan, aggregating the loans by specific securitization issuance, in determining the value of the portfolio at September 30, 2006. The Company also considered that these loans are collateral for securitization borrowings; therefore, taking into consideration the impact of any sale of the loan portfolio on the securitization borrowings, the related cash flows and the overall value of the residual interests in the securitization transactions that have been retained by the Company. Significant assumptions used by the Company in determining this value were supported by comparison to available market data for similar portfolios and transactions as well as a third party valuation of the residual interests in the securitization transactions.

Although the Company considers its valuation methodology to be appropriate, the realized value from a market transaction may differ given the inherently subjective nature of the valuation, including uncertainties related to the various market assumptions and other data used in the calculation and that difference could be material. The actual value from a market transaction will be subject to, among other things, changes in both short- and long-term interest rates, prepayment rates, housing prices, credit loss experience and the shape and slope of the yield curve. The Company will continue to monitor and assess the significant assumptions underlying this value in the future.

Loans held for sale, net, was comprised of the following:

	September 30, 2006			December 31, 2005
Principal balance	$	5,715,950		$	969,491
Deferred origination costs, net and unamortized premiums		112,094			15,039
Allowance for lower of cost or market value		(159,375	)		(20,723	)
Loans held for sale, net	$	5,668,669		$	963,807

Mortgage loans 90 or more days past due totaled $455,200 and $188,744 as of September 30, 2006 and December 31, 2005, respectively. As of September 30, 2006, the Company has reserved $23,104 for past due interest on such delinquent loans.

During 2005, the Company purchased mortgage insurance on a portion of mortgage loans. The mortgage insurance insures the Company against certain losses on the covered loans, and assists the Company in reducing its credit risk by lowering the effective loan-to-value ratios on the applicable mortgage loans. As of

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September 30, 2006, approximately $706,476 in principal balance of mortgage loans held by the Company was covered by such mortgage insurance.

The Company finances its mortgage loan portfolio through warehouse repurchase agreements and securitization financing transactions, which are described in Note 5. Substantially all of the mortgage loans held by the Company were pledged under such borrowings as of September 30, 2006 and December 31, 2005.

Properties securing the mortgage loans in the Company’s portfolio are geographically dispersed throughout the United States. As of September 30, 2006, approximately 33%, 13%, 7% and 7% of the properties were located in California, Florida, Illinois and New York, respectively. The remaining properties securing the Company’s mortgage loan portfolio did not exceed 5% of the total portfolio in any other state.

Reverse Repurchase Agreements

Through Arlington Funding, LLC (Arlington Funding), a commercial paper conduit managed by the Company (see Note 5), the Company has provided warehouse financing to mortgage originators. As of September 30, 2006 and December 31, 2005, the outstanding balance of such financings was $37,333 and $135,906, respectively, and the weighted average coupon was 5.73% and 4.74%, respectively. The Company funds its advances through commercial paper borrowings. As of September 30, 2006 and December 31, 2005, the Company had received as collateral for the reverse repurchase agreements mortgage loans with a fair value of $38,330 and $140,676, respectively.

5. Borrowings:

Commercial Paper and Repurchase Agreements

The Company issues commercial paper and enters into repurchase agreements to fund its investments in mortgage-backed securities and mortgage loans, as well as its warehouse lending and fixed income trading activities. Commercial paper issuances are conducted through Georgetown Funding Company, LLC (Georgetown Funding) and Arlington Funding.

Georgetown Funding is a special purpose Delaware limited liability company organized for the purpose of issuing extendable commercial paper notes collateralized by mortgage-backed securities and entering into reverse repurchase agreements with the Company and its affiliates. The Company serves as administrator for Georgetown Funding’s commercial paper program and all of Georgetown Funding’s transactions are conducted with the Company. Through the Company’s administration agreement and repurchase agreements, the Company is the primary beneficiary of Georgetown Funding and consolidates this entity for financial reporting purposes. The commercial paper notes issued by Georgetown Funding are rated A1+/P1 by Standard & Poor’s and Moody’s Investors Service, respectively. The Company’s Master Repurchase Agreement with Georgetown Funding enables the Company to finance up to $12,000,000 of mortgage-backed securities.

Arlington Funding is a special purpose Delaware limited liability company organized for the purpose of issuing extendable commercial paper notes collateralized by non-conforming mortgages and providing warehouse financing in the form of reverse repurchase agreements to the Company and its affiliates and to mortgage originators with which the Company has a relationship. The Company serves as administrator for Arlington Funding’s commercial paper program and provides collateral as well as guarantees for commercial paper issuances. As part of those guarantees, the Company has pledged $4,082 in cash to collateralize its obligation. Through these arrangements, the Company is the primary beneficiary of Arlington Funding and consolidates this entity for financial reporting purposes. The extendable commercial paper notes issued by Arlington Funding are rated A1+/P1 by Standard & Poor’s and Moody’s Investors Service, respectively. The Company’s financing capacity through Arlington Funding is $5,000,000.

The Company also has short-term financing facilities that are structured as repurchase agreements with various financial institutions to fund its portfolio of mortgage loans. The interest rates under these agreements are based on LIBOR plus a spread that ranges between 0.60% to 1.25% based on the nature of the mortgage collateral.

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The following tables provide information regarding the Company’s outstanding commercial paper, repurchase agreement borrowings, and mortgage financing facilities.

	September 30, 2006									December 31, 2005
	Commercial Paper			Repurchase Agreements			Short-Term Mortgage Financing Facilities (1)			Commercial Paper			Repurchase Agreements			Short-Term Mortgage Financing Facilities (1)
Outstanding balance	$	3,720,804		$	1,924,976		$	762,387		$	6,996,950		$	1,653,599		$	1,045,020
Weighted-average rate		5.36	%		5.33	%		6.04	%		4.37	%		4.39	%		5.16	%
Weighted-average term to maturity		21.6 days			19.2 days			NA			19.9 days			18.4 days			NA

(1) Under these mortgage financing agreements, which expire or may be terminated by the Company or the counterparty within one year, the Company may finance mortgage loans for up to 180 days. The interest rates on these borrowings reset daily.

	September 30, 2006									September 30, 2005
	Commercial Paper			Repurchase Agreements			Short-Term Mortgage Financing Facilities			Commercial Paper			Repurchase Agreements			Short-Term Mortgage Financing Facilities
Weighted-average outstanding balance during the three months ended	$	2,916,752		$	1,095,487		$	998,697		$	8,300,373		$	2,014,444		$	3,661,232
Weighted-average rate during the three months ended		5.40	%		5.35	%		6.03	%		3.55	%		3.50	%		4.29	%
Weighted-average outstanding balance during the nine months ended	$	1,998,994		$	624,004		$	1,064,325		$	7,836,804		$	2,997,247		$	1,923,132
Weighted-average rate during the nine months ended		5.01	%		5.01	%		5.68	%		3.08	%		2.93	%		4.15	%

Securitization Financing

The Company has issued asset-backed securities through securitization trusts to finance a portion of the Company’s portfolio of mortgage loans. The asset-backed securities are secured solely by the mortgages transferred to the trust and are non-recourse to the Company. The principal and interest payments on the mortgages provide the funds to pay debt service on the securities. This securitization activity is accounted for as a financing since the securitization trusts do not meet the qualifying special purpose entity criteria under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125,” and because the Company maintains continuing involvement in the securitized mortgages through its ownership of certain interests issued by the trust. As of September 30, 2006, the Company has issued approximately $7,200,000 of asset-backed securities. Of these asset-backed securities issued by the Company, as described below, $4,942,263 is outstanding as of September 30, 2006.

Interest rates on these securities reset monthly and are indexed to one-month LIBOR. The weighted average interest rate payable on the securities was 5.75% and 4.76% as of September 30, 2006 and December 31, 2005, respectively. Although the stated maturities for each of these securities are 30 years, the Company expects the securities to be fully repaid prior thereto due to borrower prepayments.

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As of September 30, 2006 and December 31, 2005, the outstanding balance of the securities was as follows:

	September 30, 2006			December 31, 2005
Security balance	$	4,959,381		$	6,654,187
Discount on bonds, net		(17,118	)		(11,989	)
Balance of securitization financing, net	$	4,942,263		$	6,642,198
Current balance of loans and other assets collateralizing the securities	$	5,010,036		$	6,706,821

In addition to the discount, which represents the difference between the sales price of the securities and the face amount, the Company has deferred the costs incurred to issue the securities. These costs totaled $9,185 and $12,808 as of September 30, 2006 and December 31, 2005, respectively, and are included in prepaid expenses and other assets in the consolidated balance sheets. The discount and deferred costs are amortized as a component of interest expense over the life of the debt.

See also Note 6 for information regarding the effects of derivative instruments on the Company’s borrowing costs.

Long-Term Debt

As of September 30, 2006 and December 31, 2005, the Company had issued a total of $317,500 of long-term debentures through TRS Holdings. The long-term debentures accrue and require payments of interest quarterly at an annual rate of three-month LIBOR plus 2.25% to 3.25%. The weighted average interest rate on these long-term debentures was 8.13% and 6.70% as of September 30, 2006 and December 31, 2005, respectively.

6. Derivative Financial Instruments and Hedging Activities:

In the normal course of its operations, the Company is a party to financial instruments that are accounted for as derivative financial instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and for Hedging Activities,” as amended (SFAS 133). These instruments include interest rate caps, Eurodollar futures contracts, U.S. Treasury futures contracts, swaptions, certain borrower interest rate lock agreements, certain commitments to purchase and sell mortgage loans and mortgaged-backed securities, and warrants to purchase common stock.

Derivative Instruments

The Company utilizes derivative financial instruments to hedge the interest rate risk associated with its borrowings. The Company also uses derivatives to economically hedge certain positions in mortgage-backed securities and mortgage loans. The derivative financial instruments include interest rate caps, Eurodollar futures contracts, U.S. Treasury futures contracts and swaptions. As discussed below, certain of these derivatives are designated as cash flow hedges under SFAS 133 and others are not designated as cash flow hedges. The counterparties to these instruments are U.S. financial institutions.

Interest rate caps are primarily used to hedge the interest rate exposure on the Company’s securitization borrowings. In exchange for a fee paid at inception of the agreement, the Company receives a floating rate based on one-month LIBOR whenever one-month LIBOR exceeds a specified rate (the “strike” rate). Eurodollar futures contracts are a proxy for the forward AA/AAA LIBOR-based credit curve and allow the Company the ability to lock in three-month LIBOR forward rates for its short-term borrowings based on the maturity dates of the contracts. Swaptions are options to enter into interest rate swaps at specified future dates. In exchange for a

17

fee paid at inception, the Company has an option to enter into an interest rate swap with a counterparty effectively either locking in a predetermined fixed rate or margin over the terms of the interest rate swap. The following table summarizes these derivative positions as of September 30, 2006 and December 31, 2005:

	September 30, 2006					December 31, 2005
	Notional Amount		Fair Value			Notional Amount		Fair Value
Cash flow hedges:
Interest rate cap agreements (1)	$	—	$	—		$	4,710,928	$	38,494
Eurodollar futures contracts (2)		22,790,000		(33,173	)		—		—
No hedge designation:
Interest rate cap agreements (3)		4,400,898		29,710			980,821		219
Eurodollar futures contracts (4)		6,494,000		117			—		—
Other (5)		450,600		(1,682	)		—		—

(1) Comprised of five interest rate caps which mature between 2007 and 2010. The notional amounts of the caps amortize over the life of the agreements. The strike rates also vary over the life of the agreements between 4.08% and 6.10%.

(2) The $22,790,000 total notional amount of Eurodollar futures contracts as of September 30, 2006 represents the accumulation of Eurodollar futures contracts that mature on a quarterly basis between 2006 and 2011 and hedge borrowings of between $2,685,000 and $100,000.

(3) Comprised of nine interest rate caps maturing between 2008 and 2010 with strike rates between 3.84% and 10.50%.

(4) Comprised of Eurodollar futures with varying maturities between 2006 and 2011.

(5) Comprised of one put swaption that expires in 2011 and a U.S. Treasury futures contract that expires in December 2006. The underlying swap has a 5 year term beginning in 2011 and maturing in 2016 with the strike rate of 5.81%.

During the year, the Company had designated certain interest rate caps and Eurodollar futures contracts as cash flow hedges of the variability in interest payments associated with the Company’s securitization borrowings. The notional amount and terms of each of these derivative instruments were matched against a like amount of current and/or anticipated borrowings and terms under the Company’s securitization financings. These instruments were highly effective hedges and qualified as cash flow hedges under SFAS 133. Accordingly, changes in the fair value of these derivatives were reported in other comprehensive income to the extent the hedge was effective, while changes in fair value attributable to hedge ineffectiveness are reported in earnings. The Company recorded $476 in earnings and $513 in losses, respectively, in losses related to ineffectiveness during the three and nine months ended September 30, 2006, respectively.

As a result of the reclassification of the Company’s mortgage loan portfolio to held-for-sale classification (see Note 4) and the Company’s current estimate of forecasted securitization borrowings, the Company de-designated these cash flow hedges effective September 30, 2006. The Company is continuing to defer in other comprehensive income the gains and losses from these cash flow hedge transactions related to those future periods where the occurrence of the forecasted transaction is still probable. These gains and losses will be reclassified to earnings in the periods in which the earnings are affected by the hedged cash flows.

In addition, during the third quarter of 2006, the Company also designated certain Eurodollar futures contracts as cash flow hedges of the variability in interest payments associated with the Company’s forecasted borrowings used to fund the purchase of securities for its MBS investment portfolio. Accordingly, changes in the fair value of these derivatives are reported in other comprehensive income to the extent the hedge was effective, while changes in fair value attributable to hedge ineffectiveness are reported in earnings. The Company recorded $4,374 in losses related to ineffectiveness during the three months ended September 30, 2006. The gains and

18

losses on these cash flow hedge transactions that are reported in other comprehensive income are reclassified to earnings in the periods in which the earnings are affected by the hedged cash flows.

The net effect of the Company’s cash flow hedges on the variability in interest payments was to decrease interest expense by $7,874 and $9,798 for the three and nine months ended September 30, 2006. These hedging activities decreased interest expense by $1,133 and $8,474 during the same periods in 2005. The total net loss deferred in accumulated other comprehensive income relating to these derivatives was $25,550 at September 30, 2006. Of this amount, $3,925 is expected to flow through the Company’s statement of operations over the next twelve months.

The Company also uses derivative instruments, including certain interest rate caps, Eurodollar futures contracts, U.S. Treasury futures contracts and swaptions, to hedge certain mortgage-backed security and mortgage loan positions and related borrowings that are not designated as hedges under SFAS 133. For example, Eurodollar futures contracts have been used to hedge the financing for certain mortgage-backed security positions and commitments to purchase certain mortgage-backed securities. The Company also uses Eurodollar futures contracts to hedge its exposure on loan commitments. The changes in fair value on these derivatives are recorded to net investment income in the statement of operations. For the three months and nine months ended September 30, 2006, the Company recorded net losses of $15,793 and $29,114, respectively, on these derivatives.

Commitments

The Company enters into commitments to (i) originate mortgage loans (referred to as interest rate lock agreements), (ii) purchase and sell mortgage loans, and (iii) purchase and sell MBS. As of September 30, 2006, the Company has $529,476 and $1,914,359 in commitments to originate and sell mortgage loans, respectively, and no outstanding commitments to purchase mortgage loans.

As of September 30, 2006, $314,359 of the total commitments to sell mortgage loans are considered derivatives and accounted for under SFAS 133. There were no gains or losses resulting from these derivatives as the rates at which the Company has committed to sell the loans approximates their fair value at September 30, 2006.

As of September 30, 2006, the Company had made forward commitments to purchase $240,000 in Hybrid ARM securities. These commitments to purchase mortgage-backed securities are designated as cash flow hedges of the anticipated purchases and as of September 30, 2006 were valued at $(98), which was deferred as a loss to accumulated other comprehensive income. Gains and losses on commitments deferred to other comprehensive income are transferred from accumulated other comprehensive income to earnings over the life of the hedged item after settlement of the forward purchase or immediately to earnings when the commitment is net settled in a pair-off transaction. There were $125,000 in purchase commitments that were paired-off during the three and nine months ended September 30, 2006 resulting in a $332 gain. There were no pair-off transactions for the three and nine months ended September 30, 2005.

As of September 30, 2006, the Company had made forward commitments to purchase $320,537 Hybrid ARM securities to be designated as trading upon settlement. These commitments to purchase mortgage-backed securities are not designated as hedges under SFAS 133 and as of September 30, 2006, were valued at $321,315 resulting in a gain of $778, which is recognized as income.

Stock Warrants

In connection with its capital raising activities, the Company may receive warrants to acquire equity securities. These instruments are accounted for as derivatives with changes in the fair value recorded to net investment income under SFAS 133. During the three and nine months ended September 30, 2006, the Company recorded net losses of $(29) and net gains of $184 respectively, related to these instruments. During the same periods in 2005, the Company recorded a net gains of $727 and $467, respectively, related to these instruments.

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As of September 30, 2006 and December 31, 2005, the Company held stock warrants with a fair value of $1,783 and $1,599, respectively.

7. Income Taxes:

In connection with the Company’s merger with FBR Asset effective March 31, 2003, the parent company, FBR Group elected REIT status under the Internal Revenue Code. As a REIT, FBR Group is not subject to Federal income tax on earnings distributed to its shareholders. Most states recognize REIT status as well. Since FBR Group intends to distribute 100% of its REIT taxable income to shareholders, the Company has recognized no income tax expense on its REIT income.

To maintain tax qualification as a REIT, FBR Group must meet certain income and asset tests and distribution requirements. The REIT must distribute to shareholders at least 90% of its (parent company) taxable income. A predominance of the REIT’s gross income must come from real estate sources and other portfolio- type income. A significant portion of the REIT’s assets must consist of real estate and similar portfolio investments, including mortgage-backed securities. Beginning in 2001, the tax law changed to allow REITs to hold a certain percentage of their assets in taxable REIT subsidiaries. The income generated from the Company’s taxable REIT subsidiaries is taxed at normal corporate rates and will generally not be distributed to the Company’s shareholders. Failure to maintain REIT qualification would subject FBR Group to Federal and state corporate income taxes at regular corporate rates.

During the three and nine months ended September 30, 2006, the Company recorded tax benefits of $26,062 and $26,541, respectively, for losses attributable to taxable REIT subsidiaries. The Company’s annualized effective tax rate at its taxable REIT subsidiaries was 40.7% for the nine months ended September 30, 2006. During the three and nine months ended September 30, 2005, the Company recorded $8,090 and $26,825, respectively, of income tax expense for income attributable to taxable REIT subsidiaries. The Company’s effective tax rate at its taxable REIT subsidiaries was 46% for the nine months ended September 30, 2005. The disparity between the Company’s effective tax rate in the nine months ended September 30, 2005 as compared to the comparable period in 2006 is due primarily to the non-deductible nature of the $7,500 charge recorded in the first quarter 2005 relating to the Company’s proposed settlements with the Securities and Exchange Commission (SEC) and the NASD’s Department of Market Regulation (see Note 10) and the effects of changes in state apportionment.

8. Net Capital Requirements:

The Company’s U.S. broker-dealer subsidiaries, FBR & Co. and FBR Investment Services, Inc. (FBRIS), are registered with the SEC and are members of the National Association of Securities Dealers, Inc. Additionally, FBRIL is registered with the Financial Services Authority (FSA) of the United Kingdom. As such, they are subject to the minimum net capital requirements promulgated by the SEC and FSA. As of September 30, 2006, FBR & Co. had net capital of $53,359 that was $49,099 in excess of its required minimum net capital of $4,260. As of September 30, 2006, FBRIS and FBRIL had net capital in excess of required amounts.

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9. Earnings Per Share:

The following tables present the computations of basic and diluted earnings per share for the three and nine months ended September 30, 2006 and 2005:

	Three Months Ended September 30, 2006						Three Months Ended September 30, 2005
	Basic			Diluted			Basic		Diluted
Weighted average shares outstanding:
Common stock		172,091			172,091			169,745		169,745
Stock options and restricted stock		—			—			—		745
Weighted average common and common equivalent shares outstanding		172,091			172,091			169,745		170,490
Net (loss) earnings applicable to common stock	$	(67,392	)	$	(67,392	)	$	23,045	$	23,045
(Loss) earnings per common share	$	(0.39	)	$	(0.39	)	$	0.14	$	0.14

	Nine Months Ended September 30, 2006						Nine Months Ended September 30, 2005
	Basic			Diluted			Basic		Diluted
Weighted average shares outstanding:
Common stock		171,376			171,376			169,166		169,166
Stock options and restricted stock		—			—			—		956
Weighted average common and common equivalent shares outstanding		171,376			171,376			169,166		170,122
Net (loss) earnings applicable to common stock	$	(71,085	)	$	(71,085	)	$	100,700	$	100,700
(Loss) earnings per common share	$	(0.41	)	$	(0.41	)	$	0.60	$	0.59

As of September 30, 2006 and 2005, 3,085,293 and 2,855,006, respectively of outstanding options were anti-dilutive. See Note 11 for additional information regarding outstanding options and restricted stock.

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10. Commitments and Contingencies:

Repurchase and Premium Recapture Obligations

The Company’s sales of mortgage loans are subject to standard mortgage industry representations and warranties that may require the Company to repurchase the mortgage loans due to breaches of these representations and warranties or if a borrower fails to make one or more of the first loan payments due on the loan. In addition, the Company is generally obligated to repay all or a portion of the original premium received on the sale of loans in the event that the loans are repaid within a specified time period subsequent to sale. The Company maintains a liability reserve for its repurchase and premium recapture obligations. The reserve is increased through charges to the gain (or loss) recorded at the time of sale. The reserve is reduced by charge-offs when loans are repurchased or premiums are repaid. Activity for the reserve was as follows for the period ended September 30, 2006 and 2005 (the Company did not maintain a reserve for repurchase and premium recapture obligations prior to the acquisition of First NLC in February 2005):

	September 30, 2006			September 30, 2005
Balance at beginning of period/at acquisition of First NLC	$	12,457		$	8,238
Provision		25,021			6,724
Charge-offs		(12,355	)		(5,484	)
Balance at end of period	$	25,123		$	9,478

Litigation

As of September 30, 2006, except as described below, the Company was not a defendant or plaintiff in any lawsuits or arbitrations, nor involved in any governmental or self-regulatory organization (SRO) matters that are expected to have a material adverse effect on the Company’s financial condition or statements of operations. The Company is a defendant in a small number of civil lawsuits and arbitrations (together, litigation) relating to its various businesses. In addition, the Company is subject to various reviews, examinations, investigations and other inquiries by governmental agencies and SROs. There can be no assurance that these matters individually or in aggregate will not have a material adverse effect on the Company’s financial condition or results of operations in a future period. However, based on management’s review with counsel, resolution of these matters is not expected to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

Many aspects of the Company’s business involve substantial risks of liability and litigation. Underwriters, broker-dealers and investment advisers are exposed to liability under Federal and state securities laws, other Federal and state laws and court decisions, including decisions with respect to underwriters’ liability and limitations on indemnification, as well as with respect to the handling of customer accounts. For example, underwriters may be held liable for material misstatements or omissions of fact in a prospectus used in connection with the securities being offered and broker-dealers may be held liable for statements made by their securities analysts or other personnel. In certain circumstances, broker-dealers and asset managers may also be held liable by customers and clients for losses sustained on investments. In recent years, there has been an increasing incidence of litigation and actions by government agencies and SROs involving the securities industry, including class actions that seek substantial damages. The Company is also subject to the risk of litigation, including litigation that may be without merit. As the Company intends to actively defend such litigation, significant legal expenses could be incurred. An adverse resolution of any future litigation against the Company could materially affect the Company’s operating results and financial condition.

The Company’s business (through its subsidiary First NLC and affiliated entities) includes the origination, acquisition, pooling, securitization and sale of non-conforming residential mortgage loans. Consequently, the

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Company is subject to additional federal and state laws in this area of operation, including laws relating to lending, consumer protection, privacy and unfair trade practices.

Putative Class Action Securities Lawsuits

The Company and certain current and former senior officers and directors have been named in a series of putative class action securities lawsuits filed in the second quarter of 2005, all of which are pending in the United States District Court for the Southern District of New York. These cases have been consolidated under the name In re FBR Inc. Securities Litig. A consolidated amended complaint has been filed asserting claims under the Securities Exchange Act of 1934 and alleging misstatements and omissions concerning (i) the SEC and NASD investigations described below relating to FBR & Co.’s involvement in the private investment in public equity on behalf of CompuDyne, Inc. in October 2001 and (ii) the alleged conduct of FBR and certain FBR officers and employees in allegedly facilitating certain sales of CompuDyne shares. The Company is contesting these lawsuits vigorously, but the Company cannot predict the likely outcome of these lawsuits or their likely impact on the Company at this time.

Shareholders’ Derivative Action

The Company has been named a nominal defendant, and certain current and former senior officers and directors have been named as defendants, in three shareholders’ derivative actions. Two of these actions, brought by Lemon Bay Partners LLC and Walter Boyle, are pending in the United States District Court for the Southern District of New York and have been consolidated, for pre-trial purposes only, with the pending putative class action securities lawsuits under the name In re FBR Inc. Securities and Derivative Litig. The third, brought by Gary Walter and Harry Goodstadt, has been filed in the Circuit Court for Arlington County, Virginia. All three cases claim that certain of the Company’s current and former officers and directors breached their duties to the Company based on allegations substantially similar to those in the In re FBR Inc. Securities Litig. et al. putative class action lawsuits described above. The Company has not responded to any of these complaints and no discovery has commenced. The Company cannot predict the likely outcome of this action or its likely impact on us at this time. The Board of Directors has established a special committee whose jurisdiction includes the Boyle and Walter/Goodstadt matters as well as consideration of shareholder demand letters which contain similar allegations, and the special committee has been authorized to make final decisions whether such litigation is in the Company’s best interests.

Other Litigation

Our subsidiary, First NLC Financial Services, LLC (“First NLC”), has been named in a putative class action in the U.S. District Court for the Northern District of Illinois (Cerda v. First NLC Financial Services, LLC), which alleges violations of the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq. First NLC is contesting this lawsuit vigorously, but we cannot predict the likely outcome of this lawsuit or the likely impact on First NLC or on us at this time.

Regulatory Charges and Related Matters

On April 26, 2005, the Company announced that its broker-dealer subsidiary, FBR & Co., proposed settlement to the staffs of the SEC and the NASD’s Department of Market Regulation to resolve ongoing, previously disclosed investigations by the SEC and NASD staffs. The proposed settlement concerns alleged insider trading, violations of antifraud provisions of the federal securities laws and applicable NASD rules and other charges concerning the Company’s trading in a Company account and the offering of a private investment in public equity on behalf of a public company in October 2001.

In the settlement offers, without admitting or denying any wrongdoing, FBR & Co. proposed to pay $3,500 to the SEC and $4,000 to the NASD and consent to injunctions, censure and additional undertakings to improve its administrative and compliance procedures.

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The proposed settlement is subject to review and approval by the SEC and the NASD, respectively, which may accept, reject or impose further conditions or other modifications to some or all of the terms of the proposed settlements. There are no assurances regarding the SEC’s and NASD’s consideration or determination of any offer of settlement, and no settlement is final unless and until approved by the SEC or NASD, as applicable. The Company has recorded a $7,500 charge, in March 2005, with respect to the proposed settlements with the SEC and NASD.

As previously reported by the Company, one of the Company’s investment adviser subsidiaries, Money Management Associates, Inc. (MMA), is involved in an investigation by the SEC with regard to the adequacy of disclosure of risks concerning the strategy of a sub-advisor to a now-closed bond fund. The SEC staff has advised MMA that it is considering recommending that the SEC bring a civil action/and or institute a public administrative proceeding against MMA and one of its officers (who is not an officer of Friedman, Billings, Ramsey Group, Inc.) for violating and/or aiding and abetting violations of the federal securities laws. MMA and its officer have made a Wells submission and, if necessary, intend to defend vigorously any charges brought by the SEC. Based on management’s review with counsel, resolution of this matter is not expected to have a material adverse effect on the Company’s financial condition or results of operations. It is possible that the SEC may initiate proceedings as a result of its investigations, and any such proceedings could result in adverse judgments, injunctions, fines, penalties or other relief against MMA or one or more of its officers or employees.

Other Legal and Regulatory Matters

Except as described above, as of September 30, 2006, the Company was not a defendant or plaintiff in any lawsuits or arbitrations that are expected to have a material adverse effect on the Company’s financial condition or results of operations. The Company is a defendant in a small number of civil lawsuits and arbitrations relating to its various businesses, and is subject to various reviews, examinations, investigations and other inquiries by governmental agencies and SROs, none of which are expected to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

Incentive Fees

The Company recognizes incentive income from the partnerships based on what would be due to the Company if the partnership terminated on the balance sheet date. Incentive allocations may be based on unrealized gains and losses, and could vary significantly based on the ultimate realization of the gains or losses. The Company may therefore reverse previously recorded incentive allocations in future periods relating to the Company’s managed partnerships. As of September 30, 2006, $2,317 was subject to such potential future reversal.

11. Shareholders’ Equity:

Dividends

The Company declared the following distributions during the nine months ended September 30, 2006 and year ended December 31, 2005:

Declaration Date	Record Date	Payment Date	Dividends Per Share
2006
September 13, 2006	September 29, 2006	October 31, 2006	$	0.05
June 8, 2006	June 30, 2006	July 28, 2006	$	0.20
March 15, 2006	March 31, 2006	April 28, 2006	$	0.20
2005
December 7, 2005	December 30, 2005	January 31, 2006	$	0.20
September 13, 2005	September 30, 2005	October 31, 2005	$	0.34
June 9, 2005	June 30, 2005	July 29, 2005	$	0.34
March 17, 2005	March 31, 2005	April 29, 2005	$	0.34

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Stock Compensation Plans

FBR Group Stock and Annual Incentive Plan (FBR Group Stock Plan)

Under the FBR Group Stock Plan, the Company may grant options to purchase stock, stock appreciation rights, performance awards and restricted and unrestricted stock for up to 24,900,000 shares of Class A common stock to eligible participants in the Plan. Participants include employees, officers and directors of the Company and its subsidiaries. The FBR Group Stock Plan has a term of 10 years and options granted may have an exercise period of up to 10 years. Options may be incentive stock options, as defined by Section 422 of the Internal Revenue Code, or nonqualified stock options.

Effective January 1, 2006, in accordance with SFAS No. 123(R) “Share-Based Payment” (SFAS 123R), the Company adopted a fair value based measurement method in accounting for all share based payment transactions with employees. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for options granted for the nine months ended September 30, 2006: dividend yield of 8.5%, expected volatility of 49%, risk-free interest rate of 4.7%, and an expected life of five years for all grants. The weighted average fair value of options granted during the nine months ended September 30, 2006 was $2.25. No options were granted during the three months ended September 30, 2006 under the FBR Group Stock Plan.

A summary of option activity under the FBR Group Stock Plan as of September 30, 2006, and changes during the nine months then ended is presented below:

	Number of Shares		Weighted-average Exercise Prices		Weighted-average Remaining Contractual Life
Outstanding as of December 31, 2005	3,188,726		$	17.47
Granted	217,500		$	9.31
Cancelled	(253,477	)	$	18.31
Exercised	(67,456	)	$	6.30
Outstanding as of September 30, 2006	3,085,293		$	17.01	2.1
Exercisable as of September 30, 2006	2,469,374		$	17.75	1.7

As of September 30, 2006, there was $2,111 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Plan relating to 615,919 nonvested options. The total unrecognized cost is expected to be recognized over a weighted-average period of 1.6 years.

FBR Capital Markets Corporation 2006 Long-Term Incentive Plan (FBR Capital Markets Long-Term Incentive Plan)

In connection with its formation, FBR Capital Markets (see Note 2) established the FBR Capital Markets Long-Term Incentive Plan. Under the FBR Capital Markets Long-Term Incentive Plan, FBR Capital Markets may grant options to purchase stock, stock appreciation rights, performance awards and restricted and unrestricted stock for up to 5,509,143 shares of common stock, subject to increase under certain provisions of the plan, to eligible participants. Participants include employees, officers and directors of the Company and its subsidiaries. The FBR Capital Markets Long-Term Incentive Plan has a term of 10 years and options granted may have an exercise period of up to 10 years. Options may be incentive stock options, as defined by Section 422 of the Internal Revenue Code, or nonqualified stock options.

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The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for options granted for the three months ended September 30, 2006: dividend yield of zero, expected volatility of 30%, risk-free interest rate of 4.8%, and an expected life of four and one-half years for all grants. The weighted average fair value of options granted during the three months ended September 30, 2006 was $5.00. No options were granted prior to the third quarter of 2006.

A summary of option activity under the FBR Capital Markets Long Term Incentive Plan as of September 30, 2006, and changes during the nine months then ended, is presented below:

	Number of Shares	Weighted-average Exercise Prices		Weighted-average Remaining Contractual Life
Outstanding as of December 31, 2005	—	$	—
Granted	3,385,000	$	15.00
Cancelled	—	$	—
Exercised	—	$	—
Outstanding as of September 30, 2006	3,385,000	$	15.00	5.9
Exercisable as of September 30, 2006	—	$	—	—

As of September 30, 2006, there was $16,358 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the FBR Capital Markets Long Term Incentive Plan relating to 3,385,000 nonvested options. The total unrecognized cost is expected to be recognized over a weighted-average period of 2.9 years.

Stock Compensation Expense

Compensation expense recognized in income for stock options for the three months and nine months ended September 30, 2006 was $1,113 and $2,090, respectively, and related tax benefit of $23 and $45, respectively. In addition, in accordance with the provisions of SFAS 123R, the Company recognized compensation expense of $446 and $1,342 relating to shares offered under the Employee Stock Purchase Plan for the three months and nine months ended September 30, 2006 respectively. The following table illustrates the effect on net income and earnings per share for the three months and nine months ended September 30, 2005, if the Company had applied the fair value recognition provisions of SFAS 123R to options granted under the Stock Plan. For purposes of this pro forma disclosure, the value of options is estimated using the Black-Scholes option pricing model with share-based awards amortized over the vesting periods pursuant to SFAS 123.

	Three months ended September 30, 2005		Nine months ended September 30, 2005
Net income	$	23,045	$	100,700
Add: Stock-based employee compensation expense included in reported net income, net of tax effects		31		92
Deduct: Stock-based employee compensation, net of tax effects		200		1,557
Pro forma net income	$	22,876	$	99,235
Basic earnings per share—as reported	$	0.14	$	0.60
Basic earnings per share—pro forma	$	0.13	$	0.59
Diluted earnings per share—as reported	$	0.14	$	0.59
Diluted earnings per share—pro forma	$	0.13	$	0.58

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Restricted Stock

The Company grants restricted common shares to employees that vest ratably over a three to four year period or cliff-vest after two to three years for various purposes based on continued employment over these specified periods. During the nine months ended September 30, 2006 and 2005, the Company granted 755,765 shares and 1,053,719 shares, respectively, of such FBR Group restricted Class A common stock at weighted average share prices of $9.55 per share and $16.40 per share, respectively. As of September 30, 2006 and December 31, 2005, a total of 1,874,434 and 2,038,340, respectively, shares of such FBR Group restricted Class A common stock was outstanding with unamortized deferred compensation of $12,744 and $15,602, respectively. As a result of adopting SFAS 123R, deferred compensation costs have been reclassified within the equity section of the balance sheet. This change in presentation had no net effect on the Company’s total equity. A summary of these unvested restricted stock awards as of September 30, 2006, and changes during the nine months then ended is presented below:

	Number of Shares		Weighted-average Grant-date Fair Value		Weighted-average Remaining Vesting Period
Nonvested as of December 31, 2005	2,038,340		$	16.40
Granted	755,765		$	9.55
Vested	(763,636	)	$	9.29
Cancelled	(156,035	)	$	14.66
Nonvested as of September 30, 2006	1,874,434		$	14.93	1.8

For the three months ended September 30, 2006 and 2005, the Company recognized $3,175 and $3,330, respectively, of compensation expense related to this FBR Group restricted stock. For the nine months ended September 30, 2006 and 2005, the Company recognized $10,016 and $10,286 respectively, of compensation expense related to this FBR Group restricted stock.

In addition, as part of the Company’s satisfaction of incentive compensation earned for past service under the Company’s variable compensation programs, employees may receive restricted Class A common stock in lieu of cash payments. These restricted Class A common stock shares are issued to an irrevocable trust and are not returnable to the Company. The Company issued 609,465 and 720,174 shares of FBR Group restricted common stock valued at $6,503 and $12,313 respectively, to the trust for the nine months ended September 30, 2006 and 2005, respectively, in settlement of such accrued incentive compensation. A summary of the undistributed restricted stock issued to the trust as of September 30, 2006, and changes during the nine months then ended is presented below:

	Number of Shares		Weighted-average Grant-date Fair Value		Weighted-average Remaining Vesting Period
Share Balance as of December 31, 2005	1,198,314		$	20.12
Shares issued to Trust	609,465		$	10.67
Shares distributed from Trust	(325,822	)	$	16.91
Share Balance as of September 30, 2006	1,481,957		$	16.93	1.6

Employee Stock Purchase Plan

The Company initiated the 1997 Employee Stock Purchase Plan (the Purchase Plan) on September 1, 1998. Under this Purchase Plan, eligible employees may purchase Class A common stock through payroll deductions at a price that is 85% of the lower of the market value of the common stock on the first day of the offering period or the last day of the offering period. As discussed above, in accordance with the provisions of SFAS 123R, effective January 1, 2006 the Company is required to recognize compensation expense relating to shares offered

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under the Purchase Plan. For the three months and nine months ended September 30, 2006, the Company recognized such compensation expense of was $446 and $1,342, respectively.

Employee Stock Purchase and Loan Plan

In connection with the Employee Stock Purchase and Loan Plan, in July and August 2001, the Company issued FBR Group stock and received five-year, limited recourse promissory notes from employees with interest accruing at 6.5 percent accreting to principal for the remaining purchase price. The notes are collateralized by the shares of stock purchased under the plan. As of September 30, 2006 and December 31, 2005, the balance outstanding on these loans was $72 and $4,018, respectively. During the nine months ended September 30, 2006, $124 of compensation expense was recorded for dividends paid on the shares purchased with proceeds from the notes.

12. Segment Information:

The Company considers its capital markets, asset management, principal investing, and mortgage banking operations to be four separately reportable segments. The capital markets segment includes the Company’s investment banking and institutional brokerage operations. Asset management includes the Company’s fee based asset management operations. The Company’s principal investing segment includes mortgage related investment activities, and substantially all of the Company’s equity security investing activities. The Company’s mortgage banking segment includes the origination and sale of mortgage loans for residential properties. The Company has developed systems and methodologies to allocate overhead costs to its business units and, accordingly, presents segment information consistent with internal management reporting. Revenue generating transactions between the individual segments have been included in the net revenue and pre-tax income of each segment. These transactions include investment banking activities provided by the capital markets segment to other segments and the sale of mortgage loans between the mortgage banking and principal investing segments. The following table illustrates the financial information for the Company’s segments for the periods presented:

	Capital Markets			Asset Management			Principal Investing			Mortgage Banking			Intersegment Eliminations (1)			Consolidated Totals
Three Months Ended September 30, 2006
Net revenues	$	35,619		$	5,930		$	(147,054	)	$	22,710		$	—		$	(82,795	)
Operating loss		(43,754	)		(3,385	)		(159,929	)		(12,605	)		—			(219,673	)
Three Months Ended September 30, 2005
Net revenues	$	123,218		$	9,625		$	23,579		$	28,873		$	(6,657	)	$	178,638
Operating income (loss)		21,790			77			12,873			3,052			(6,657	)		31,135
Nine Months Ended September 30, 2006
Net revenues	$	224,474		$	20,184		$	(118,641	)	$	78,586		$	—		$	204,603
Operating loss		(39,245	)		(8,900	)		(159,303	)		(16,397	)		—			(223,845	)
Nine Months Ended September 30, 2005
Net revenues	$	371,152		$	28,772		$	100,546		$	63,717		$	(15,375	)	$	548,812
Operating income (loss)		62,017			192			76,109			4,582			(15,375	)		127,525

(1) Intersegment Eliminations represent the elimination of intersegment transactions noted above.

13. Recent Accounting Pronouncements:

In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140” (SFAS 155). This Statement will be effective beginning in the first quarter of 2007. Earlier adoption is permitted. The statement permits interests in hybrid financial assets that contain an embedded derivative that would require

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bifurcation to be accounted for as a single financial instrument at fair value with changes in fair value recognized in earnings. This election is permitted on an instrument-by-instrument basis for all hybrid financial instruments held, obtained, or issued as of the adoption date. The Company is currently assessing the impact and timing of adoption of SFAS 155.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140,” (SFAS 156) which permits entities to elect to measure servicing assets and servicing liabilities at fair value and report changes in fair value in earnings. Adoption of SFAS 156 is required for financial periods beginning after September 15, 2006. The Company is currently assessing the impact and timing of adoption of SFAS 156, but does not expect the standard to have a material impact on the consolidated financial statements.

In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). This statement clarifies the definition of fair value, establishes a framework and hierarchy of fair value measurements, and expands disclosures about fair value measurements. This statement emphasizes that companies should use a market-based approach using similar assumptions that market participants would use in their assessment of the fair value of an asset or liability. These assumptions should include, but are not limited to, risks associated with the asset or liability and restrictions on the sale or use of the asset. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently assessing the impact of adoption of SFAS 157.

In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently assessing the impact of adoption of FIN 48.

In June 2005, the FASB ratified the consensus reached by the EITF on Issue 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (EITF 04-5). EITF 04-5 presumes that a general partner controls a limited partnership, and should therefore consolidate a limited partnership, unless the limited partners have the substantive ability to remove the general partner without cause based on a simple majority vote or can otherwise dissolve the limited partnership, or unless the limited partners have substantive participating rights over decision making. The Company adopted EITF 04-5 effective January 1, 2006. Adoption of this guidance did not have an impact on the consolidated financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108). Due to diversity in practice among registrants, SAB 108 expresses SEC staff views regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement is necessary. SAB 108 is effective for fiscal years ending after November 15, 2006, and early application is encouraged. The Company does not believe SAB 108 will have a material impact on its results from operations or financial position.

14. Subsequent Event:

Credit Facility

On October 20, 2006, the Company entered into an $180,000, 364-day senior secured credit agreement with various financial institutions that is available for general corporate purposes, working capital and other potential short-term liquidity needs, and replaces the Company’s previous senior unsecured credit facility that expired on that same date.

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

The following analysis of the consolidated financial condition and results of operations of Friedman, Billings, Ramsey Group, Inc. (the “Company”) should be read in conjunction with the unaudited Consolidated Financial Statements as of September 30, 2006 and 2005, and the Notes thereto and the Company’s 2005 Annual Report on Form 10-K.

Business Environment

Our revenues consist primarily of capital raising revenue and advisory fees in investment banking; agency commissions, principal transactions, and mortgage trading income in institutional brokerage; base management fees and incentive allocations and fees in asset management; and net interest income, net investment income, including realized gains from merchant banking investments and mortgage loans, equity method earnings, and dividend income in principal investing and mortgage banking.

Principal Investing and Mortgage Banking

The majority of our principal investing is in mortgage related investments, particularly mortgage loans and mortgage-backed securities (MBS), but we also invest in merchant banking opportunities, including equity securities, mezzanine debt and senior loans, including non-real estate related assets, subject to maintaining our REIT status. We engage in various mortgage banking activities through our non-conforming mortgage loan originator, First NLC.

Our mortgage related investment activities are subject to various risks, including, interest rate, prepayment risk and credit risk. For example, short-term interest rates have been increasing and may continue to increase. Such increases in short-term rates have caused LIBOR, the interest rate that is the basis for most of our funding costs, to increase. Because the financing arrangements we have for our mortgage assets are floating-rate and adjust periodically, the interest expense on this funding increases directly as LIBOR increases. It is possible to mitigate some of the effects on earnings from increases in short-term rates by hedging with derivative instruments such as interest-rate cap, swaps, or futures. As of September 30, 2006, we have entered into various derivative instruments to substantially hedge the interest rate risk on our borrowings.

At the same time that short-term interest rates have risen, long-term interest rates have been relatively stable. This environment has led to the continuation of refinancing opportunities for mortgage borrowers and, thus, higher than historical prepayment speeds. Higher prepayment speeds cause us to amortize any premium (the amount paid in excess of par for the asset) we have in our mortgage portfolio at a faster rate thus reducing our reported net interest yield. These higher prepayment speeds may persist causing our yield in the mortgage portfolio to be lower than anticipated.

The increase in interest rates has not been accompanied by a comparable increase in loan interest rates or coupons for non-conforming mortgage loans. The resulting compression in spread between these assets and related liabilities has resulted in lower profitability for non-conforming mortgage assets that are either held in portfolio or that are sold for cash. It is not known when or if coupons will fully adjust to reflect the higher cost of funds for these mortgage assets.

The Company is subject to credit risk as a result of our investments in mortgage loans. We manage credit risk by among other things, purchasing and originating loans at favorable loan to value ratios and for a portion of the portfolio by purchasing mortgage insurance. In addition to portfolio monitoring procedures performed by management, we engage third parties to monitor loan servicer performance, including loan collection activities and management of defaulted loans. There can be no assurance that the activities we employ to manage credit risk will be effective to manage the risk of mortgage loan default.

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Our principal investing activities also include investments in merchant banking opportunities, including equity securities, mezzanine debt and senior loans. Our merchant banking portfolio includes investments in various industries, including financial services, real estate and mortgage banking. Such merchant banking investments in these industries may be subject to similar risks to those of our mortgage investing activities.

We constantly evaluate the rates of return that can be achieved in each investment category and for each individual investment in which we participate. Although increases in short-term rates over the past year have reduced the rate of return on our mortgage investments, we have continued to maintain a high allocation of our assets and capital in this sector. There is no assurance that our past experience will be indicative of future results or that mortgage investments will provide higher rates of return than other investment alternatives. Consequently, we continue to evaluate investment opportunities against the returns available in each of our investment alternatives and endeavor to allocate our assets and capital with an emphasis toward the highest risk-adjusted returns available. This strategy will cause us to have different allocations of capital in different environments.

Capital Markets and Asset Management

Our investment banking (capital raising, merger and acquisition, restructuring, and advisory services), institutional brokerage and asset management revenues are linked to the capital markets business activities. In addition, our business activities are focused in the financial services, real estate, energy, technology, healthcare, and diversified industries sectors. Historically, we have focused on small and mid-cap stocks, although our research coverage and associated brokerage activities increasingly involve larger-cap stocks. By their nature, our business activities are highly competitive and are not only subject to general market conditions, volatile trading markets, and fluctuations in the volume of market activity, but also to the conditions affecting the companies and markets in our areas of focus. As a result, revenues can be subject to significant volatility from period to period.

Our investment banking and asset management revenues and net income are subject to substantial positive and negative fluctuations due to a variety of factors that cannot be predicted with great certainty. These factors include the overall condition of the economy and the securities markets as a whole and the industry sectors on which we focus. For example, a significant portion of the performance-based or incentive revenues that we recognize from our venture capital, private equity, and other asset management activities is based on the value of securities held by the funds we manage. The value of these securities includes unrealized gains or losses that may change from one period to another. Although when market conditions permit, we may take steps to realize or lock-in gains on these securities, these securities are often illiquid, and therefore such steps may not be possible, and the value of these securities is subject to increased market risk. Similarly, investment banking activities and our market share are subject to significant market risk.

In order to profit in this increasingly competitive environment, we continually evaluate each of our businesses across varying market conditions for competitiveness, profitability, and alignment with our long-term strategic objectives, including the diversification of revenue sources. We believe that it is important to diversify and strengthen our revenue base by increasing the segments of our business that offer a recurring and more predictable source of revenue.

On July 20, 2006, the Company closed a private offering to institutional investors by its newly formed taxable REIT subsidiary, FBR Capital Markets Corporation (FBR Capital Markets) and a concurrent private placement by FBR Capital Markets to two affiliates of Crestview Partners. These transactions in the aggregate resulted in the sale of 18 million shares of common equity for $270 million by FBR Capital Markets. The Company retains a beneficial 71.9% ownership interest in FBR Capital Markets. See Liquidity and Capital Resources for additional information.

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Results of Operations

Three months ended September 30, 2006 compared to three months ended September 30, 2005

Net income decreased from $23.0 million 2005 to a net loss of $ 67.4 million during 2006. The 2006 loss is primarily due to our decision as of September 30, 2006, to reclassify the mortgage loan portfolio held at the REIT from held for investment to held for sale. As a result of this change, we recorded our investment in this portfolio at the lower of cost or market, and consequently recognized a $146.8 million write-down in 2006. In addition, in 2006 we recognized other-than-temporary impairment write-downs of $19.9 million relating to certain investments in our merchant banking investment portfolio. The decrease in net income from 2005 also reflects a significant reduction in capital raising revenues in 2006 as compared to 2005, consistent with the industry’s relatively low volume of new equity issues as well as reductions in net interest and dividends from principal investing activities and earnings from mortgage banking activities.

These write-downs, reduced investment banking activities, and lower principal investment and mortgage banking returns were partially offset by a $121.5 million gain recorded as a result of the July 2006 share issuance by FBR Capital Markets, a holding company for the Company’s capital markets operations formed in the second quarter 2006. This gain represents the increase in value of the Company’s investment in FBR Capital Markets as a result of the share issuance and, based on the structure of the transaction, this gain was not taxable. Subsequent to the share issuance, the Company retains a 71.9% beneficial ownership interest in FBR Capital Markets.

In addition to the above, effective January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment” (SFAS 123R). Pursuant to the provisions of SFAS 123R, we recorded $1.6 million of compensation expense related to such share-based payments during the third quarter of 2006. The third quarter 2006 net loss also includes a $26.1 million tax benefit as compared to an $8.1 million income tax provision recorded in the third quarter of 2005.

The Company’s net revenues decreased from $178.6 million in 2005 to $(82.8) million in 2006 due to the following changes in revenues and interest expense.

Capital raising revenue decreased 92% from $86.0 million in 2005 to $6.9 million in 2006. The decrease is attributable to a decrease in amounts raised in private placement transactions as well as fewer lead or co-lead managed transactions completed in 2006 as compared to 2005. The Company completed one private equity placement during the third quarter 2006 generating $3.7 million in revenues compared to four private equity placements in 2005 generating $56.8 million. During the third quarter of 2006, the Company managed four public equity offerings raising $328 million, compared to eleven public equity offerings raising $4.8 billion in 2005.

Advisory revenue increased 93% from $3.0 million in 2005 to $5.8 million in 2006 reflecting an increase in the number of advisory engagements in 2006.

Institutional brokerage revenue from agency commissions and principal transactions decreased $2.1 million from $24.8 million in 2005 to $22.7 million in 2006 as a result of decrease in trading gains offset by increases in trading volume. In addition, the Company’s mortgage sales and trading operations contributed revenues net of interest expense of $(0.2) million in 2006, reflecting, $13.8 million in interest income, a net investment loss of $1.5 million and $12.5 million of interest expense. The Company’s mortgage sales and trading operations contributed revenues net of interest expense of $0.7 million in 2005, reflecting $11.3 million in interest income, a net investment loss of $2.4 million and $8.2 million of interest expense.

Asset management base management fees decreased 38% from $7.9 million in 2005 to $4.9 million in 2006. The decrease is primarily attributable to the decrease in average net assets under management in 2006 as compared to 2005, due in large part to the closure and liquidation of certain hedge and offshore funds during the third and fourth quarters of 2005. Asset management incentive allocations and fees decreased from $0.8 million in 2005 to $(0.03) million in 2006 as a result of fund performance during the period.

Revenues from our principal investment, mortgage banking, and warehouse financing activities, net of related interest expense, totaled $(110.1) million for the third quarter of 2006 compared to $57.7 million for the

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third quarter of 2005. The decrease in net revenues is primarily the result of a $146.8 million write-down in the Company’s loan portfolio and the recognition of other-than-temporary impairments related to the merchant banking portfolio. As of September 30, 2006, the Company made a determination in evaluating its investment strategy and its intent related to its held-for-investment mortgage loan portfolio to reclassify these loans to held-for-sale. As a result of this change, the Company recorded its investment in this loan portfolio at the lower of cost or market and recognized a $146.8 million write-down in the value of these loans. The change in intent is primarily based on the strategy to redeploy the capital invested in that portfolio more rapidly to investments with a higher earnings potential than if the portfolio were held to maturity. Significant components of these net revenues, including net interest and net investment income (loss), are discussed below.

The components of net interest income from mortgage investments are summarized in the following table (dollars in thousands):

	Three months ended September 30, 2006							Three months ended September 30, 2005
	Average Balance		Income/ (Expense)			Yield/ Cost		Average Balance		Income/ (Expense)			Yield/ Cost
Mortgage-backed securities	$	4,215,595	$	62,491		5.93	%	$	9,783,015	$	77,102		3.15	%
Mortgage loans		6,395,043		107,102		6.70	%		5,449,225		94,044		6.90	%
Reverse repurchase agreements		256,844		3,763		5.73	%		193,780		2,018		4.08	%
	$	10,867,482		173,356		6.38	%	$	15,426,020		173,164		4.49	%
Other (1)				3,756							620
				177,112							173,784
Repurchase agreements	$	1,095,487		(14,984	)	(5.35	)%	$	1,567,729		(13,896	)	(3.47	)%
Commercial paper		2,916,752		(40,265	)	(5.40	)%		8,300,373		(75,299	)	(3.55	)%
Mortgage financing credit facilities		998,697		(15,394	)	(6.03	)%		3,661,232		(40,174	)	(4.29	)%
Securitization		5,281,887		(74,686	)	(5.53	)%		1,322,002		(14,224	)	(4.21	)%
Derivative contracts (2)		—		7,874					—		1,133
	$	10,292,823		(137,455	)	(5.23	)%	$	14,851,336		(142,460	)	(3.75	)%
Net interest income/spread			$	39,657		1.15	%			$	31,324		0.74	%

(1) Includes interest income on cash and other miscellaneous interest-earning assets.

(2) Includes the effect of derivative instruments accounted for as cash flow hedges.

In connection with the repositioning of the mortgage-backed securities portfolio, the Company liquidated $7.4 billion of securities from this portfolio during the first half of 2006. As a result of these sales, the related repurchase agreement and commercial paper borrowings used to fund these investments likewise decreased significantly. The change in mortgage financing credit facilities and securitization balances from the same period in 2005 reflects the change in the funding source of the mortgage loan portfolio from short-term to long-term.

As shown in the table above, net interest income increased by $8.3 million from the quarter ended September 30, 2005 to the quarter ended September 30, 2006. This increase was due to a slightly higher increase in interest income yield as compared to the increase in the cost of funding. Amortization expense totaled $12.7 million during the third quarter of 2006 compared to $24.9 million during the third quarter of 2005 reflecting the lower premium in the MBS portfolio during 2006 as compared to 2005.

Net interest income from the MBS portfolio increased by $16.7 million from $(5.9) million in 2005 to $10.8 million in 2006 due to an increase in the net interest spread earned on the portfolio from (0.3)% in 2005 to 0.5% in 2006.

Mortgage loan portfolio, mortgage banking and warehouse financing related interest income was $110.9 million with related interest expense of $93.6 million, resulting in net interest income of $17.3 million for

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the third quarter of 2006. This compares to mortgage loan portfolio, mortgage banking and warehouse financing related interest income of $96.1 million with related interest expense of $59.4 million, resulting in net interest income of $36.7 million for the quarter ended September 30, 2005. The reduction in net interest income is due primarily to increases in short term interest rates.

In addition to net interest income, the Company recorded $4.8 million in dividend income from its merchant banking equity investment portfolio in 2006, compared to $8.8 million during 2005. The decrease in dividend income was primarily due to the decrease in the number of and amount of capital invested in dividend paying companies in the merchant banking portfolio. The Company realized a net investment loss of $170.6 million during 2006 compared to net investment income of $4.9 million in 2005. The following table summarizes the components of net investment income (loss) (dollars in thousands):

	Three months ended September 30,
	2006			2005
Available for sale and cost method securities—other-than-temporary impairments	$	(19,903	)	$	—
Mortgage loans held-for-sale—lower of cost or market write-down		(146,823	)		—
Realized gains on sale of equity investments and mortgage-backed securities		4,380			4,502
Income (loss) from equity method investments		100			(404	)
(Losses) gains on investment securities—marked-to-market, net		(3,324	)		683
Other, net		(5,051	)		85
	$	(170,621	)	$	4,866

The 2006 net investment loss is due primarily to the effects of reclassifying the portfolio of loans held-for-investment to held-for-sale as of September 30, 2006, as discussed above. In determining the lower-of-cost or market value of these loans, the Company considered various factors effecting the overall value of the portfolio, including but not limited, to factors such as prepayment speeds, default rates, loss assumptions, geographic locations, collateral values, and mortgage insurance coverage. The Company utilized the present value of expected cash flows considering the specific characteristics of each individual loan, aggregating the loans by specific securitization issuance, in determining the value of the portfolio at September 30, 2006. The Company also considered that these loans are collateral for securitization borrowings; therefore, taking into consideration the impact of any sale of the loan portfolio on the securitization borrowings, the related cash flows and the overall value of the residual interests in the securitization transactions that have been retained by the Company. Significant assumptions used by the Company in determining this value were supported by comparison to available market data for similar portfolios and transactions as well as a third party valuation of the residual interests in the securitization transactions.

Although the Company considers its valuation methodology to be appropriate, the realized value from a market transaction may differ given the inherently subjective nature of the valuation, including uncertainties related to the various market assumptions and other data used in the calculation and that difference could be material. The actual value from a market transaction will be subject to, among other things, changes in both short- and long-term interest rates, prepayment rates, housing prices, credit loss experience and the shape and slope of the yield curve. The Company will continue to monitor and assess the significant assumptions underlying this value in the future.

As of September 30, 2006, as part of the Company’s quarterly assessment of unrealized losses in its portfolio of marketable equity securities for potential other-than-temporary impairments and its assessment of cost method investments, the Company recorded an other-than-temporary impairment charge of $19.9 million relating to marketable equity securities and cost method investments.

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Other net investment income primarily includes net gains and losses from derivatives not designated as hedges under SFAS 133. These derivatives primarily include hedges relating to the financing for certain MBS positions.

During the three months ended September 30, 2006 and 2005, the Company sold $2.2 billion and $1.3 billion of loans, respectively, and earned a gross premium of 2.25% and 2.57%, respectively. During the third quarter of 2006, the provision for losses increased significantly as compared to the prior year and prior 2006 quarters reflecting the effects of an industry-wide increase in requests for buy-backs of loans related to early pay defaults. The components of net investment income from mortgage banking activities are as follows (dollars in thousands):

	Three months ended September 30,
	2006			2005
Gross gain from loan sale transactions, including hedge activities	$	45,951		$	34,200
Provision for losses, including repurchase and premium recapture and lower of cost or market valuation allowances		(23,843	)		(3,312	)
Direct loan origination costs, net of fees earned		(6,016	)		(13,288	)
	$	16,092		$	17,600

Other revenues increased from $5.5 million in 2005 to $6.5 million in 2006 primarily due to an increase in 12b-1 fees and other interest income.

The Company’s mortgage loan portfolio is comprised of loans predominately originated in 2005 and purchased by the Company in the second half of 2005 and therefore has a limited history. For the three months ended September 30, 2005, the Company’s average loans held for investment balance was $4.0 billion. For the three months ended September 30, 2005, the Company recorded a provision for loan losses relating to its portfolio of loans held for investment of $4.9 million. As discussed previously, the Company reclassified this loan portfolio to a held for sale designation as of September 30, 2006.

Interest expense unrelated to our principal investing, mortgage banking, warehouse financing and brokerage activities primarily relates to long-term debt issued through FBR TRS Holdings. These costs increased from $4.2 million in 2005 to $6.5 million in 2006 due to increased long-term borrowings of $40.0 million subsequent to the third quarter of 2005, as well as increased interest rates associated with these borrowings.

Total non-interest expenses decreased 7.2% from $147.5 million in 2005 to $136.9 million in 2006. This decrease reflects reductions in variable compensation, professional services and business development costs due in part to decreased investment banking revenues. These decreases are offset by increased mortgage loan related costs due to larger loan portfolio balances during 2006 as compared to 2005 as well as increased occupancy and equipment costs in 2006 reflecting investments made in upgrading and expanding office space.

Compensation and benefits expense decreased 21.4% from $88.3 million in 2005 to $69.4 million in 2006. This decrease is primarily due to a reduction in variable compensation as a result of decreased investment banking revenues offset slightly by the $1.6 million of stock compensation expense recorded pursuant to SFAS 123R.

Professional services decreased 11.7% from $16.2 million in 2005 to $14.3 million in 2006 primarily due to reductions in corporate accounting and consulting costs in 2006 in part due to 2005 results including non-recurring costs associated with the integration of First NLC’s operations into the Company’s control structure. In addition, the change reflects decreased costs associated with capital raising activities consistent with the decrease in investment banking revenue.

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Business development expenses decreased 13.6% from $8.8 million in 2005 to $7.6 million in 2006, primarily due to reductions in corporate business development costs, including advertising and marketing costs as well as costs associated with investor conferences. In addition, the change reflects decreased costs associated with capital raising activities consistent with the decrease in investment banking revenue.

Clearing and brokerage fees increased 20.8% from $2.4 million in 2005 to $2.9 million in 2006. The increase is due to increased equity trading volumes as well as mortgage trading activity.

Occupancy and equipment expense increased 37.2% from $9.4 million in 2005 to $12.9 million in 2006, including an increase of $0.8 million in depreciation expense from $2.6 million in 2005 to $3.4 million in 2006. This overall increase is primarily due to the investments made in expanding and upgrading office space at our Arlington facilities, upgrades of technology, as well as an increase in costs associated with First NLC and its loan origination platform.

Communications expense increased 16.1% from $5.6 million in 2005 to $6.5 million in 2006 primarily due to increased costs related to market data and customer trading services.

Other operating expenses increased 37.9% from $16.9 million in 2005 to $23.3 million in 2006. This change is primarily due to increased mortgage servicing and mortgage insurance costs as well as costs incurred in 2006 in settlement of certain claims and disputes associated with the Company’s operating activities.

The total income tax provision changed from a $8.1 million tax expense in 2005 to a $26.1 million tax benefit in 2006 due to the current year losses at the Company’s taxable REIT subsidiaries. The Company’s annualized effective tax rate at its taxable REIT subsidiaries was 38.6% for the three months ended September 30, 2006 compared to 43.0% in 2005. The disparity between the effective tax rates is due primarily to the effects of charges state apportionment.

Nine months ended September 30, 2006 compared to nine months ended September 30, 2005

Net income decreased from $100.7 million in 2005 to a $71.1 million loss in 2006. The 2006 loss is primarily due to our decision as of September 30, 2006, to reclassify the mortgage loan portfolio held at the REIT from held for investment to held for sale. As a result of this change, we recorded our investment in this portfolio at the lower of cost or market, and consequently recognized a $146.8 million write-down in the third quarter 2006. In addition, in 2006 we recognized other-than-temporary impairment write-downs of $62.4 million relating to certain investments in our merchant banking investment portfolio. The decrease in net income from 2005 also reflects a significant reduction in capital raising revenues in 2006 as compared to 2005, consistent with the industry’s relatively low volume of new equity issues as well as reductions in net interest and dividends from principal investing activities, reductions in asset management fees and earnings from mortgage banking activities.

These write-downs, reduced investment banking activities, and lower principal investment, asset management and mortgage banking returns were partially offset by a $121.5 million gain recorded as a result of the July 2006 share issuance by FBR Capital Markets, a holding company for the Company’s capital markets operations formed in the second quarter 2006. This gain represents the increase in value of the Company’s investment in FBR Capital Markets as a result of the share issuance and, based on the structure of the transaction, this gain was not taxable. Subsequent to the share issuance, the Company retains a 71.9% beneficial ownership interest in FBR Capital Markets. These items are also offset by $7.5 million of expenses recognized in the first quarter of 2005 relating to proposed settlements with the SEC and NASD Department of Market Regulation.

In addition to the above, effective January 1, 2006, the Company adopted SFAS 123R. Pursuant to the provisions of SFAS 123R, we recorded $3.4 million of compensation expense related to such share-based

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payments during 2006. The net loss in 2006 also includes a $26.5 million tax benefit as compared to a $26.8 million income tax provision recorded in 2005.

The Company’s net revenues decreased 62.7% from $548.8 million in 2005 to $204.6 million in 2006 due to the following changes in revenues and interest expense.

Capital raising revenue decreased 55.8% from $267.9 million in 2005 to $118.3 million in 2006. The decrease is attributable to a decrease in amounts raised in private placement transactions as well as fewer lead or co-lead managed transactions completed in 2006 as compared to 2005. During the first nine months of 2006, the Company completed nine private equity placements generating $81.7 million in revenues compared to ten private equity placements in 2005 generating $163.6 million. In addition, during the first nine months of 2006, the Company managed 20 public equity offerings raising $5.7 billion, compared to 42 public equity offerings raising $12.1 billion in 2005.

Advisory revenue increased 45.6% from $10.3 million in 2005 to $15.0 million in 2006 primarily due to an increase in the number of advisory engagements.

Institutional brokerage revenue from agency commissions and principal transactions increased 8.2% from $75.9 million in 2005 to $82.1 million in 2006 as a result a decrease in trading gains offset by increases in trading volume. In addition, the Company’s mortgage sales and trading operations contributed revenues net of interest expense of $3.4 million, reflecting $48.6 million in interest income, a net investment loss of $3.0 million and $42.2 million of interest expense.

Asset management base management fees decreased 38% from $24.2 million in 2005 to $15 million in 2006. The decrease is primarily attributable to the decrease in average productive assets under management in 2006 as compared to 2005, due in large part to the closure and liquidation of certain hedge and offshore funds during the third and fourth quarters of 2005, as well as a decrease in mutual fund administrative fees. Asset management incentive allocations and fees decreased 25% from $1.2 million in 2005 to $0.9 million in 2006 as a result of fund performance during the period.

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Revenues from our principal investment, mortgage banking and warehouse financing activities, net of related interest expense, totaled $9.0 million for the first nine months of 2006 compared to $176.9 million for the first nine months of 2005. The decrease in net revenues is primarily the result of a $146.8 million write-down in the Company’s loan portfolio and the recognition of other-than-temporary impairments related to the merchant banking portfolio. As of September 30, 2006, the Company made a determination in evaluating its investment strategy and its intent related to its held-for investment mortgage loan portfolio to reclassify these loans to held-for-sale. As a result of this change, the Company recorded its investment in this loan portfolio at the lower of cost or market and recognized a $146.8 million write-down in the value of these loans. The change in intent is primarily based on the strategy to redeploy the capital invested in that portfolio more rapidly to investments with higher earnings potential than if the portfolio were held to maturity. Significant components of these net revenues, including net interest and net investment income (loss), are discussed below.

The components of net interest income from mortgage investments are summarized in the following table (dollars in thousands):

	Nine Months Ended September 30, 2006							Nine Months Ended September 30, 2005
	Average Balance		Income / (Expense)			Yield / Cost		Average Balance		Income / (Expense)			Yield / Cost
Mortgage-backed securities	$	2,806,702	$	112,508		5.35	%	$	10,749,189	$	266,593		3.31	%
Mortgage loans		7,058,192		363,237		6.86	%		2,714,293		141,946		6.97	%
Reverse repurchase agreements		201,652		8,377		5.48	%		284,159		7,495		3.48	%
	$	10,066,546		484,122		6.41	%	$	13,747,641		416,034		4.03	%
Other (1)				5,071							980
				489,193							417,014
Repurchase agreements	$	624,004		(23,717	)	(5.01	)%	$	2,832,484		(62,031	)	(2.89	)%
Commercial paper		1,998,994		(75,969	)	(5.01	)%		7,836,804		(182,852	)	(3.08	)%
Mortgage financing credit facilities		1,064,325		(45,830	)	(5.68	)%		1,923,132		(60,590	)	(4.15	)%
Securitization		5,874,786		(237,533	)	(5.33	)%		573,722		(18,101	)	(4.16	)%
Derivative contracts (2)		—		9,798					—		8,474
	$	9,562,109		(373,251	)	(5.15	)%	$	13,166,142		(315,100	)	(3.15	)%
Net interest income/spread			$	115,942		1.26	%			$	101,914		0.88	%

(1) Includes interest income on cash and other miscellaneous interest-earning assets.

(2) Includes the effect of derivative instruments accounted for as cash flow hedges.

As a result of the First NLC acquisition in February 2005, the increase in the mortgage portfolio and the repositioning of the MBS portfolio to eliminate a negative spread on much of the portfolio, the Company’s 2006 principal investment portfolio composition shifted significantly from that of the same period in 2005. In connection with the repositioning of the mortgage-backed securities portfolio, the Company liquidated $7.4 billion of securities from this portfolio during the first nine months of 2006. As a result of these sales, the related repurchase agreement and commercial paper borrowings used to fund these investments likewise decreased significantly. In contrast, the 2006 mortgage loan portfolio and related funding liabilities, while comparable to the fourth quarter of 2005, have increased significantly from those of the first three quarters of 2005, representing the majority of the principal investment portfolio at September 30, 2006.

As shown in the table above, net interest income increased by $14.0 million from the nine months ended September 30, 2005 to the nine months ended September 30, 2006. This increase was due to an increase in the average balance of mortgage loans which have higher yields than those earned on our MBS portfolio offset by increased borrowing costs due to continued increases in short term interest rates. Amortization expense totaled $33.8 million in the first nine months of 2006 compared to $58.0 million in the first nine months of 2005.

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Net interest income from the MBS portfolio decreased by $22.8 million from $43.4 million in 2005 to $20.6 million in 2006 due to a decrease in the average balance of the MBS portfolio and decrease in the net interest spread earned on the portfolio from 0.4% in 2005 to 0.3% in 2006.

Mortgage loan portfolio, mortgage banking and warehouse financing related interest income was $371.6 million with related interest expense of $291.2 million, resulting in net interest income of $80.4 million for the first nine months of 2006. This compares to mortgage loan portfolio, mortgage banking and warehouse financing related interest income of $149.4 million with related interest expense of $89.9 million, resulting in net interest income of $59.5 million for the nine months ended September 30, 2005.

In addition to net interest income, the Company recorded $12.5 million in dividend income from its merchant banking equity investment portfolio in 2006, compared to $20.6 million during 2005. The decrease in dividend income was primarily due to the decrease in the number of and amount of capital invested in dividend paying companies in the merchant banking portfolio. The Company realized a net investment loss of $175.7 million during 2006 compared to net investment income of $18.7 million in 2005. The following table summarizes the components of net investment income (loss) (dollars in thousands):

	Nine months ended September 30,
	2006			2005
Available for sale and cost method securities—other-than-temporary impairments	$	(62,422	)	$	—
Mortgage loans held-for-sale—lower of cost or market write-down		(146,823	)		—
Realized gains on sale of equity investments and mortgage-backed securities		28,152			18,520
Income (loss) from equity method investments		1,284			(840	)
(Losses) gains on investment securities—marked-to-market, net		(729	)		929
Other, net		4,812			137
	$	(175,726	)	$	18,746

The 2006 net investment loss is due primarily to the effects of reclassifying the portfolio of loans held-for-investment to held-for-sale as of September 30, 2006, as discussed above. In determining the lower-of-cost or market value of these loans, the Company considered various factors effecting the overall value of the portfolio, including but not limited, to factors such as prepayment speeds, default rates, loss assumptions, geographic locations, collateral values, and mortgage insurance coverage. The Company utilized the present value of expected cash flows considering the specific characteristics of each individual loan, aggregating the loans by specific securitization issuance, in determining the value of the portfolio at September 30, 2006. The Company also considered that these loans are collateral for securitization borrowings; therefore, taking into consideration the impact of any sale of the loan portfolio on the securitization borrowings, the related cash flows and the overall value of the residual interests in the securitization transactions that have been retained by the Company. Significant assumptions used by the Company in determining this value were supported by comparison to available market data for similar portfolios and transactions as well as a third party valuation of the residual interests in the securitization transactions.

Although the Company considers its valuation methodology to be appropriate, the realized value from a market transaction may differ given the inherently subjective nature of the valuation, including uncertainties related to the various market assumptions and other data used in the calculation and that difference could be material. The actual value from a market transaction will be subject to, among other things, changes in both short- and long-term interest rates, prepayment rates, housing prices, credit loss experience and the shape and slope of the yield curve. The Company will continue to monitor and assess the significant assumptions underlying this value in the future.

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As part of the Company’s quarterly assessments of unrealized losses in its portfolio of marketable equity securities for potential other-than-temporary impairments and its assessment of cost method investments, the Company recorded other-than-temporary impairment charges of $62.4 million relating to marketable equity securities and cost method investments in 2006.

Other net investment income primarily includes net gains and losses from derivatives not designated as hedges under SFAS 133. These derivatives primarily include hedges relating to the financing for certain MBS positions.

During the nine months ended September 30, 2006 and 2005, the Company sold $5.6 billion and $2.6 billion of loans, respectively, and earned a gross premium of 1.92% and 2.68%, respectively. During the third quarter of 2006, the provision for losses increased significantly as compared to the prior year and prior 2006 quarters reflecting the effects of an industry-wide increase in requests for buy-backs of loans related to early pay defaults. The components of net investment income from mortgage banking activities are as follows (dollars in thousands):

	Nine months ended September 30,
	2006			2005
Gross gain from loan sale transactions, including hedge activities	$	111,406		$	72,715
Provision for losses, including repurchase and premium recapture and lower of cost or market valuation allowances		(36,119	)		(7,707	)
Direct loan origination costs, net of fees earned		(19,056	)		(29,368	)
	$	56,231		$	35,640

Other revenues decreased from $17.1 million in 2005 to $17.0 million in 2006 primarily due to a decrease in interest income related to warehouse financing.

The Company’s mortgage loan portfolio is comprised of loans predominately originated in 2005 and purchased by the Company in the second half of 2005 and therefore has a limited history. For the nine months ended September 30, 2006 and 2005, the Company’s average loans held for investment balance was $6.0 billion and $1.8 billion, respectively. For the nine months ended September 30, 2006 and 2005, the Company recorded provisions for loan losses relating to its portfolio of loans held for investment $15.7 million and $6.0 million, respectively. As discussed previously, the Company reclassified these loans to a held for sale category as of September 30, 2006.

Interest expense unrelated to our principal investing, mortgage banking, warehouse financing and brokerage activities primarily relates to long-term debt issued through FBR TRS Holdings. These costs increased from $9.3 million in 2005 to $19.0 million in 2006 due to increased long-term borrowings of $40 million subsequent to the third quarter of 2005 as well as increased interest rates associated with these borrowings.

Total non-interest expenses increased 1.7% from $421.3 million in 2005 to $428.4 million in 2006. This increase reflects the inclusion of costs related to First NLC and its operations for the entire first nine months of 2006 as compared to 2005 results that include First NLC activities from the date of acquisition, February 16, 2005, through September 30, 2005. This increase also reflects increased mortgage loan related costs due to larger portfolio balances during 2006. These increases are offset by the $7.5 million of expenses recognized in the first quarter of 2005 relating to proposed settlements with the SEC and NASD’s Department of Market Regulation. This increase is further offset by decreases in variable compensation, professional services and business development costs due in part to decreased investment banking revenues.

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Compensation and benefits expense decreased 8% from $244.2 million in 2005 to $224.6 million in 2006. This decrease is primarily due to a $32.5 million decrease in variable compensation associated with the decrease in investment banking revenue offset by a $16.7 million increase in First NLC compensation and the $3.4 million of stock compensation recorded pursuant to SFAS 123R. The increase in First NLC compensation is attributable to the inclusion of its activities for the entire 2006 period as compared to its inclusion in 2005 results from the date of acquisition, as well as net increase in its headcount related to expansion of its origination platform.

Professional services decreased 17% from $50.0 million in 2005 to $41.5 million in 2006 primarily due to reductions in corporate accounting and consulting costs in 2006 in part due to 2005 results including non-recurring costs associated with the integration of First NLC’s operations into the Company’s control structure. In addition, the change reflects decreased costs associated with capital raising activities consistent with the decrease in investment banking revenue.

Business development expenses decreased 16.3% from $36.2 million in 2005 to $30.3 million in 2006. This decrease is primarily due to a decrease in corporate business development costs, including advertising costs and costs associated with the Company’s sponsorship of the PGA Tour’s FBR Open, as well as costs associated with investor conferences. In addition, the change reflects decreased costs associated with capital raising activities consistent with the decrease in investment banking revenue.

Clearing and brokerage fees increased 29.7% from $6.4 million in 2005 to $8.3 million in 2006. The increase is due to increased equity trading volumes as well as mortgage trading activity.

Occupancy and equipment expense increased 52.3% from $23.9 million in 2005 to $36.4 million in 2006, including an increase of $3.3 million in depreciation expense from $6.7 million in 2005 to $10.0 million in 2006. This overall increase is primarily due to the investments made in expanding and upgrading office space at our Arlington facilities, upgrades of technology, as well as an increase in costs associated with First NLC, reflecting the inclusion of its activities for the entire 2006 period as compared to its inclusion in 2005 results from the date of acquisition.

Communications expense increased 21.5% from $14.9 million in 2005 to $18.1 million in 2006 primarily due to increased costs related to market data and customer trading services as well as increased costs associated with First NLC, reflecting the inclusion of its activities for the entire 2006 period as compared to its inclusion in 2005 results from the date of acquisition.

Other operating expenses increased 51.6% from $45.7 million in 2005 to $69.3 million in 2006. This change is primarily due to an increase of approximately $26.2 million in servicing fees and insurance related to the mortgage loan portfolio offset by the $7.5 million incurred in 2005 relating to the proposed settlements with the SEC and the NASD’s Department of Market Regulation.

The total income tax provision changed from a $26.8 million tax expense in 2005 to a $26.5 million tax benefit in 2006 due to the current year losses at the Company’s taxable REIT subsidiaries. The Company’s annualized effective tax rate at its taxable REIT subsidiaries was 40.7% for the nine months ended September 30, 2006 compared to 46% in 2005. The disparity between the effective tax rates is due primarily to the non-deductible nature of the $7.5 million accrued during the first quarter of 2005 relating to the Company’s proposed settlements with the SEC and the NASD’s Department of Market Regulation and the effects of changes in state apportionment.

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Liquidity and Capital Resources

Liquidity is a measurement of our ability to meet potential cash requirements including ongoing commitments to repay borrowings, fund investments, loan acquisition and lending activities, and for other general business purposes. In addition, regulatory requirements applicable to our broker-dealer subsidiaries require minimum capital levels for these entities. The primary sources of funds for liquidity consist of borrowings under repurchase agreements, commercial paper borrowings, securitization financings, principal and interest payments on mortgage-backed securities and mortgage loans, dividends on equity securities, proceeds from sales of securities and mortgage loans, internally generated funds, equity capital contributions, and credit provided by banks, clearing brokers, and affiliates of our principal clearing broker. Potential future sources of liquidity for us include existing cash balances, internally generated funds, borrowing capacity through margin accounts and under warehouse and corporate lines of credit, and future issuances of common stock, preferred stock, or debt.

FBR Capital Markets Corporation Private Equity Offering

On July 20, 2006, the Company closed a private offering to institutional investors by its newly formed taxable REIT subsidiary, FBR Capital Markets, and a concurrent private placement by FBR Capital Markets to two affiliates of Crestview Partners. These two concurrent transactions in the aggregate resulted in the sale of 18 million shares of common equity for $270 million by FBR Capital Markets. Cash proceeds to FBR Capital Markets, after deducting a placement fee payable to an affiliate of Crestview Partners with respect to the shares purchased by the Crestview affiliates and other costs, were $259.7 million. In connection with the transactions, we completed the contribution to FBR Capital Markets of our investment banking, institutional brokerage and research and asset management businesses, including the existing subsidiaries FBR & Co., Inc., FBRIL, FBRIM and FBR Fund Advisors. As a result of these transactions, we retain a beneficial 71.9% ownership interest in FBR Capital Markets, and will continue to consolidate FBR Capital Markets for financial reporting purposes.

In addition, in connection with this private placement, pursuant to the guidance in Staff Accounting Bulletin No. 51, “Accounting for Sales of Stock of a Subsidiary,” the Company adopted an accounting policy to recognize gains and losses on issuances of subsidiary stock in the statement of operations. Accordingly, in July 2006, we recognized a net gain $121.5 million related to the sale of the FBR Capital Markets shares.

As part of these transactions, the Company and FBR Capital Markets entered into a series of agreements, including a contribution agreement, a corporate agreement, a services agreement, a management services agreement, a trademark license agreement and a tax sharing agreement. In addition, FBR Capital Markets and the Company entered into a series of agreements with affiliates of Crestview Partners, including an investment agreement, a governance agreement, a voting agreement, a registration rights agreement, a professional services agreement and option agreements to purchase additional shares.

Sources of Funding

We believe that our existing cash balances, cash flows from operations, borrowing capacity, other sources of liquidity and execution of our financing strategies should be sufficient to meet our cash requirements. We have obtained, and believe we will be able to continue to obtain, short-term financing in amounts and at interest rates consistent with our financing objectives. We may, however, seek debt or equity financings, in public or private transactions, to provide capital for corporate purposes and/or strategic business opportunities, including possible acquisitions, joint ventures, alliances, or other business arrangements which could require substantial capital outlays. Our policy is to evaluate strategic business opportunities, including acquisitions and divestitures, as they arise. There can be no assurance that we will be able to generate sufficient funds from future operations, or raise sufficient debt or equity on acceptable terms, to take advantage of investment opportunities that become available. Should our needs ever exceed these sources of liquidity, we believe that most of our investments could be sold, in most circumstances, to provide cash.

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As of September 30, 2006, the Company’s indebtedness totaled $13.4 billion, which resulted in a leverage ratio of 11.5 to 1. In addition to trading account securities sold short and other payables and accrued expenses, our indebtedness consisted of repurchase agreements with several financial institutions, commercial paper issued through Georgetown Funding and Arlington Funding, securitization financing and long term debentures issued through our taxable REIT subsidiary, FBR TRS Holdings, Inc. (TRS Holdings). Such long-term debt issuances have totaled $317.5 million. These long term debt securities accrue and require payments of interest quarterly at annual rates of three-month LIBOR plus 2.25%-3.25%, mature in thirty years, and are redeemable, in whole or in part, without penalty after five years. As of September 30, 2006, we had $324.4 million of long-term corporate debt.

As of September 30, 2006, the Company had outstanding securitization financing liabilities of $4.9 billion. The securities have a final maturity in 2035 and are callable at par once the total balance of the loans collateralizing the debt is reduced to a certain percentage of their respective original balances as defined in the securitization documents. The balance of debt is reduced as the underlying loan collateral is paid down. Interest rates on these bonds reset monthly and are indexed to one-month LIBOR. The weighted average interest rate payable on the securities was 5.75% as of September 30, 2006.

On October 20, 2006, we entered into a $180 million, 364-day senior secured credit agreement with various financial institutions. The facility is available for general corporate purposes, working capital and other potential short-term liquidity needs and replaces the Company’s previous senior unsecured facility that expired on that same date.

Georgetown Funding is a special purpose Delaware limited liability company, organized for the purpose of issuing extendable commercial paper notes in the asset-backed commercial paper market and entering into reverse repurchase agreements with us and our affiliates. We serve as administrator for Georgetown Funding’s commercial paper program, and all of Georgetown Funding’s transactions are conducted with FBR. Through our administration agreement, and repurchase agreements we are the primary beneficiary of Georgetown Funding and consolidate this entity for financial reporting purposes. The extendable commercial paper notes issued by Georgetown Funding are rated A1+/P1 by Standard & Poor’s and Moody’s Investors Service, respectively. Our Master Repurchase Agreement with Georgetown Funding enables us to finance up to $12 billion of mortgage-backed securities.

Arlington Funding is a special purpose Delaware limited liability company, organized for the purpose of issuing extendable commercial paper notes in the asset-backed commercial paper market and providing warehouse financing in the form of reverse repurchase agreements to the Company and its affiliates and to mortgage originators with which we have a relationship. We serve as administrator for Arlington Funding’s commercial paper program and provide collateral as well as guarantees for commercial paper issuances. Through these arrangements we are the primary beneficiary of Arlington Funding and consolidate this entity for financial reporting purposes. The extendable commercial paper notes issued by Arlington Funding are rated A1+/P1 by Standard & Poor’s and Moody’s Investors Service, respectively. Our financing capacity through Arlington Funding is $5 billion.

The Company also has short-term financing facilities that are structured as repurchase agreements with various financial institutions to fund its portfolio of mortgage loans and certain of its mortgage-backed securities. The interest rates under these agreements are based on LIBOR plus a spread that ranges between 0.60% to 1.25% based on the nature of the mortgage collateral.

Our mortgage financing repurchase agreements include provisions contained in the standard master repurchase agreement as published by the Bond Market Association and may be amended and supplemented in accordance with industry standards for repurchase facilities. Our mortgage financing repurchase agreements include financial covenants, with which the failure to comply would represent an event of default under the applicable repurchase agreement. Similarly, each repurchase agreement includes events of default for failures to

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qualify as a REIT, events of insolvency and events of default on other indebtedness. As provided in the standard master repurchase agreement as typically amended, upon the occurrence of an event of default or termination event the applicable counterparty has the option to terminate all repurchase transactions under such counterparty’s repurchase agreement and to demand immediate payment of any amount due from us to the counterparty.

Under our repurchase agreements, we may be required to pledge additional assets to our repurchase agreement counterparties in the event the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral (i.e., margin call), which may take the form of additional securities or cash. Margin calls on repurchase agreements collateralized by our MBS investments primarily result from events such as declines in the value of the underlying mortgage collateral caused by factors such as rising interest rates or prepayments. Margin calls on repurchase agreements collateralized by our mortgage loans primarily result from events such as declines in the value of the underlying mortgage collateral caused by interest rates, prepayments, and/or the deterioration in the credit quality of the underlying loans.

To date, we have not had any margin calls on our repurchase agreements that we were not able to satisfy with either cash or additional pledged collateral. However, should we encounter a surge in interest rates, prepayments, or delinquency levels, margin calls on our repurchase agreements could result in a manner that could cause an adverse change in our liquidity position.

The following table provides information regarding the Company’s outstanding commercial paper, repurchase agreement borrowings, and mortgage financing facilities (dollars in thousands).

	September 30, 2006									December 31, 2005
	Commercial Paper			Repurchase Agreements			Short-Term Mortgage Financing Facilities (1)			Commercial Paper			Repurchase Agreements			Short-Term Mortgage Financing Facilities (1)
Outstanding balance	$	3,720,804		$	1,924,976		$	762,387		$	6,996,950		$	1,653,599		$	1,045,020
Weighted-average rate		5.36	%		5.33	%		6.04	%		4.37	%		4.39	%		5.16	%
Weighted-average term to maturity		21.6 days			19.2 days			N/A			19.9 days			18.4 days			NA

(1) Under these mortgage financing agreements, which expire or may be terminated by the Company or the counterparty within one year, the Company may finance mortgage loans for up to 180 days. The interest rates on these borrowings reset daily.

Assets

Our principal assets consist of MBS, non-conforming mortgage loans, cash and cash equivalents, receivables, long-term investments, and securities held for trading purposes. As of September 30, 2006, liquid assets consisted primarily of cash and cash equivalents of $365.1 million. In addition, we held $6.0 billion in MBS, $5.7 billion in non-conforming mortgage loans, $242.1 million in long-term investments, $488.1 million in trading securities, and a receivable for securities sold of $946.1 million as of September 30, 2006.

Long-term investments primarily consist of investments in marketable equity and non-public equity securities, managed partnerships (including hedge, private equity, and venture capital funds), in which we serve as managing partner and our investment in RNR II (QP), LP and RNR II (FBR Employers), LP (partnerships we do not manage). Although our investments in hedge, private equity and venture capital funds are mostly illiquid, the underlying investments of such entities are, in the aggregate, mostly publicly-traded, liquid equity and debt securities, some of which may be restricted due to contractual “lock-up” requirements.

As of September 30, 2006, our mortgage-backed securities portfolio was comprised primarily of agency-backed ARM and Hybrid ARM securities. Excluding principal receivable, which totaled $23.7 million, the total par value of the portfolio was $5.9 billion and fair value of the portfolio was $6.0 billion. As of September 30,

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2006, the weighted average coupon of the portfolio was 6.04%. As of September 30, 2006, the principal balance of the mortgage loan portfolio was $5.7 billion and the weighted average coupon was 7.46%.

The actual yield on the MBS and the mortgage portfolio is affected by the price paid to acquire or the deferred net costs incurred to originate the investment. Our cost basis in MBS and mortgage loans is normally greater than the par value (i.e., a premium), resulting in the yield being less than the stated coupon. Based on our December 2005 decision to reposition the MBS portfolio and the resulting portfolio sales during 2006 and reinvestment activity to date, the MBS portfolio had a premium of $46.8 million (0.79% of the unpaid principal balance or par value) as of September 30, 2006.

The following table provides additional detail regarding the Company’s merchant banking investments as of September 30, 2006 (dollars in thousands).

	September 30, 2006
Merchant Banking Investments	Shares	Cost/Adjusted Basis		Fair Value/ Carrying Value
Aames Investment Corporation (2)	4,707,900	$	18,832	$	18,832
Amtrust Financial Services (1)	2,558,994		16,749		16,749
Asset Capital Corporation, Inc. (1)	948,766		7,500		7,500
Castlepoint Holdings (1)	500,000		4,650		4,650
Cmet Finance Holdings, Inc. (1)(2)	65,000		975		975
ECC Capital (2)	3,940,110		4,807		4,019
Fieldstone Investment Corporation (2)	3,588,329		32,869		31,326
Government Properties Trust (2)	210,000		1,894		1,894
Legacy Reserves (1)	619,133		9,894		9,894
Lexington Strategic Asset Corporation (1)	537,634		5,000		5,000
New York Mortgage Trust, Inc. (2)	200,000		772		772
People’s Choice Financial Corporation (1)(2)	3,500,000		10,500		10,500
Quanta Capital Holdings Ltd. (2)	2,870,620		5,282		5,282
Specialty Underwriters Alliance, Inc. (2)	918,602		5,658		7,624
Taberna Realty Finance Trust (1)	985,663		10,000		10,000
United Western Bancorp	219,000		3,870		4,660
Vintage Wine Trust, Inc. (1)	1,075,269		10,000		10,000
Whittier Energy Corporation	898,060		5,000		5,600
Preferred equity investment (2)			2,500		2,500
Other			1,171		1,171
Total Merchant Banking Investments		$	157,923	$	158,948

(1) As of September 30, 2006 these shares cannot be traded in a public market (e.g., NYSE or Nasdaq) but may be sold in private transactions.

(2) Cost/Adjusted basis reflects the effects of other than temporary impairment charges.

Net unrealized gains and losses related to our mortgage portfolio, including derivatives accounted for as cash flow hedges, and merchant banking investments that are included in “accumulated other comprehensive income” in our balance sheet totaled $(18.9) million and $1.2 million, respectively, as of September 30, 2006. If we choose to liquidate these securities or we determine that a decline in value of these investments below our cost basis is “other than temporary,” a portion or all of the gains or losses will be recognized as realized gain (loss) in the statement of operations during the period in which the liquidation or determination is made. Our investment portfolio is exposed to potential future downturns in the markets and private debt and equity securities are exposed to deterioration of credit quality, defaults, and downward valuations.

Regulatory Capital

FBR & Co. and FBRIS, as U.S. broker-dealers, are registered with the SEC and are members of the National Association of Securities Dealers, Inc. (NASD). Additionally, FBRIL, our U.K. broker-dealer, is registered with the Financial Services Authority (FSA) of the United Kingdom. As such, they are subject to the minimum net

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capital requirements promulgated by the SEC and FSA, respectively. As of September 30, 2006, FBR & Co. had total regulatory net capital of $53 million that was $49 million in excess of its required minimum net capital of $4 million. In addition, FBRIS and FBRIL had regulatory capital as defined in excess of required amounts. Regulatory net capital requirements increase when the broker-dealers are involved in underwriting activities based upon a percentage of the amount being underwritten.

Dividends

The Company declared the following distributions during the nine months ended September 30, 2006 and year ended December 31, 2005:

Declaration Date	Record Date	Payment Date	Dividends Per Share
2006
September 13, 2006	September 29, 2006	October 31, 2006	$	0.05
June 8, 2006	June 30, 2006	July 28, 2006	$	0.20
March 15, 2006	March 31, 2006	April 28, 2006	$	0.20
2005
December 7, 2005	December 30, 2005	January 31, 2006	$	0.20
September 13, 2005	September 30, 2005	October 31, 2005	$	0.34
June 9, 2005	June 30, 2005	July 29, 2005	$	0.34
March 17, 2005	March 31, 2005	April 29, 2005	$	0.34

Contractual Obligations

The Company has contractual obligations to make future payments in connection with short and long-term debt, non-cancelable lease agreements and other contractual commitments as well as uncalled capital commitments to various investment partnerships that may be called over the next six years. The following table sets forth these contractual obligations by fiscal year (in thousands):

	2006		2007		2008		2009		2010		Thereafter		Total
Long-term debt (1)	$	—	$	970	$	970	$	970	$	970	$	320,567	$	324,447
Minimum rental and other contractual commitments		4,755		23,901		24,048		17,270		16,336		61,431		147,741
Securitization financing (2)		—		—		—		—		—		4,959,063		4,959,063
Capital commitments (3)		—		—		—		—		—		—		—
Total Contractual Obligations	$	4,755	$	24,871	$	25,018	$	18,240	$	17,306	$	5,341,061	$	5,431,251

(1) This table excludes interest payments to be made on the Company’s long-term debt securities issued through TRS Holdings. The Company will incur approximately $6.5 million in interest related to these long-term debt securities in the fourth quarter of 2006. Based on a weighted average 3-month LIBOR of 5.50% as of September 30, 2006, plus a weighted average margin of 2.63%, estimated annualized interest on the current outstanding principal of $317.5 million of long-term debt securities would be approximately $25.8 million for the year ending December 31, 2007. These long-term debt securities mature in thirty years beginning in March 2033 through October 2035. Note that interest on this long-term debt floats based on 3-month LIBOR, therefore, actual coupon interest will differ from this estimate.

(2) Although the stated maturities for these securities are thirty years, the Company expects the securities to be fully repaid prior thereto due to borrower prepayments and/or possible clean-up calls.

(3) The table above excludes $6.5 million of uncalled capital commitments to various investment partnerships that may be called over the next ten years. This amount was excluded because the Company cannot determine when, if ever, the commitments will be called.

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The Company also has short-term commercial paper and repurchase agreement liabilities of $3.7 billion and $2.7 billion, respectively, as of September 30, 2006. See Note 5 in the financial statements for further information.

As of September 30, 2006, the Company had made interest rate lock agreements with mortgage borrowers and commitments to sell mortgage loans of $529 million and $1.9 billion, respectively.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk generally represents the risk of loss through a change in realizable value that can result from a change in the prices of equity securities, a change in the value of financial instruments as a result of changes in interest rates, a change in the volatility of interest rates or, a change in the credit rating of an issuer. The Company is exposed to the following market risks as a result of its investments in mortgage-backed securities, mortgage loans and equity investments. Except for trading securities held by FBR & Co. and certain mortgage-backed securities designated as trading, none of these investments is held for trading purposes.

Interest Rate Risk

Leveraged MBS and Mortgage Loans

The Company is subject to interest-rate risk as a result of its principal investment and mortgage banking activities. Through these activities, the Company invests in mortgage-backed securities and mortgage loans and finances those investments with repurchase agreement, commercial paper and securitization borrowings, all of which are interest rate sensitive financial instruments. The Company is exposed to interest rate risk that fluctuates based on changes in the level or volatility of interest rates and mortgage prepayments and in the shape and slope of the yield curve. The Company attempts to hedge a portion of its exposure to rising interest rates primarily through the use of paying fixed and receiving floating interest rate swaps, interest rate caps, and Eurodollar futures and put option contracts. The counterparty to the Company’s derivative agreements at September 30, 2006 are U.S. financial institutions.

The Company’s primary risk is related to changes in both short and long term interest rates, which affect the Company in several ways. As interest rates increase, the market value of the mortgage-backed securities and mortgage loans may be expected to decline, prepayment rates may be expected to go down, and duration may be expected to extend. An increase in interest rates is beneficial to the market value of the Company’s derivative instruments designated as hedges. For example, for interest rate swap positions, the cash flows from receiving the floating rate portion increase and the fixed rate paid remains the same under this scenario. If interest rates decline, the reverse is true for mortgage-backed securities and mortgage loans, paying fixed and receiving floating interest rate swaps, interest rate caps, and Eurodollar futures and put option contracts.

The Company records its derivatives at fair value. The differential between amounts paid and received for derivative instruments designated as hedges is recorded as an adjustment to interest expense. In addition, the Company records the ineffectiveness of its hedges, if any, in earnings for the respective periods. In general (i.e., presuming the hedged risk is still probable of occurring), in the event of early termination of these derivatives, the Company receives or makes a payment based on the fair value of the instrument, and the related deferred gain or loss recorded in other comprehensive income is amortized into income or expense over the original hedge period.

The table that follows shows the expected change in market value for the Company’s current mortgage-backed securities, mortgage loans, and derivatives related to the Company’s principal investment and mortgage banking activities under several hypothetical interest-rate scenarios. Interest rates are defined by the U.S. Treasury yield curve. The changes in rates are assumed to occur instantaneously. It is further assumed that the changes in rates occur uniformly across the yield curve and that the level of LIBOR changes by the same amount as the yield curve. Actual changes in market conditions are likely to be different from these assumptions.

Changes in value are measured as percentage changes from their respective values presented in the column labeled “Value at September 30, 2006.” Actual results could differ significantly from these estimates. The estimated change in value of the mortgages loans and mortgage-backed securities reflects an effective duration of .81 and 1.5, respectively. The effective durations are based on observed market value changes, as well as management’s own estimate of the effect of interest rate changes on the fair value of the investments including assumptions regarding prepayments based, in part, on age of and interest rate on the mortgages and the

48

mortgages underlying the mortgage-backed securities, prior exposure to refinancing opportunities, and an overall analysis of historical prepayment patterns under a variety of past interest rate conditions (dollars in thousands, except per share amounts).

	Value at September 30, 2006		Value at September 30, 2006 with 100 basis point increase in interest rates			Percent Change		Value at September 30, 2006 with 100 basis point decrease in interest rates		Percent Change
Assets
Mortgage securities	$	5,971,276	$	5,855,861		(1.93	)%	$	6,035,422	1.07	%
Mortgage loans		5,668,669		5,609,148		(1.05	)%		5,700,980	0.57	%
Derivative assets		55,229		93,394		69.10	%		29,478	(46.63	)%
Reverse repurchase agreements		120,103		120,103		—			120,103	—
Other		2,842,778		2,842,778		—			2,842,778	—
Total Assets	$	14,658,055	$	14,521,284		(0.93	)%	$	14,728,761	0.48	%
Liabilities
Repurchase agreements and commercial paper	$	6,408,167	$	6,408,167		—		$	6,408,167	—
Securitization financing		4,942,263		4,942,263		—			4,942,263	—
Derivative liabilities		60,354		(7,883	)	(113.06	)%		134,311	122.54	%
Other		1,950,071		1,950,071		—			1,950,071	—
Total Liabilities		13,360,855		13,292,618		(0.51	)%		13,434,812	0.55	%
Minority Interest		133,519		133,519		—			133,519	—
Shareholders’ Equity		1,163,681		1,095,147		(5.89	)%		1,160,430	(0.28	)%
Total Liabilities and Shareholders’ Equity	$	14,658,055	$	14,521,284		(0.93	)%	$	14,728,761	0.48	%
Book Value per Share	$	6.75	$	6.35		(5.89	)%	$	6.73	(0.28	)%

As shown above, the Company’s portfolio of mortgage loans and mortgage-backed securities generally will benefit less from a decline in interest rates than it will be adversely affected by a same scale increase in interest rates. This may effectively limit an investor’s upside potential in a market rally.

Other

The value of our direct investments in other companies is also likely to be affected by significant changes in interest rates. For example, many of the companies are exposed to risks similar to those identified above as being applicable to our own investments in mortgage-backed securities and mortgage loans. Additionally, changes in interest rates often affect market prices of equity securities. Because each of the companies in which we invest has its own interest rate risk management process, it is not feasible for us to quantify the potential impact that interest rate changes would have on the stock price or the future dividend payments by any of the companies in which we have invested.

Equity Price Risk

The Company is exposed to equity price risk as a result of its investments in marketable equity securities, investment partnerships, and trading securities. Equity price risk changes as the volatility of equity prices changes or the values of corresponding equity indices change.

49

While it is impossible to exactly project what factors may affect the prices of equity sectors and how much the effect might be, the table below illustrates the impact a ten percent increase and a ten percent decrease in the price of the equities held by the Company would have on the value of the total assets and the book value of the Company as of September 30, 2006 (dollars in thousands, except per share amounts).

	Value at September 30, 2006			Value of Equity at September 30, 2006 with 10% Increase in Price			Percent Change		Value at September 30, 2006 with 10% Decrease in Price			Percent Change
Assets
Marketable equity securities	$	81,181		$	89,299		10.00	%	$	73,063		(10.00	)%
Equity method investments		42,167			46,384		10.00	%		37,950		(10.00	)%
Investment securities—marked to market		35,289			38,818		10.00	%		31,760		(10.00	)%
Other long-term investments		5,707			5,707		—			5,707		—
Trading securities—equities		15,384			16,922		10.00	%		13,846		(10.00	)%
Other		14,478,327			14,478,327		—			14,478,327		—
Total Assets	$	14,658,055		$	14,675,457		0.12	%	$	14,640,653		(0.12	)%
Liabilities	$	13,360,855		$	13,360,855		—		$	13,360,855		—
Minority Interest		133,519			133,519		—			133,519		—
Shareholders’ Equity
Common stock		1,744			1,744		—			1,744		—
Paid-in-capital		1,551,248			1,551,248		—			1,551,248		—
Employee stock loan receivable		(72	)		(72	)	—			(72	)	—
Accumulated comprehensive (deficit) income		(17,691	)		(9,573	)	45.89	%		(25,809	)	45.89	%
Retained earnings		(371,548	)		(362,264	)	(2.50	)%		(380,832	)	2.50	%
Total Shareholders’ Equity		1,163,681			1,181,083		1.50	%		1,146,279		(1.50	)%
Total Liabilities and Shareholders’ Equity	$	14,658,055		$	14,675,457		0.12	%	$	14,640,653		(0.12	)%
Book Value per Share	$	6.75		$	6.85		(1.49	)%	$	6.64		(1.49	)%

Except to the extent that the Company sells its marketable equity securities or other long term investments, or a decrease in their market value is deemed to be other than temporary, an increase or decrease in the market value of those assets will not directly affect the Company’s earnings, however an increase or decrease in the value of equity method investments, investment securities-marked to market, as well as trading securities will directly effect the Company’s earnings.

50

Item 4. Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer, Eric F. Billings, and principal financial officer, Kurt R. Harrington, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, Eric F. Billings and Kurt R. Harrington concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

There has been no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Forward-Looking Statements

This Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Some of the forward-looking statements can be identified by the use of forward-looking words such as “believes”, “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates” or the negative of those words or other comparable terminology. Such statements include, but are not limited to, those relating to the effects of growth, our principal investment activities, levels of assets under management and our current equity capital levels. Forward-looking statements involve risks and uncertainties. You should be aware that a number of important factors could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, the effect of demand for public offerings, activity in the secondary securities markets, interest rates, interest spreads, and mortgage prepayment speeds, the risks associated with merchant banking investments, available technologies, competition for business and personnel, and general economic, political, and market conditions. We will not necessarily update the information presented or incorporated by reference in this Form 10-Q if any of these forward-looking statements turn out to be inaccurate. For a more detailed discussion of the risks affecting our business see our Form 10-K for 2005 and especially the section “Risk Factors.”

51

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

Regulatory Investigations

As of September 30, 2006, except as described below, the Company was not a defendant or plaintiff in any lawsuits or arbitrations, nor involved in any governmental or self-regulatory organization (SRO) matters that are expected to have a material adverse effect on the Company’s financial condition or statements of operations. The Company is a defendant in a small number of civil lawsuits and arbitrations (together, litigation) relating to its various businesses. In addition, the Company is subject to various reviews, examinations, investigations and other inquiries by governmental agencies and SROs. There can be no assurance that these matters individually or in aggregate will not have a material adverse effect on the Company’s financial condition or results of operations in a future period. However, based on management’s review with counsel, resolution of these matters is not expected to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

Many aspects of the Company’s business involve substantial risks of liability and litigation. Underwriters, broker-dealers and investment advisers are exposed to liability under Federal and state securities laws, other Federal and state laws and court decisions, including decisions with respect to underwriters’ liability and limitations on indemnification, as well as with respect to the handling of customer accounts. For example, underwriters may be held liable for material misstatements or omissions of fact in a prospectus used in connection with the securities being offered and broker-dealers may be held liable for statements made by their securities analysts or other personnel. In certain circumstances, broker-dealers and asset managers may also be held liable by customers and clients for losses sustained on investments. In recent years, there has been an increasing incidence of litigation and actions by government agencies and SROs involving the securities industry, including class actions that seek substantial damages. The Company is also subject to the risk of litigation, including litigation that may be without merit. As the Company intends to actively defend such litigation, significant legal expenses could be incurred. An adverse resolution of any future litigation against the Company could materially affect the Company’s operating results and financial condition.

The Company’s business (through its subsidiary First NLC and affiliated entities) includes the origination, acquisition, pooling, securitization and sale of non-conforming residential mortgage loans. Consequently, the Company is subject to additional federal and state laws in this area of operation, including laws relating to lending, consumer protection, privacy and unfair trade practices.

Putative Class Action Securities Lawsuits

The Company and certain current and former senior officers and directors have been named in a series of putative class action securities lawsuits filed in the second quarter of 2005, all of which are pending in the United States District Court for the Southern District of New York. These cases have been consolidated under the name In re FBR Inc. Securities Litig. A consolidated amended complaint has been filed asserting claims under the Securities Exchange Act of 1934 and alleging misstatements and omissions concerning (i) the SEC and NASD investigations described on page 49 relating to FBR & Co.’s involvement in the private investment in public equity on behalf of CompuDyne, Inc. in October 2001 and (ii) the alleged conduct of FBR and certain FBR officers and employees in allegedly facilitating certain sales of CompuDyne shares. The Company is contesting these lawsuits vigorously, but the Company cannot predict the likely outcome of these lawsuits or their likely impact on the Company at this time.

Shareholders’ Derivative Action

The Company has been named a nominal defendant, and certain current and former senior officers and directors have been named as defendants, in three shareholders’ derivative actions. Two of these actions, brought

52

by Lemon Bay Partners LLC and Walter Boyle, are pending in the United States District Court for the Southern District of New York and have been consolidated, for pre-trial purposes only, with the pending putative class action securities lawsuits under the name In re FBR Securities and Derivative Litig. The third, brought by Gary Walter and Harry Goodstadt, has been filed in the Circuit Court for Arlington County, Virginia. All three cases claim that certain of the Company’s current and former officers and directors breached their duties to the Company based on allegations substantially similar to those in the In re FBR Inc. Securities Litig. putative class action lawsuits described above. The Company has not responded to any of these complaints and no discovery has commenced. The Company cannot predict the likely outcome of this action or its likely impact on us at this time. The Board of Directors has established a special committee whose jurisdiction includes the Boyle and Walter/Goodstadt matters as well as consideration of shareholder demand letters which contain similar allegations, and the special committee has been authorized to make final decisions whether such litigation is in the Company’s best interests.

Other Litigation

Our subsidiary, First NLC Financial Services, LLC (“First NLC”), has been named in a putative class action in the U.S. District Court for the Northern District of Illinois (Cerda v. First NLC Financial Services, LLC), which alleges violations of the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq. First NLC is contesting this lawsuit vigorously, but we cannot predict the likely outcome of this lawsuit or the likely impact on First NLC or on us at this time.

Regulatory Charges and Related Matters

On April 26, 2005, the Company announced that its broker-dealer subsidiary, FBR & Co., proposed settlement to the staffs of the SEC and the NASD’s Department of Market Regulation to resolve ongoing, previously disclosed investigations by the SEC and NASD staffs. The proposed settlement concerns alleged insider trading, violations of antifraud provisions of the federal securities laws and applicable NASD rules and other charges concerning the Company’s trading in a Company account and the offering of a private investment in public equity on behalf of a public company in October 2001.

In the settlement offers, without admitting or denying any wrongdoing, FBR & Co. proposed to pay $3,500 to the SEC and $4,000 to the NASD and consent to injunctions, censure and additional undertakings to improve its administrative and compliance procedures.

The proposed settlement is subject to review and approval by the SEC and the NASD, respectively, which may accept, reject or impose further conditions or other modifications to some or all of the terms of the proposed settlements. There are no assurances regarding the SEC’s and NASD’s consideration or determination of any offer of settlement, and no settlement is final unless and until approved by the SEC or NASD, as applicable. The Company has recorded a $7,500 charge, in March 2005, with respect to the proposed settlements with the SEC and NASD.

As previously reported by the Company, one of the Company’s investment adviser subsidiaries, Money Management Associates, Inc. (MMA), is involved in an investigation by the SEC with regard to the adequacy of disclosure of risks concerning the strategy of a sub-advisor to a now-closed bond fund. The SEC staff has advised MMA that it is considering recommending that the SEC bring a civil action/and or institute a public administrative proceeding against MMA and one of its officers (who is not an officer of Friedman, Billings, Ramsey Group, Inc.) for violating and/or aiding and abetting violations of the federal securities laws. MMA and its officer have made a Wells submission and, if necessary, intend to defend vigorously any charges brought by the SEC. Based on management’s review with counsel, resolution of this matter is not expected to have a material adverse effect on the Company’s financial condition or results of operations. It is possible that the SEC may initiate proceedings as a result of its investigations, and any such proceedings could result in adverse judgments, injunctions, fines, penalties or other relief against MMA or one or more of its officers or employees.

53

Other Legal and Regulatory Matters

Except as described above, as of September 30, 2006, the Company was not a defendant or plaintiff in any lawsuits or arbitrations that are expected to have a material adverse effect on the Company’s financial condition or results of operations. The Company is a defendant in a small number of civil lawsuits and arbitrations relating to its various businesses, and is subject to various reviews, examinations, investigations and other inquiries by governmental agencies and SROs, none of which are expected to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

Item 1A. Risk Factors

As of September 30, 2006, there have been no material changes in the risk factors of the Company as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Item 6. Exhibits

3.01	Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on March 31, 2003, as amended May 15, 2003).
3.02	Bylaws (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on March 31, 2003, as amended May 15, 2003).
4.01	Form of Specimen Certificate for Registrant’s Class A Common Stock (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the Registration Statement on Form S-3 (file no. 333-107731)).
10.01	Credit agreement, dated as of October 20, 2006, among Friedman, Billings, Ramsey Group, Inc. and JP Morgan Chase Bank N.A., as Administrative Agent, J.P. Morgan Securities, Inc. as Sole Lead Arranger and Sole Bookrunner, and Calyon New York Branch, as Syndication Agent.
11	Statement Regarding Computation of Per Share Earnings (see Part I, Item 1, Note 8 to the Registrant’s Consolidated Financial Statements (omitted pursuant to Item 601(a)(ii) of Regulation S-K).
12	Computation of Ratio of Earnings to Fixed Charges.
31.01	Certification of Eric F. Billings, Chief Executive Officer of Friedman, Billings, Ramsey Group, Inc. pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02	Certification of Kurt R. Harrington, Chief Financial Officer of Friedman, Billings, Ramsey Group, Inc. pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01	Certification of Eric F. Billings, Chief Executive Officer of Friedman, Billings, Ramsey Group, Inc. pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended).
32.02	Certification of Kurt R. Harrington, Chief Financial Officer of Friedman, Billings, Ramsey Group, Inc. pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended).

54

SIGNATURES

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

Friedman, Billings, Ramsey Group, Inc.
By:	/s/    KURT R. HARRINGTON
	Kurt R. Harrington
	Senior Vice President, Chief Financial Officer (Principal Financial Officer)

Date: November 9, 2006

By:	/s/    ROBERT J. KIERNAN
	Robert J. Kiernan
	Senior Vice President, Controller and Chief Accounting Officer
	(Principal Accounting Officer)

Date: November 9, 2006

55

EX-10.01

Exhibit 10.01

$180,000,000

CREDIT AGREEMENT

dated as of

October 20, 2006

among

FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.

The Lenders Party Hereto

and

JPMORGAN CHASE BANK, N.A.,

as Administrative Agent

J.P. MORGAN SECURITIES INC.,

as Sole Lead Arranger and Sole Bookrunner

and

CALYON NEW YORK BRANCH

as Syndication Agent

TABLE OF CONTENTS

		Page
ARTICLE I Definitions		1
SECTION 1.01.	Defined Terms	1
SECTION 1.02.	Classification of Loans and Borrowings.	17
SECTION 1.03.	Terms Generally.	17
SECTION 1.04.	Accounting Terms; GAAP	17
ARTICLE II The Credits		17
SECTION 2.01.	Commitments; Term-Out Option	17
SECTION 2.02.	Loans and Borrowings	18
SECTION 2.03.	Requests for Borrowings	18
SECTION 2.04.	Funding of Borrowings	19
SECTION 2.05.	Interest Elections	20
SECTION 2.06.	Termination, Reduction and Increase of Commitments	21
SECTION 2.07.	Repayment of Loans; Evidence of Debt	22
SECTION 2.08.	Prepayment of Loans	23
SECTION 2.09.	Fees	23
SECTION 2.10.	Interest	24
SECTION 2.11.	Alternate Rate of Interest	24
SECTION 2.12.	Increased Costs	25
SECTION 2.13.	Break Funding Payments	26
SECTION 2.14.	Taxes	26
SECTION 2.15.	Payments Generally; Pro Rata Treatment; Sharing of Set-offs	27
SECTION 2.16.	Mitigation Obligations; Replacement of Lenders	29
ARTICLE III Representations and Warranties		29
SECTION 3.01.	Organization; Powers	29
SECTION 3.02.	Authorization; Enforceability	30
SECTION 3.03.	Governmental Approvals; No Conflicts	30
SECTION 3.04.	Financial Condition; No Material Adverse Change	30
SECTION 3.05.	Properties	31
SECTION 3.06.	Litigation and Environmental Matters	31
SECTION 3.07.	Compliance with Laws and Agreements	31
SECTION 3.08.	Investment Company Status	31
SECTION 3.09.	Taxes	32
SECTION 3.10.	ERISA	32
SECTION 3.11.	Disclosure	32
SECTION 3.12.	Subsidiaries	32
SECTION 3.13.	REIT Qualification	33
SECTION 3.14.	Regulatory Matters Pertaining to FRB & Co.	33
ARTICLE IV Conditions		33
SECTION 4.01.	Effective Date	33
SECTION 4.02.	Each Credit Event	34

(i)

ARTICLE V Affirmative Covenants		35
SECTION 5.01.	Financial Statements; Other Information	35
SECTION 5.02.	Notices of Material Events	37
SECTION 5.03.	Existence; Conduct of Business	38
SECTION 5.04.	Payment of Obligations	38
SECTION 5.05.	Maintenance of Properties; Insurance	38
SECTION 5.06.	Books and Records; Inspection Rights	38
SECTION 5.07.	Compliance with Laws	38
SECTION 5.08.	Use of Proceeds	38
SECTION 5.09.	Further Assurances With Respect to Security Interests	38
ARTICLE VI Negative Covenants		39
SECTION 6.01.	Indebtedness	39
SECTION 6.02.	Liens	40
SECTION 6.03.	Mergers, Consolidations, Sale of Assets, etc.	41
SECTION 6.04.	Restricted Payments	41
SECTION 6.05.	Transactions with Affiliates	42
SECTION 6.06.	Restrictive Agreements	42
SECTION 6.07.	Subordinated Indebtedness	42
SECTION 6.08.	Lines of Business	42
SECTION 6.09.	Change in Fiscal Periods	43
SECTION 6.10.	Tangible Net Worth	43
SECTION 6.11.	Liquidity	43
ARTICLE VII Events of Default		43
ARTICLE VIII The Administrative Agent		46
ARTICLE IX Miscellaneous		48
SECTION 9.01.	Notices	48
SECTION 9.02.	Waivers; Amendments	48
SECTION 9.03.	Expenses; Indemnity; Damage Waiver.	50
SECTION 9.04.	Successors and Assigns	51
SECTION 9.05.	Survival	53
SECTION 9.06.	Counterparts; Integration; Effectiveness	53
SECTION 9.07.	Severability	54
SECTION 9.08.	Right of Setoff	54
SECTION 9.09.	Governing Law; Jurisdiction; Consent to Service of Process	54
SECTION 9.10.	WAIVER OF JURY TRIAL	55
SECTION 9.11.	Headings	55
SECTION 9.12.	Confidentiality	55
SECTION 9.13.	USA PATRIOT Act	56

(ii)

SCHEDULES:

Schedule 2.01 — Commitments

Schedule 3.06 — Disclosed Matters

Schedule 3.12 — Subsidiaries

Schedule 6.01 — Existing Indebtedness

Schedule 6.02 — Existing Liens

Schedule 6.06 — Existing Restrictions

EXHIBITS:

Exhibit A — Form of Assignment and Assumption

Exhibit B — Form of Opinion of Borrower’s Counsel

Exhibit C — Form of Opinion of Special New York Counsel to JPMorgan Chase Bank, N.A.

Exhibit D — Form of Security Agreement

Exhibit E — Form of Subordination Agreement

(iii)

CREDIT AGREEMENT dated as of October 20, 2006 among FRIEDMAN, BILLINGS, RAMSEY GROUP, INC., the LENDERS party hereto, and JPMORGAN CHASE BANK, N.A., as Administrative Agent.

The parties hereto agree as follows:

ARTICLE I

DEFINITIONS

SECTION 1.01. Defined Terms. As used in this Agreement, the following terms have the meanings specified below:

“ABR”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate.

“Adjusted LIBO Rate” means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate.

“Administrative Agent” means JPMCB, in its capacity as administrative agent for the Lenders hereunder.

“Administrative Questionnaire” means an Administrative Questionnaire in a form supplied by the Administrative Agent.

“Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

“Aggregate Deficit Amount” means, in relation to the Repo Transactions of any Person, the sum of the respective Deficit Amounts (if any) for each such Repo Transaction.

“Alternate Base Rate” means, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 0.50%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively.

“Applicable Margin” means:

(a) with respect to any ABR Loan,

(i) for any day prior to the Term-Out Option becoming effective, 0.25% and

Credit Agreement

(ii) for any day from and after the Term-Out Option becoming effective, 0.50%; and

(b) with respect to any Eurodollar Loan,

(i) for any day prior to the Term-Out Option becoming effective, 1.25%; and

(ii) for any day from and after the Term-Out Option becoming effective, 1.50%.

“Applicable Percentage” means, with respect to any Lender, the percentage of the total Commitments represented by such Lender’s Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments.

“Assets for Purposes of Assessing Liquidity” means, at any time, the sum of the following assets of the Borrower (calculated on an unconsolidated basis) plus (to the extent provided in clauses (h), (i) and (j) below) assets of any Special Purpose Subsidiary and assets of other Persons deemed to constitute assets of the Borrower at such time:

(a) (i) 50% of all equity securities held in the merchant banking portfolio which are (x) registered or unregistered securities that are not subject to volume or other trading restrictions under Rule 144 promulgated by the SEC (or any successor or similar rule then in force), (y) listed on a recognized national securities exchange and (z) otherwise not subject to statutory, regulatory or contractual arrangements or other restrictions;

(ii) 80% of all equity securities held in the merchant banking portfolio which (x) are securities that are not registered for resale but are of a class that is listed on a recognized national securities exchange, (y) may be subject to volume or other trading restrictions under Rule 144 referred to above but which can be traded to “qualified institutional buyers” (as such term is defined in Rule 144A promulgated by the SEC (or any successor or similar rule then in force)) without volume or trading restrictions and (z) are otherwise not subject to statutory, regulatory or contractual arrangements or other restrictions;

(iii) 100% of all other equity securities held in the merchant banking portfolio; and

(iv) 100% of all debt securities (including loans) held in the merchant banking portfolio;

(b) all loans and advances to, and other investments in, Subsidiaries (but without duplication of any amount included under clause (j) below), provided that this clause (b) shall include only 50% of (i) the aggregate principal amount of temporary (i.e., not exceeding 45 days) subordinated loans supporting underwritings by FBR & Co. and (ii) other subordinated loans supporting underwritings by FBR & Co. but (in the case of this subclause (ii)) only during the initial 45 days of such other loans;

(c) 4.5% of Eligible MBS;

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(d) (i) 10% of all asset-backed securities (other than Eligible MBS) rated “A” (or equivalent) or better by Moody’s, S&P or Fitch and (ii) 40% of all asset-backed securities (other than Eligible MBS) rated “BBB” (or equivalent) or better by Moody’s, S&P or Fitch but below “A” (or equivalent) by Moody’s, S&P or Fitch, provided that if at any time (x) securities of the types referred to in subclauses (i) and (ii) above exceed 10% of the total assets of the Borrower at such time, such excess shall be excluded from the calculation under this clause (d) and shall be included in the calculation under clause (g) below and (y) securities of the types referred to in subclause (ii) above exceed $100,000,000, such excess shall be excluded from the calculation under this clause (d) and shall be included in the calculation under clause (g) below;

(e) 5% of warehouse advances that are secured by Eligible Sub-Prime Loans;

(f) 5% of Eligible Sub-Prime Loans;

(g) all other assets of the Borrower (other than cash, Cash Equivalents and assets of a type specified in clauses (a) through (f) above), including long-term assets of the Borrower such as goodwill and other intangibles, plus all amounts in respect of assets of a type specified in such clauses that are required to be included under this clause (g); provided that, with respect to sub-prime, whole mortgage loans that are subject to a “true sale” securitization (but which, for accounting purposes, are required to be shown on the Borrower’s balance sheet), the amount to be included for purposes of this clause (g) with respect to such securitized assets shall be the value of such assets net of the Indebtedness and/or other liabilities of such securitization as shown on the balance sheet of the Borrower;

(h) (without duplication of the amount of any assets included under this definition) all assets of any Special Purpose Subsidiary of the types specified in clauses (c), (d), (e), (f) and (g) above, but only to the extent of the applicable percentage specified in such clauses of the assets of such Special Purpose Subsidiary of the respective types;

(i) (without duplication of the amount of any assets included under this definition) all assets of any Person deemed under Section 6.01(d)(ii) to constitute assets of the Borrower of the types specified in clauses (c), (d), (e), (f) and (g) above, but only to the extent of the applicable percentage (as specified in the relevant clause) of the assets of such Person of the respective types; and

(j) with respect to the assets of any Person deemed under Section 6.01(d)(iii) to constitute assets of the Borrower, an amount equal to the greater of (i) all assets of such Person of the types specified in any of the foregoing clauses of this definition, but only to the extent of the applicable percentage specified in the relevant clause) of the assets of such Person of the respective types and (ii) all loans and advances to, and other investments in, such Person.

As used in this definition, mortgage-backed securities and other asset-backed securities shall be carried at fair value in accordance with GAAP, with resulting charges or credits, as applicable, to shareholders’ equity.

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“Assignment and Assumption” means an assignment and assumption entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent.

“Assuming Lender” is defined in Section 2.06(c).

“Availability Period” means the period from and including the Effective Date to but excluding the earlier of the Commitment Termination Date and the date of termination of the Commitments.

“Board” means the Board of Governors of the Federal Reserve System of the United States of America.

“Borrower” means Friedman, Billings, Ramsey Group, Inc., a Virginia corporation.

“Borrowing” means Loans of the same Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect.

“Borrowing Request” means a request by the Borrower for a Borrowing in accordance with Section 2.03.

“Broker-Dealer Subsidiary” means any Subsidiary which is registered as a broker-dealer with the SEC or operates a securities brokerage business outside the United Stated and is subject to regulation or licensing as such under the applicable local law.

“Business Day” means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed; provided that, when used in connection with a Eurodollar Loan, the term “Business Day” shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market.

“Capital Lease Obligations” of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.

“Cash Equivalents” means:

(a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within 90 days from the date of issuance thereof;

(b) investments in commercial paper maturing within 90 days from the date of issuance thereof and having, at the date of acquisition thereof, the highest credit ratings obtainable from S&P and from Moody’s;

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(c) investments in certificates of deposit, banker’s acceptances and time deposits maturing within 90 days from the date of issuance thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof and which has the highest credit ratings obtainable from S&P and from Moody’s;

(d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above; and

(e) money market funds that (i) comply with the criteria set forth in SEC Rule 2a-7 under the Investment Company Act of 1940, (ii) are rated AAA by S&P and Aaa by Moody’s and (iii) have portfolio assets of at least $5,000,000,000.

“Change of Control” means: (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Exchange Act and the rules of the SEC thereunder as in effect on the date hereof) (other than by the Permitted Holders) of Equity Interests representing more than 25% of the aggregate ordinary voting power represented by the issued and outstanding Equity Interests of the Borrower; (b) occupation of a majority of the seats (other than vacant seats) on the board of directors of the Borrower by Persons who were neither (i) nominated by the board of directors of the Borrower nor (ii) appointed by directors so nominated; or (c) the acquisition of direct or indirect Control of the Borrower by any Person or group (other than by the Permitted Holders).

“Change in Law” means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender (or, for purposes of Section 2.12(b), by any lending office of such Lender or by such Lender’s holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement.

“Commitment” means, with respect to each Lender, the commitment of such Lender to make Loans hereunder, expressed as an amount representing the maximum aggregate amount of such Lender’s Credit Exposure hereunder, as such commitment may be (a) reduced or increased from time to time pursuant to Section 2.06 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial amount of each Lender’s Commitment is set forth on Schedule 2.01, or in the Assignment and Assumption (or, in the case of any Assuming Lender, the agreement entered into by such Assuming Lender under Section 2.06(c)) pursuant to which such Lender shall have assumed its Commitment, as applicable. The initial aggregate amount of the Lenders’ Commitments is $180,000,000.

“Commitment Termination Date” means October 19, 2007.

“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.

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“Credit Exposure” means, with respect to any Lender at any time, the aggregate outstanding principal amount of such Lender’s Loans at such time.

“Default” means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.

“Deficit Amount” means, at any time in respect of a Repo Transaction of any Person, the excess (if any) of (i) the aggregate amount of payment obligations for which such Person is then liable under such Repo Transaction minus (ii) the then aggregate value of the collateral then securing such payment obligations.

“Disclosed Matters” means the actions, suits and proceedings and the environmental matters disclosed in Schedule 3.06.

“Disqualified Mortgage Loan” means any mortgage loan that (a) (or any characteristic of which or of the origination of which) triggers the thresholds of Section 32 of Regulation Z of the Federal Reserve Board (12 C.F.R. §226.32), (b) is a “high cost” or “high risk” loan under any applicable state, county or municipal law or regulation, (c) is a “covered” or “threshold” loan under any applicable state, county or municipal law or regulation, but only to the extent that such law or regulation expressly exposes assignees of mortgage loans to possible civil or criminal liability or damages, or would expose any Lender or the Administrative Agent (whether or not as an assignee) to regulatory action or enforcement proceedings, penalties or other sanctions, or would materially impair the enforceability of such mortgage loan, or (d) (or any characteristic of which or of the origination of which) contains any term or condition, or involves any loan origination practice, that has been defined as “predatory” under any such applicable federal, state, county or municipal law or regulation, or that has been expressly categorized as an “unfair” or “deceptive” term, condition or practice in any such applicable federal, state, county or municipal law or regulation.

“DTC” means The Depository Trust Company.

“dollars” or “$” refers to lawful money of the United States of America.

“Effective Date” means the date hereof, provided that the conditions specified in Section 4.01 are satisfied (or waived in accordance with Section 9.02).

“Effective Duration” means, with respect to any mortgage-backed security, an estimate, expressed as a whole number or a fraction thereof, of the percentage change in the price of such mortgage-backed security for a 100 basis point change in the applicable rate for such mortgage-backed security, further adjusted by a prepayment model, which estimates mortgage-backed security price changes as a function of prepayment rate movements.

“Eligible MBS” means mortgage-backed securities (including any current principal and interest receivable thereunder) (i) that are guaranteed as to principal and interest by Freddie Mac,

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Fannie Mae or Ginnie Mae or are rated AAA by S&P, (ii) that are backed by a pool or pools of undivided interests in residential mortgages, (iii) that have been issued in a registered public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (it being understood that mortgage-backed securities issued in an offering pursuant to Rule 144A under said Act do not qualify), (iv) that have an Effective Duration of not more than 4.0 and (v) the value of which is represented by the principal thereof and accrued and unpaid interest thereon; provided that if at any time the aggregate amount of Eligible MBS having an Effective Duration of more than 3.0 exceeds 20% of the total value of Eligible MBS at such time, such excess shall be excluded from the calculation of the value of Eligible MBS at such time for purposes of clause (c) of the definition of “Assets for Purposes of Assessing Liquidity” in this Section (and such excess shall be included in the calculation under clause (g) of such definition).

“Eligible Sub-Prime Loan” means a sub-prime, whole mortgage loan that (a) is secured by a mortgage covering improved real property containing a one-, two-, three- or four-family residence that is not a mobile home or manufactured housing, (b) is not eligible for purchase by Fannie Mae or Freddie Mac under any of their prime mortgage loan purchase programs, (c) conforms to market underwriting standards and is eligible for inclusion in a pool backing asset-backed securities rated by Moody’s and S&P in accordance with such ratings agencies’ respective published criteria therefore, (d) at purchase is not evidenced by a promissory note dated older than 180 days, (e) has not been held by the Borrower for more than 180 days, (f) is not a Disqualified Mortgage Loan, (g) is a performing loan (i.e., no payment in respect of such loan is overdue by more than 30 days) and (h) is not included in an on-balance sheet securitization.

“Environmental Laws” means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material or to health and safety matters.

“Environmental Liability” means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.

“Equity Interests” means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person, and any warrants, options or other rights entitling the holder thereof to purchase or acquire any such equity interest.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

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“ERISA Affiliate” means any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the IRC or, solely for purposes of Section 302 of ERISA and Section 412 of the IRC, is treated as a single employer under Section 414 of the IRC.

“ERISA Event” means (a) any “reportable event”, as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an “accumulated funding deficiency” (as defined in Section 412 of the IRC or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the IRC or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA.

“Eurodollar”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate.

“Event of Default” has the meaning assigned to such term in Article VII.

“Examining Authority” means, with respect to any Person, the organization designated by the SEC as the Examining Authority for such Person as provided in paragraph (c)(12) of the Net Capital Rule.

“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time.

“Excluded Taxes” means, with respect to the Administrative Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America (or any political subdivision thereof, including, without limitation, any State of the United States of America and any political subdivision of such State), or by the jurisdiction under the laws of which such recipient is organized (or any political subdivision thereof) or in which its principal office is located (or any political subdivision thereof) or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America (or any political subdivision thereof, including, without limitation, any State of the United States of America and any political subdivision of such State), or any similar tax imposed by any other jurisdiction in which the Borrower is located (or any political subdivision thereof) and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.16(b)), any withholding tax that is imposed

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on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office) or is attributable to such Foreign Lender’s failure to comply with Section 2.14(e), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.14(a).

“Fannie Mae” means the Federal National Mortgage Association.

“FBR & Co.” means Friedman, Billings, Ramsey & Co., Inc., a Delaware corporation.

“FBR Asset” means FBR Asset Investment Corporation, a Virginia corporation.

“FBRCMC” means FBR Capital Markets Corporation, a Virginia corporation.

“Federal Funds Effective Rate” means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it.

“Financial Officer” means the chief financial officer, chief accounting officer, treasurer or controller of the Borrower.

“Fitch” means Fitch Ratings.

“FOCUS Report” means the Financial and Operational Combined Uniform Single Report (Form X-17a-5) required to be filed with the SEC or a national securities exchange, or any report that is required in lieu of such report.

“Foreign Lender” means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.

“Freddie Mac” means the Federal Home Loan Mortgage Corporation.

“GAAP” means generally accepted accounting principles in the United States of America.

“Ginnie Mae” means the Government National Mortgage Association.

“Governmental Authority” means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.

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“Guarantee” of or by any Person (the “guarantor”) means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. Notwithstanding anything herein to the contrary, “Guarantee” shall not include any Swap Agreement of the Borrower in the nature of a market value swap or total return swap with respect to assets of a Special Purpose Subsidiary.

“Hazardous Materials” means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law.

“Indebtedness” of any Person means, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty and (j) all obligations, contingent or otherwise, of such Person in respect of bankers’ acceptances. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. Anything to the contrary herein notwithstanding, the Indebtedness of any Person shall include the Aggregate Deficit Amount for the Repo Transactions of such Person (but shall not include any other obligation or liability of such Person arising from such Repo Transactions).

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“Indemnified Taxes” means Taxes other than Excluded Taxes.

“Interest Election Request” means a request by the Borrower to convert or continue a Borrowing in accordance with Section 2.05.

“Interest Payment Date” means (a) with respect to any ABR Loan, the last day of each January, April, July and October and (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months’ duration, each day prior to the last day of such Interest Period that occurs at intervals of three months’ duration after the first day of such Interest Period.

“Interest Period” means, with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Borrower may elect; provided that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (ii) any Interest Period pertaining to a Eurodollar Borrowing that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and, in the case of a Borrowing, thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.

“IRC” means the Internal Revenue Code of 1986, as amended from time to time.

“JPMCB” means JPMorgan Chase Bank, N.A.

“Lenders” means the Persons listed on Schedule 2.01 and any other Person that shall have become a party hereto pursuant to an instrument executed by such Person pursuant to Section 2.06(c) or an Assignment and Assumption, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Assumption.

“LIBO Rate” means, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the “LIBO Rate” with respect to such Eurodollar Borrowing for such Interest Period shall be the rate at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period.

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“Lien” means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.

“Loan Documents” means, collectively, this Agreement, the promissory notes (if any) executed and delivered pursuant to Section 2.07(e) and the Security Documents.

“Loans” means the loans made by the Lenders to the Borrower pursuant to this Agreement.

“Material Adverse Effect” means a material adverse effect on (a) the business, assets, operations, prospects or condition, financial or otherwise, of the Borrower and the Subsidiaries taken as a whole, (b) the ability of the Borrower to perform any of its obligations under this Agreement and the other Loan Documents or (c) the validity or enforceability of this Agreement and the other Loan Documents or of the rights of or benefits available to the Lenders hereunder and thereunder.

“Material Indebtedness” means Indebtedness (other than the Loans), or obligations in respect of one or more Swap Agreements, of any one or more of the Borrower and its Subsidiaries in an aggregate principal amount exceeding $25,000,000. For purposes of determining Material Indebtedness, the “principal amount” of the obligations of the Borrower or any Subsidiary in respect of (a) any Swap Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the Borrower or such Subsidiary would be required to pay if such Swap Agreement were terminated at such time and (b) any Repo Transactions thereof at any time shall be the Aggregate Deficit Amount for such Repo Transactions at such time.

“Maturity Date” means the Commitment Termination Date or, if the Term-Out Option shall have exercised and become effective, the Term-Out Maturity Date.

“Moody’s” means Moody’s Investors Service, Inc.

“Multiemployer Plan” means a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

“NASD” means the National Association of Securities Dealers, Inc., or any other self-regulatory organization that succeeds to the functions thereof.

“Net Capital Rule” means Rule 15c3-1 of the General Rules and Regulations as promulgated by the SEC under the Exchange Act (17 C.F.R. §240.15c3-1), as such Rule may be amended from time to time, or any rule or regulation of the SEC which replaces Rule 15c3-1.

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“NYSE” means the New York Stock Exchange, Inc.

“Other Taxes” means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made under this Agreement or any other Loan Document from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document.

“Participant” has the meaning set forth in Section 9.04.

“PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions.

“Permitted Encumbrances” means:

(a) Liens imposed by law for taxes that are not yet due or are being contested in compliance with Section 5.04;

(b) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.04;

(c) pledges and deposits made in the ordinary course of business in compliance with workers’ compensation, unemployment insurance and other social security laws or regulations;

(d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business;

(e) judgment liens in respect of judgments that do not constitute an Event of Default under clause (k) of Article VII; and

(f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower;

provided that the term “Permitted Encumbrances” shall not include any Lien securing Indebtedness.

“Permitted Holders” means Eric F. Billings and any Permitted Transferee thereof.

“Permitted Transferee” means, with respect to any individual, (a) such individual’s spouse, parents, immediate family members, descendants, heirs, executors, administrators, testamentary trustees, legatees or beneficiaries and (b) a trust, the beneficiaries of which, or a corporation or partnership, the stockholders or partners of which, are such individual and/or his or her spouse, parents, immediate family members and/or descendants.

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“Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.

“Plan” means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the IRC or Section 302 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

“Pre-Merger FBR” means Friedman, Billings, Ramsey Group, Inc., a Virginia corporation (as constituted prior to the merger with FBR Asset).

“Prime Rate” means the rate of interest per annum publicly announced from time to time by JPMCB as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective.

“Qualifying Long-Term Indebtedness” means, at any time, unsecured Indebtedness of the Borrower with a remaining term of greater than one year to the extent the same should be set forth on a balance sheet of the Borrower (excluding items which appear solely in the footnotes thereto) in accordance with GAAP; provided that all such Indebtedness shall be subordinated in right of payment to the payment of all principal, interest and other amounts payable under this Agreement and the other Loan Documents on terms not less favorable to the Lenders than those set forth in Exhibit E.

“Register” has the meaning set forth in Section 9.04.

“Related Parties” means, with respect to any specified Person, such Person’s Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person’s Affiliates.

“Repo Transaction” means any repurchase agreement, reverse repurchase agreement, sale buyback or buy sellback agreement or securities lending and borrowing agreement.

“Required Lenders” means, at any time, Lenders having Credit Exposures and unused Commitments representing more than 50% of the sum of the total Credit Exposures and unused Commitments at such time.

“Restricted Payment” means any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interests in the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such Equity Interests in the Borrower or any option, warrant or other right to acquire any such Equity Interests in the Borrower.

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“SEC” means the Securities and Exchange Commission, or any regulatory body that succeeds to the functions thereof.

“Security Agreement” means a Security Agreement substantially in the form of Exhibit D between the Borrower and the Administrative Agent.

“Security Documents” means, collectively, the Security Agreement, any security or similar agreement entered into pursuant to Section 5.09 in favor of the Administrative Agent, all Uniform Commercial Code financing statements required by the terms of any such agreement to be filed with respect to the security interests created pursuant thereto, and any subordination or similar agreement entered into pursuant to Section 6.01 in favor of the Administrative Agent or the Lenders.

“SIPA” means the Securities Investor Protection Act of 1970, as amended from time to time.

“SIPC” means the Securities Investor Protection Corporation established pursuant to SIPA or any other corporation that succeeds to the functions thereof.

“S&P” means Standard & Poor’s Ratings Services.

“Special Purpose Subsidiaries” means (a) Georgetown Funding Company, LLC, (b) Arlington Funding Company, LLC and (c) any other special purpose vehicle sponsored by the Borrower or a wholly-owned, direct or indirect Subsidiary of the Borrower for the purpose of financing solely mortgage loans, receivables of a type commonly securitized, mortgage-backed securities and/or other asset-backed securities (but only if the accounts of such vehicle would be consolidated with those of the Borrower in the Borrower’s consolidated financial statements), provided that, prior to the formation of any such vehicle under this clause (c), the Borrower shall notify the Administrative Agent thereof.

“Statutory Reserve Rate” means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.

“Subsidiary” means, with respect to any Person (the “parent”) at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent’s consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or

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more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. Unless otherwise specified, any reference to a “Subsidiary” shall be a reference to a Subsidiary of the Borrower. Notwithstanding anything herein to the contrary, solely for purposes of Sections 3.12 and 6.06, “Subsidiary” shall not include any Special Purpose Subsidiary.

“Subordinated Indebtedness” of any Person means any Indebtedness of such Person that by its terms (or the terms of the applicable subordination agreement) is subordinated in right of payment to any other Indebtedness or other obligations of such Person.

“Swap Agreement” means any agreement with respect to any swap, forward, future or derivative transaction or option or similar agreement involving, or settled by reference to, one or more rates, currencies, commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions; provided that no phantom stock or similar plan providing for payments only on account of services provided by current or former directors, officers, employees or consultants of the Borrower or the Subsidiaries shall be a Swap Agreement.

“Tangible Net Worth” means, for the Borrower (determined on an unconsolidated basis in accordance with GAAP), the sum of (a) shareholders’ equity of the Borrower minus (b) goodwill (including goodwill recorded as a result of the merger of Pre-Merger FRB and FBR Asset).

“Taxes” means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority.

“Term-Out Maturity Date” means October 17, 2008.

“Term-Out Option” means the option of the Borrower to extend the maturity of the Loans pursuant to Section 2.01(b).

“Transactions” means the execution, delivery and performance by the Borrower of this Agreement and the other Loan Documents, the borrowing of Loans and the use of the proceeds thereof.

“TRS Holdings” means FBR TRS Holdings, Inc., a Virginia corporation.

“Type”, when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate.

“U.S. Broker-Dealer Subsidiary” means any Subsidiary which is registered as a broker-dealer with the SEC.

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“Withdrawal Liability” means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.

SECTION 1.02. Classification of Loans and Borrowings. For purposes of this Agreement, Loans or Borrowings may be classified and referred to by Type (e.g., a “Eurodollar Loan” or a “Eurodollar Borrowing”, respectively).

SECTION 1.03. Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. The word “will” shall be construed to have the same meaning and effect as the word “shall”. Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person’s successors and assigns, (c) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.

SECTION 1.04. Accounting Terms; GAAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith.

ARTICLE II

THE CREDITS

SECTION 2.01. Commitments; Term-Out Option. (a) Subject to the terms and conditions set forth herein, each Lender agrees to make Loans to the Borrower from time to time during the Availability Period in an aggregate principal amount that will not result in (i) such Lender’s Credit Exposure exceeding such Lender’s Commitment or (ii) the total Credit Exposures exceeding the total Commitments. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Loans.

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(b) The Borrower may, by notice to the Administrative Agent (which shall promptly notify the Lenders) not less than 30 days prior to the Commitment Termination Date, extend the Maturity Date for all Loans outstanding at the opening of business on the Commitment Termination Date to the Term-Out Maturity Date; provided that such extension shall not be effective unless (i) no Default shall have occurred and be continuing on each of the date of the notice requesting such extension and on the Commitment Termination Date; (ii) the representations and warranties of the Borrower set forth in this Agreement shall be true and complete on and as of the date of such notice and the Commitment Termination Date with the same force and effect as if made on and as of each such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); and (iii) the Borrower shall have furnished to the Administrative Agent a certificate of a Financial Officer dated as of the Commitment Termination Date confirming compliance with the conditions set forth in clauses (i) and (ii) above.

SECTION 2.02. Loans and Borrowings. (a) Each Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their respective Commitments. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments of the Lenders are several and no Lender shall be responsible for any other Lender’s failure to make Loans as required.

(b) Subject to Section 2.11, each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement.

(c) At the commencement of each Interest Period for any Eurodollar Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $10,000,000. At the time that each ABR Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $10,000,000; provided that an ABR Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total Commitments. Borrowings of more than one Type may be outstanding at the same time; provided that there shall not at any time be more than a total of five Eurodollar Borrowings outstanding.

(d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date.

SECTION 2.03. Requests for Borrowings. To request a Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing or (b) in the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, on the date of the proposed Borrowing. Each such telephonic Borrowing

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Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02:

(i) the aggregate amount of the requested Borrowing;

(ii) the date of such Borrowing, which shall be a Business Day;

(iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing;

(iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term “Interest Period”; and

(v) the location and number of the Borrower’s account to which funds are to be disbursed, which shall comply with the requirements of Section 2.04.

If no election as to the Type of Borrowing is specified, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender’s Loan to be made as part of the requested Borrowing.

SECTION 2.04. Funding of Borrowings. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 5:00 p.m., New York City time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower maintained with the Administrative Agent in New York City and designated by the Borrower in the applicable Borrowing Request.

(b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender’s share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation or (ii) in the case of the Borrower, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender’s Loan included in such Borrowing.

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SECTION 2.05. Interest Elections. (a) Each Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall have an initial Interest Period as specified (or deemed specified) in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing.

(b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower.

(c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02:

(i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing);

(ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day;

(iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and

(iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term “Interest Period”.

If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration.

(d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender’s portion of each resulting Borrowing.

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(e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto.

SECTION 2.06. Termination, Reduction and Increase of Commitments. (a) Unless previously terminated, the Commitments shall terminate on the Commitment Termination Date.

(b) The Borrower may at any time terminate, or from time to time reduce, the Commitments; provided that (i) each reduction of the Commitments shall be in an amount that is an integral multiple of $5,000,000 and not less than $25,000,000 and (ii) the Borrower shall not terminate or reduce the Commitments if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.08, the total Credit Exposures would exceed the total Commitments. The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Commitments under this paragraph at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each such notice delivered by the Borrower shall be irrevocable; provided that a notice of termination of the Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Commitments shall be permanent. Each reduction of the Commitments shall be made ratably among the Lenders in accordance with their respective Commitments.

(c) The Borrower may, at any time by notice to the Administrative Agent, propose an increase in the total Commitments hereunder (each such proposed increase being a “Commitment Increase”) either by having a Lender increase its Commitment then in effect (each an “Increasing Lender”) or by adding as a Lender with a new Commitment hereunder a Person which is not then a Lender (each an “Assuming Lender”) in each case with the approval of the Administrative Agent (not to be unreasonably withheld), which notice shall specify the name of each Increasing Lender and/or Assuming Lender, as applicable, the amount of the Commitment Increase and the portion thereof being assumed by each such Increasing Lender or Assuming Lender, and the date on which such Commitment Increase is to be effective (the “Commitment Increase Date”) (which shall be a Business Day at least three Business Days after delivery of such notice and 30 days prior to the Commitment Termination Date); provided that:

(i) the minimum amount of the increase of the Commitment of any Increasing Lender, and the minimum amount of the Commitment of any Assuming Lender, as part of any Commitment Increase shall be in an amount that is an integral multiple of $5,000,000 and not less than $10,000,000;

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(ii) immediately after giving effect to any Commitment Increase, the total Commitments hereunder shall not exceed $300,000,000;

(iii) no Default shall have occurred and be continuing on the relevant Commitment Increase Date or shall result from any Commitment Increase; and

(iv) the representations and warranties of the Borrower set forth in this Agreement and the other Loan Documents shall be true and correct on and as of the relevant Commitment Increase Date as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date).

Each Commitment Increase (and the increase of the Commitment of each Increasing Lender and/or the new Commitment of each Assuming Lender, as applicable, resulting therefrom) shall become effective as of the relevant Commitment Increase Date upon receipt by the Administrative Agent, on or prior to 9:00 a.m., New York City time, on such Commitment Increase Date, of (A) a certificate of a duly authorized officer of the Borrower stating that the conditions with respect to such Commitment Increase under this paragraph (c) have been satisfied and (B) an agreement, in form and substance satisfactory to the Borrower and the Administrative Agent, pursuant to which, effective as of such Commitment Increase Date, the Commitment of each such Increasing Lender shall be increased or each such Assuming Lender, as applicable, shall undertake a Commitment, duly executed by such Increasing Lender or Assuming Lender, as the case may be, and the Borrower and acknowledged by the Administrative Agent. Upon the Administrative Agent’s receipt of a fully executed agreement from each Increasing Lender and/or Assuming Lender referred to in clause (B) above, together with the certificate referred to in clause (A) above, the Administrative Agent shall record the information contained in each such agreement in the Register and give prompt notice of the relevant Commitment Increase to the Borrower and the Lenders (including, if applicable, each Assuming Lender). On each Commitment Increase Date the Borrower shall simultaneously (i) prepay in full the outstanding Loans (if any) held by the Lenders immediately prior to giving effect to the relevant Commitment Increase, (ii) if the Borrower shall have so requested in accordance with this Agreement, borrow new Loans from all Lenders (including, if applicable, any Assuming Lender) such that, after giving effect thereto, the Loans are held ratably by the Lenders in accordance with their respective Commitments (after giving effect to such Commitment Increase) and (iii) pay to the Lenders the amounts, if any, payable under Section 2.13.

SECTION 2.07. Repayment of Loans; Evidence of Debt. (a) The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Loan on the Maturity Date.

(b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.

(c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender’s share thereof.

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(d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement.

(e) Any Lender may request that Loans made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns).

SECTION 2.08. Prepayment of Loans. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to prior notice in accordance with paragraph (b) of this Section.

(b) The Borrower shall notify the Administrative Agent by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment or (ii) in the case of prepayment of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.06, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.06. Promptly following receipt of any such notice relating to a Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Borrowing shall be in an amount that would be permitted in the case of an advance of a Borrowing of the same Type as provided in Section 2.02. Each prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.10.

SECTION 2.09. Fees. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a commitment fee, which shall accrue at a rate of 0.20% per annum on the average daily unused amount of the Commitment of such Lender during the period from and including the Effective Date to but excluding the date on which such Commitment terminates. Accrued commitment fees shall be payable in arrears on the last day of January, April, July and October of each year and on the date on which the Commitments terminate, commencing on the first such date to occur after the date hereof. All commitment fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day).

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(b) The Borrower agrees to pay to the Administrative Agent, for its own account, an administration fee in the amounts and at the times separately agreed upon between the Borrower and the Administrative Agent.

(c) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, in the case of commitment fees, to the Lenders. Fees paid shall not be refundable under any circumstances.

SECTION 2.10. Interest. (a) The Loans comprising each ABR Borrowing shall bear interest at the Alternate Base Rate plus the Applicable Margin.

(b) The Loans comprising each Eurodollar Borrowing shall bear interest, in the case of a Eurodollar Loan, at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Margin.

(c) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Loans as provided in paragraph (a) of this Section.

(d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan, upon the termination of the Commitments and (if the Term-Out Option shall be exercised) upon the Maturity Date; provided that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Loan prior to the end of the Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion.

(e) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error.

SECTION 2.11. Alternate Rate of Interest. If prior to the commencement of any Interest Period for a Eurodollar Borrowing:

(a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period; or

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(b) the Administrative Agent is advised by the Required Lenders that the Adjusted LIBO Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period;

then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made as an ABR Borrowing.

SECTION 2.12. Increased Costs. (a) If any Change in Law shall:

(i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate); or

(ii) impose on any Lender or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender;

and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered.

(b) If any Lender determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender’s capital or on the capital of such Lender’s holding company, if any, as a consequence of this Agreement or the Loans made by such Lender to a level below that which such Lender or such Lender’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s policies and the policies of such Lender’s holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender’s holding company for any such reduction suffered.

(c) A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.

(d) Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender’s right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender pursuant to this Section

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for any increased costs or reductions incurred more than 270 days prior to the date that such Lender notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender’s intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 270-day period referred to above shall be extended to include the period of retroactive effect thereof.

SECTION 2.13. Break Funding Payments. In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Eurodollar Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.08(b) and is revoked in accordance therewith) or (d) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.16, then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be deemed to include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted LIBO Rate that would have been applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest which would accrue on such principal amount for such period at the interest rate which such Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the eurodollar market. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.

SECTION 2.14. Taxes. (a) Any and all payments by or on account of any obligation of the Borrower hereunder or under any other Loan Document shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent or the Lenders (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law.

(b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.

(c) The Borrower shall indemnify the Administrative Agent and each Lender, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent or such Lender (as the case may be) on or with respect to any payment by or on account of any obligation of the Borrower hereunder (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under

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this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender, or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error.

(d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.

(e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate.

(f) If the Administrative Agent or a Lender determines, in its sole discretion, that it has received a refund of any Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section, it shall pay over such refund to the Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of the Administrative Agent or such Lender and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); provided that the Borrower, upon the request of the Administrative Agent or such Lender, agrees to repay the amount paid over to the Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent or such Lender in the event the Administrative Agent or such Lender is required to repay such refund to such Governmental Authority. This Section shall not be construed to require the Administrative Agent or any Lender to make available its tax returns (or any other information relating to its taxes which it deems confidential) to the Borrower or any other Person.

SECTION 2.15. Payments Generally; Pro Rata Treatment; Sharing of Set-offs. (a) The Borrower shall make each payment required to be made by it hereunder (whether of principal, interest, fees or other amounts payable under Section 2.12, 2.13 or 2.14 or otherwise) or under any other Loan Document prior to 12:00 noon, New York City time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices to an account designated by the Administrative Agent for such purposes, except that payments pursuant to Sections 2.12, 2.13, 2.14 and 9.03 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on

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a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder and under the other Loan Document shall be made in dollars.

(b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, towards payment of principal then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal then due to such parties.

(c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation.

(d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.

(e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.04(b) or 2.15(d), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender’s obligations under such Sections until all such unsatisfied obligations are fully paid.

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SECTION 2.16. Mitigation Obligations; Replacement of Lenders. (a) If any Lender requests compensation under Section 2.12, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.14, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.12 or 2.14, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.

(b) If any Lender requests compensation under Section 2.12, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.14, or if any Lender defaults in its obligation to fund Loans hereunder, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Borrower shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.12 or payments required to be made pursuant to Section 2.14, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

The Borrower represents and warrants to the Lenders that:

SECTION 3.01. Organization; Powers. Each of the Borrower and its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required.

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SECTION 3.02. Authorization; Enforceability. The Transactions are within the Borrower’s corporate powers and have been duly authorized by all necessary corporate and, if required, stockholder action. Each of this Agreement and the other Loan Documents has been duly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.

SECTION 3.03. Governmental Approvals; No Conflicts. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except (i) such as have been obtained or made and are in full force and effect and (ii) filings and recordings in respect of the Liens created pursuant to the Security Documents, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Borrower or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Borrower or any of its Subsidiaries or its assets, or give rise to a right thereunder to require any payment to be made by the Borrower or any of its Subsidiaries, and (d) except for the Liens created pursuant to the Security Documents, will not result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries.

SECTION 3.04. Financial Condition; No Material Adverse Change.

(a) The Borrower has heretofore furnished to the Lenders (i) the consolidated balance sheet and statements of operations, changes in shareholders’ equity and cash flows of the Borrower as of and for the fiscal year ended December 31, 2005, reported on by PricewaterhouseCoopers LLP, (ii) the consolidated balance sheet and statements of operations, changes in shareholders’ equity and cash flows of the Borrower as of and for the fiscal quarter ended June 30, 2006, certified by the chief financial officer of the Borrower and (iii) the consolidating balance sheet and statements of operations, changes in shareholders’ equity and cash flows of each of the Borrower and its Subsidiaries as of and for the fiscal year ended December 31, 2005 and the fiscal quarter ended June 30, 2006, in each case certified by the chief financial officer of the Borrower. Such financial statements as at December 31, 2005 and June 30, 2006 present fairly (in the case of said consolidated statements), in all material respects, the consolidated financial position and consolidated results of operations and cash flows of the Borrower and its consolidated Subsidiaries and (in the case of said consolidating financial statements) the respective unconsolidated financial position of each of the Borrower and its Subsidiaries and the unconsolidated results of their respective operations, as of such dates and for such periods in accordance with GAAP, subject (in the case of each financial statement as at June 30, 2006 and each consolidating financial statement referred to above) to year-end audit adjustments and the absence of footnotes. Except as referred to or reflected or provided in such balance sheets (or the related footnotes) as at December 31, 2005, in the Borrower’s report on Form 10-K for the fiscal year ended December 31, 2005 or in the Borrower’s report on Form 10-Q for the fiscal quarter ended June 30, 2006, none of the Borrower nor any of its Subsidiaries has on the Effective Date any material contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments that are required to be disclosed by GAAP or in such reports on Form 10-K or 10-Q.

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(b) Since December 31, 2005, there has been no material adverse change in the business, assets, operations, prospects or condition, financial or otherwise, of the Borrower and its Subsidiaries, taken as a whole.

SECTION 3.05. Properties. (a) Each of the Borrower and its Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes. The Liens granted by the Security Documents constitute valid perfected first priority Liens on the properties and assets covered by the Security Documents, subject to no prior or equal Lien except those Liens permitted by Section 6.02.

(b) Each of the Borrower and its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by the Borrower and its Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.

SECTION 3.06. Litigation and Environmental Matters. (a) There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of its Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters) or (ii) that involve this Agreement or the Transactions.

(b) Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, neither the Borrower nor any of its Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability.

(c) Since the date of this Agreement, there has been no change in the status of the Disclosed Matters that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect.

SECTION 3.07. Compliance with Laws and Agreements. Each of the Borrower and its Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. No Default has occurred and is continuing.

SECTION 3.08. Investment Company Status. Neither the Borrower nor any of its Subsidiaries is required to register as an “investment company” as defined in the Investment Company Act of 1940.

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SECTION 3.09. Taxes. Each of the Borrower and its Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which the Borrower or such Subsidiary, as applicable, has set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect.

SECTION 3.10. ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $25,000,000 the fair market value of the assets of such Plan, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $25,000,000 the fair market value of the assets of all such underfunded Plans.

SECTION 3.11. Disclosure. The Borrower has disclosed to the Lenders all agreements, instruments and corporate or other restrictions to which it or any of its Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the reports, financial statements, certificates or other written information furnished by or on behalf of the Borrower to the Administrative Agent or any Lender in connection with the negotiation of this Agreement and the other Loan Documents or delivered hereunder or thereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time.

SECTION 3.12. Subsidiaries. Set forth in Schedule 3.12 is a complete and correct list of all of the Subsidiaries of the Borrower as of the date hereof, together with, for each such Subsidiary, (a) the jurisdiction of organization of such Subsidiary, (b) each Person holding Equity Interests of such Subsidiary and (c) the nature of the Equity Interests held by each such Person and the percentage of ownership of such Subsidiary represented by such Equity Interests. Except as disclosed in Schedule 3.12, as of the date hereof, (i) each of the Borrower and its Subsidiaries owns, free and clear of Liens (other than Liens created pursuant to the Security Documents), and has the unencumbered right to vote, all outstanding Equity Interests in each Person shown to be held by it in Schedule 3.12, (ii) all of the issued and outstanding capital stock of each such Person organized as a corporation is validly issued, fully paid and nonassessable and (iii) there are no outstanding subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including any shareholders’ or voting trust agreements) for the issuance, sale, registration or voting of, or securities convertible into, any additional shares of capital stock of any class of, or partnership or other ownership interests of any type in, any Subsidiary.

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SECTION 3.13. REIT Qualification. The Borrower has elected to be taxed as a “real estate investment trust” under the IRC. The Borrower has qualified as a “real estate investment trust” under the IRC for its taxable year ended December 31, 2004. The Borrower’s present and contemplated operations, assets and income will enable the Borrower to meet the requirements for qualification and taxation as a “real estate investment trust” under the IRC.

SECTION 3.14. Regulatory Matters Pertaining to FRB & Co. FBR & Co. is a registered broker-dealer in each jurisdiction in which it owns or leases property or in which the conduct of its business requires it to so register except to the extent that failure to so register does not and is not reasonably likely to have a Material Adverse Effect. FBR & Co. is a member in good standing of the NASD and is duly registered as a broker-dealer with the SEC. The Examining Authority for FBR & Co. is the NASD.

ARTICLE IV

CONDITIONS

SECTION 4.01. Effective Date. The obligations of the Lenders to make Loans hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.02):

(a) The Administrative Agent (or its counsel) shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement.

(b) The Administrative Agent shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Effective Date) of Hunton & Williams LLP, counsel for the Borrower, substantially in the form of Exhibit B, and covering such other matters relating to the Borrower, this Agreement or the Transactions as the Required Lenders shall reasonably request (and the Borrower hereby requests such counsel to deliver such opinion).

(c) The Administrative Agent shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Effective Date) of Milbank, Tweed, Hadley & McCloy LLP, special New York counsel to JPMCB, substantially in the form of Exhibit C (and JPMCB hereby instructs such counsel to deliver such opinion to the Lenders).

(d) The Administrative Agent shall have received such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of the Borrower, the authorization of the Transactions and any other legal matters relating to the Borrower, this Agreement or the Transactions, all in form and substance satisfactory to the Administrative Agent and its counsel.

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(e) The Administrative Agent shall have received a certificate, dated the Effective Date and signed by the President, a Vice President or a Financial Officer of the Borrower, confirming compliance with the conditions set forth in clauses (a) and (b) of Section 4.02.

(f) The Administrative Agent shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder.

(g) The Administrative Agent shall have received evidence that, to the extent required to be subordinated pursuant to Section 6.01, any Indebtedness owing by the Borrower and outstanding on the date hereof shall be subordinated to the payment of the Loans and all obligations under this Agreement and the other Loan Documents on terms not less favorable to the Lenders than those set forth in Exhibit E.

(h) The Administrative Agent (or its counsel) shall have received from each party to the Security Agreement a counterpart of the Security Agreement signed on behalf of such party, together with (i) certificates, if any, representing the Pledged Equity (as defined in the Security Agreement) accompanied by undated stock powers executed in blank and instruments evidencing the Pledged Debt (as defined in the Security Agreement) indorsed in blank, and (ii) each document (including, without limitation, any Uniform Commercial Code financing statement) required by the Security Documents or under law or reasonably requested by the Administrative Agent to be filed, registered or recorded in order to create in favor of the Administrative Agent, for the benefit of the Lenders, a perfected Lien on the property of the Borrower subject to the security interests under the Security Agreement, subject to no other Liens, which shall have been delivered to the Administrative Agent in proper form for filing, registration or recordation. In addition, the Administrative Agent shall have received the results of recent lien searches in each relevant jurisdiction with respect to the Borrower, and such searches shall reveal no Liens on any of the assets of the Borrower of the types covered by the Security Agreement.

(i) The Administrative Agent shall have received evidence that all principal, interest, fees and other amounts payable under the Credit Agreement dated as of July 21, 2005, as amended, between the Borrower, the lenders party thereto and JPMCB, as administrative agent, that are accrued to the Effective Date and/or unpaid have been paid in full and all commitments of such lenders thereunder have expired.

The Administrative Agent shall notify the Borrower and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 9.02) at or prior to 3:00 p.m., New York City time, on October 20, 2006 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time).

SECTION 4.02. Each Credit Event. The obligation of each Lender to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions:

(a) the representations and warranties of the Borrower set forth in this Agreement and in the other Loan Documents shall be true and correct on and as of the date of such Borrowing (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); and

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(b) at the time of and immediately after giving effect to such Borrowing, no Default shall have occurred and be continuing.

Each Borrowing shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in clauses (a) and (b) of this Section.

ARTICLE V

AFFIRMATIVE COVENANTS

Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full, the Borrower covenants and agrees with the Lenders that:

SECTION 5.01. Financial Statements; Other Information. The Borrower will furnish to the Administrative Agent and each Lender:

(a) within five Business Days of the earlier of (i) the date on which the same shall have been filed with the SEC and (ii) the date the same are required to be filed with the SEC (without regard to any extension of the SEC’s filing requirements), the audited consolidated balance sheet and related statements of operations, changes in shareholders’ equity and cash flows of the Borrower as of the end of and for each fiscal year of the Borrower, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by PricewaterhouseCoopers LLP or other independent public accountants of recognized national standing (without a “going concern” or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied;

(b) within five Business Days of the earlier of (i) the date on which the same shall have been filed with the SEC and (ii) the date the same are required to be filed with the SEC (without regard to any extension of the SEC’s filing requirements), the audited consolidated balance sheet and related statements of operations, changes in shareholders’ equity and cash flows of each U.S. Broker-Dealer Subsidiary as of the end of and for each fiscal year of such U.S. Broker-Dealer Subsidiary, all reported on by PricewaterhouseCoopers LLP or other independent public accountants of recognized national standing (without a “going concern” or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of such U.S. Broker-Dealer Subsidiary and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied;

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(c) on or before the date by which the financial statements referred to in clause (a) of this Section are required to be delivered, the audited consolidated balance sheet and related statements of operations, changes in shareholders’ equity and cash flows of FBRCMC as of the end of and for each fiscal year of FBRCMC, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by PricewaterhouseCoopers LLP or other independent public accountants of recognized national standing (without a “going concern” or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of FBRCMC and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied;

(d) within five Business Days of the earlier of (i) the date on which the same shall have been filed with the SEC and (ii) the date the same are required to be filed with the SEC (without regard to any extension of the SEC’s filing requirements), the consolidated balance sheet and related statements of operations, changes in shareholders’ equity and cash flows of the Borrower as of the end of and for each of the first three fiscal quarters of each fiscal year of the Borrower and the then elapsed portion of each such fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, all certified by the chief financial officer of the Borrower as presenting fairly in all material respects the consolidated financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes;

(e) on or before the date by which the financial statements referred to in clause (d) of this Section are required to be delivered, the consolidated balance sheet and related statements of operations, changes in shareholders’ equity and cash flows of FBRCMC as of the end of and for each of the first three fiscal quarters of each fiscal year of FBRCMC and the then elapsed portion of each such fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, all certified by the chief financial officer of the Borrower as presenting fairly in all material respects the consolidated financial condition and results of operations of FBRCMC and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes;

(f) on or before the respective dates by which the financial statements respectively referred to in clauses (a) and (d) of this Section are required to be delivered, the consolidating balance sheet and related statements of operations of each of the Borrower and its Subsidiaries as of the end of and for each of the fiscal quarters of each fiscal year of the Borrower and the then elapsed portion of each such fiscal year, all certified by the chief financial officer of the Borrower as presenting fairly in all material respects the respective individual unconsolidated financial condition and results of operations of each of the Borrower and its Subsidiaries in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes;

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(g) concurrently with any delivery of financial statements under clause (a) or (d) of this Section (but without duplication), a certificate of a Financial Officer of the Borrower (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Sections 6.01, 6.05, 6.10 and 6.11 and (iii) stating whether any change in GAAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 3.04 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate;

(h) within five Business Days after the filing thereof with the SEC or a national securities exchange, as applicable, the FOCUS Report of FBR & Co. for each calendar quarter and fiscal year;

(i) promptly after the same become publicly available, copies of all periodic reports and proxy statements and all other material documents filed by the Borrower or any Subsidiary with the SEC or the NYSE, any other national securities, any commodities exchange or any self-regulatory organization, or distributed by the Borrower to its shareholders generally, as the case may be; and

(j) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Borrower or any Subsidiary, or compliance with the terms of this Agreement and the other Loan Documents, as the Administrative Agent or any Lender may reasonably request.

SECTION 5.02. Notices of Material Events. The Borrower will furnish to the Administrative Agent and each Lender prompt written notice of the following:

(a) the occurrence of any Default;

(b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting the Borrower or any Affiliate thereof that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect;

(c) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower and its Subsidiaries in an aggregate amount exceeding $25,000,000; and

(d) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect.

Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto.

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SECTION 5.03. Existence; Conduct of Business. The Borrower will, and will cause each of its Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises material to the conduct of its business (including, in the case of any Broker-Dealer Subsidiary, all registrations, licenses, memberships and other authorizations with respect to its activities); provided that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 6.03.

SECTION 5.04. Payment of Obligations. The Borrower will, and will cause each of its Subsidiaries to, pay its obligations, including Tax liabilities, that, if not paid, could result in a Material Adverse Effect before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect.

SECTION 5.05. Maintenance of Properties; Insurance. The Borrower will, and will cause each of its Subsidiaries to, (a) keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (b) maintain, with financially sound and reputable insurance companies, insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations.

SECTION 5.06. Books and Records; Inspection Rights. The Borrower will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. The Borrower will, and will cause each of its Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested.

SECTION 5.07. Compliance with Laws. The Borrower will, and will cause each of its Subsidiaries to, comply with all laws, rules, regulations (including the Net Capital Rules) and orders of any Governmental Authority applicable to it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.

SECTION 5.08. Use of Proceeds. The proceeds of the Loans will be used only for general corporate purposes of the Borrower. No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations T, U and X.

SECTION 5.09. Further Assurances With Respect to Security Interests. In the event that after the date hereof the Borrower shall form or acquire any new directly owned

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Subsidiary or any existing directly owned Subsidiary shall issue additional Equity Interests, the Borrower agrees forthwith to deliver to the Administrative Agent pursuant to the Security Agreement the certificates evidencing such Equity Interests, accompanied by undated stock powers executed in blank and to take such other action as the Administrative Agent shall request to perfect the security interest created therein pursuant to the Security Agreement. The Borrower agrees that, upon the incurrence of any Indebtedness of any Subsidiary owing to the Borrower having a term to maturity of greater than one year, such Indebtedness shall be evidenced by a promissory note and the Borrower shall forthwith deliver such note to the Administrative Agent pursuant to the Security Agreement. Without limiting the foregoing, the Borrower will take such action from time to time as shall reasonably be requested by the Administrative Agent to effectuate the purposes and objectives of the Loan Documents.

ARTICLE VI

NEGATIVE COVENANTS

Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full, the Borrower covenants and agrees with the Lenders that:

SECTION 6.01. Indebtedness. The Borrower will not, and will not permit TRS Holdings to, create, incur, assume or permit to exist any Indebtedness, except:

(a) Indebtedness created hereunder and the other Loan Documents;

(b) Indebtedness existing on the date hereof and set forth in Schedule 6.01;

(c) Indebtedness of the Borrower owing to any Subsidiary; provided that any such Indebtedness which shall on the date of its incurrence have a term to maturity of greater than one year shall (i) be subordinated in right of payment to the payment of all principal, interest and other amounts payable under this Agreement and the other Loan Documents on terms not less favorable to the Lenders than those set forth in Exhibit E and (ii) not mature (nor contain any amortization or prepayment requirements) earlier than six months after the Term-Out Maturity Date;

(d) (i) Indebtedness of the Borrower in respect of, and any other obligations or liabilities of the Borrower arising from, Repo Transactions entered into the ordinary course of business of the Borrower; (ii) Guarantees, entered into in the ordinary course of business of the Borrower, of Repo Transactions of others (other than any entity covered under clause (iii) below), provided that the assets subject to such Repo Transactions so guaranteed by the Borrower shall be deemed to constitute assets of the Borrower for purposes of, and shall accordingly be included in, the definition of “Assets for Purposes of Assessing Liquidity” (but only to the extent provided in clause (i) of such definition); and (iii) Guarantees, entered into in the ordinary course of business of the Borrower, of Repo Transactions or other obligations of MHC I, a qualified “real estate investment trust” under the IRC ( a “Qualified REIT”) and a Subsidiary of the Borrower, and of any other Subsidiary of the Borrower which is a Qualified REIT, provided that, so long as any such

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Guarantee shall be in effect, all assets of such Subsidiary shall be deemed to constitute assets of the Borrower for purposes of, and shall accordingly be included in, the definition of “Assets for Purposes of Assessing Liquidity” (but only to the extent provided in clause (j) of such definition);

(e) Indebtedness of the Borrower incurred in the ordinary course of its business to finance the acquisition of Eligible MBS, asset-backed securities, warehouse advances or Eligible Sub-Prime Loans, in each case, of the type described in clauses (c), (d), (e) and (f), respectively, of the definition of “Assets for Purposes of Assessing Liquidity”;

(f) Indebtedness of the Borrower (other than any Guarantee by the Borrower of the Indebtedness of any other Person) which shall on the date of its incurrence have a term to maturity of greater than one year; provided that such Indebtedness shall (i) be subordinated in right of payment to the payment of all principal, interest and other amounts payable under this Agreement and the other Loan Documents on terms not less favorable to the Lenders than those set forth in Exhibit E and (ii) not mature (nor contain any amortization or prepayment requirements) earlier than six months after the Term-Out Maturity Date;

(g) unsecured Indebtedness of the Borrower (other than (i) any Guarantee by the Borrower of the Indebtedness of any other Person and (ii) Indebtedness owing to any Subsidiary) in addition to the Indebtedness permitted under clauses (a) through (f) of this Section; provided that the aggregate amount of all such Indebtedness outstanding pursuant to this clause (g) shall not at any time exceed $100,000,000; and

(h) unsecured Indebtedness of TRS Holdings incurred in the ordinary course of its business and consistent with its past practices; provided that the aggregate amount of all such Indebtedness (other than any such Indebtedness owing to the Borrower) outstanding pursuant to this clause (h) shall not at any time exceed $5,000,000.

SECTION 6.02. Liens. The Borrower will not, and will not permit TRS Holdings to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except:

(a) Liens created pursuant to the Loan Documents;

(b) Permitted Encumbrances;

(c) any Lien on any property of the Borrower or TRS Holdings existing on the date hereof and set forth in Schedule 6.02; provided that (i) such Lien shall not apply to any other property of the Borrower or TRS Holdings and (ii) such Lien shall secure only those obligations which it secures on the date hereof and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof;

(d) (i) Liens on any property of the Borrower securing Indebtedness, other obligations or liabilities permitted under Section 6.01(d) and (ii) Liens on Eligible MBS, asset-backed securities, warehouse advances or Eligible Sub-Prime Loans of the Borrower being financed with the Indebtedness permitted under Section 6.01(e), provided that no

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such Lien shall extend to any property of the Borrower other than (as applicable) the property subject to the relevant Repo Transaction or such Eligible MBS, asset-backed securities, warehouse advances or Eligible Sub-Prime Loans; and

(e) Liens on cash or Cash Equivalents of the Borrower securing obligations of the Borrower in respect of Swap Agreements entered into in the ordinary course of business and not for speculative purposes.

SECTION 6.03. Mergers, Consolidations, Sale of Assets, etc. The Borrower will not, and will not permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired), or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing:

(a) any Person may merge into the Borrower in a transaction in which the Borrower is the surviving corporation;

(b) any Person may merge into any Subsidiary in a transaction in which the surviving entity is a Subsidiary;

(c) any Subsidiary (other than TRS Holdings) may sell, transfer, lease or otherwise dispose of its assets to the Borrower or to another Subsidiary; and

(d) any Subsidiary may liquidate or dissolve if the Borrower determines in good faith that such liquidation or dissolution is in the best interests of the Borrower and is not materially disadvantageous to the Lenders.

SECTION 6.04. Restricted Payments. The Borrower will not declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, except:

(a) the Borrower may declare and pay dividends with respect to its Equity Interests payable solely in additional shares of its common stock;

(b) the Borrower may declare and pay cash dividends in such amounts (but not more than such amounts) and at such times as shall be necessary to meet the requirements for qualification and taxation as a “real estate investment trust” under the IRC;

(c) so long as no Default shall have occurred and be continuing or would result therefrom, the Borrower may declare and pay cash dividends during any calendar year in an aggregate amount not at any time exceeding the difference (if positive) between (i) 110% of the Borrower’s “REIT taxable income” (determined in accordance with the IRC) for the calendar year most recently ended, less (ii) the aggregate amount of any dividends declared and paid under Section 6.04(b) during such calendar year; and

(d) so long as no Default shall have occurred and be continuing or would result therefrom, the Borrower may make Restricted Payments, provided that the aggregate

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amount of such Restricted Payments made pursuant to this clause (d) during the period commencing on the date hereof and ending on the date of any such Restricted Payment shall not exceed 5% of the shareholders’ equity of the Borrower (determined on an unconsolidated basis in accordance with GAAP) as of the last day of the fiscal quarter most recently ended.

SECTION 6.05. Transactions with Affiliates. The Borrower will not, and will not permit any of its Subsidiaries to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (a) in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm’s-length basis from unrelated third parties, (b) transactions between or among the Borrower and its wholly-owned Subsidiaries not involving any other Affiliate and (c) any Restricted Payment permitted by Section 6.04.

SECTION 6.06. Restrictive Agreements. The Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of the Borrower to create, incur or permit to exist any Lien upon any of its property or assets or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any shares of its capital stock or to make or repay loans or advances to the Borrower or to Guarantee Indebtedness of the Borrower; provided that the foregoing shall not apply to (i) restrictions and conditions imposed by law or by the Loan Documents, (ii) restrictions and conditions existing on the date hereof identified on Schedule 6.06 (but shall apply to any extension or renewal of, or any amendment or modification expanding the scope of, any such restriction or condition), (iii) customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided that such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder and (iv) (in the case of clause (a) above) restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement (other than the Liens created pursuant to the Security Documents) if such restrictions or conditions apply only to the property or assets securing such Indebtedness and customary provisions in leases and other contracts restricting the assignment thereof.

SECTION 6.07. Subordinated Indebtedness. The Borrower will not purchase, redeem, retire or otherwise acquire for value, or set apart any money for a sinking, defeasance or other analogous fund for the purchase, redemption, retirement or other acquisition of, or make any voluntary payment or prepayment of the principal of or interest on, or any other amount owing in respect of, any Subordinated Indebtedness, except for regularly scheduled payments, prepayments or redemptions of principal and interest in respect thereof required pursuant to the instruments evidencing such Subordinated Indebtedness.

SECTION 6.08. Lines of Business. The Borrower will not, and will not permit any of its Subsidiaries to, engage to any material extent in any business other than the businesses of the type conducted by the Borrower and its Subsidiaries on the date of execution of this Agreement and businesses reasonably related thereto; provided that nothing in this Section 6.08 shall prevent the Borrower from acquiring or engaging in, or prevent the Borrower from permitting any of its Subsidiaries to acquire or engage in, any business or businesses that provide financial products or financial services, or create financial assets, that are used in the business of the type conducted by the Borrower and its Subsidiaries on the date of execution of this Agreement and businesses reasonably related thereto.

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SECTION 6.09. Change in Fiscal Periods. The Borrower will not change its fiscal quarters and fiscal year from that in effect on the date hereof.

SECTION 6.10. Tangible Net Worth. The Borrower will not at any time permit Tangible Net Worth to be less than the sum of (a) $1,000,000,000 plus (b) 75% of the aggregate net proceeds received by the Borrower in respect of any issuance of Equity Interests by the Borrower after September 30, 2006.

SECTION 6.11. Liquidity. The Borrower will not at any time permit the sum of (a) shareholders’ equity of the Borrower at such time (calculated on an unconsolidated basis in accordance with GAAP) plus (b) Qualifying Long-Term Indebtedness at such time to be less than Assets for Purposes of Assessing Liquidity at such time.

ARTICLE VII

EVENTS OF DEFAULT

If any of the following events (“Events of Default”) shall occur:

(a) the Borrower shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise;

(b) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement or under any other Loan Document, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of three Business Days;

(c) any representation or warranty made or deemed made by or on behalf of the Borrower in or in connection with this Agreement or any other Loan Document or any amendment or modification hereof or thereof or waiver hereunder or thereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with this Agreement or any other Loan Document or any amendment or modification hereof or thereof or waiver hereunder or thereunder, shall prove to have been incorrect in any material respect when made or deemed made;

(d) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in Section 5.02, 5.03 (with respect to the Borrower’s existence) or 5.08 or in Article VI;

(e) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in this Agreement or any other Loan Document (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent to the Borrower (which notice will be given at the request of any Lender);

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(f) the Borrower or any Subsidiary shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable, and all grace periods with respect thereto have expired;

(g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided that this clause (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness;

(h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Borrower or any Subsidiary or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered;

(i) the Borrower or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing;

(j) the Borrower or any Subsidiary shall become unable, admit in writing its inability or fail generally to pay its debts as they become due;

(k) one or more judgments for the payment of money in an aggregate amount in excess of $25,000,000 shall be rendered against the Borrower or any Subsidiary (or any combination thereof) and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Borrower or any Subsidiary to enforce any such judgment;

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(l) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower and its Subsidiaries in an aggregate amount exceeding $25,000,000;

(m) a Change of Control shall occur;

(n) any U.S. Broker-Dealer Subsidiary shall cease to be a member organization of the NASD or any national securities exchange or shall fail to maintain its registration as a broker-dealer with the SEC, in either case for a period of 10 days; or SIPC shall apply for a protective decree with respect to any U.S. Broker-Dealer Subsidiary as provided in the SIPA and such application shall remain undismissed for a period of five days; or any self-regulatory organization or Governmental Authority shall revoke the membership therein of any Broker-Dealer Subsidiary and such membership shall not be reinstated within 10 days of such suspension;

(o) the Borrower shall cease at any time to own directly 100% of the capital stock of TRS Holdings, or TRS Holdings shall cease to own directly at least 60% of the capital stock of FBRCMC, or FBRCMC shall cease at any time to own, directly or indirectly, 100% of capital stock of FBR & Co. Inc.;

(p) the Borrower shall cease at any time to meet the requirements for qualification and taxation as a “real estate investment trust” under the IRC; or

(q) the Liens created by the Security Documents shall at any time not constitute a valid and perfected Lien on the property intended to be covered thereby in favor of the Administrative Agent, free and clear of all other Liens (other than Liens permitted under Section 6.02), or, except for expiration in accordance with the express terms thereof, any of the Loan Documents shall for any reason cease to be in full force and effect or to be valid and binding on the Borrower, or the validity or enforceability thereof shall be contested by the Borrower;

then, and in every such event (other than an event with respect to the Borrower described in clause (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to the Borrower described in clause (h) or (i) of this Article, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.

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ARTICLE VIII

THE ADMINISTRATIVE AGENT

Each of the Lenders hereby irrevocably appoints the Administrative Agent as its agent hereunder and under the other Loan Documents and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof and thereof, together with such actions and powers as are reasonably incidental thereto.

The bank serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent hereunder.

The Administrative Agent shall not have any duties or obligations except those expressly set forth herein and in the other Loan Documents. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby and by the other Loan Documents that the Administrative Agent is required to exercise in writing as directed by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02), and (c) except as expressly set forth herein and in the other Loan Documents, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Subsidiaries that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02) or in the absence of its own gross negligence or willful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Borrower or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or in any other Loan Document, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.

The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document

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or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

The Administrative Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent.

Subject to the appointment and acceptance of a successor Administrative Agent as provided in this paragraph, the Administrative Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right, with the approval of the Borrower, which approval shall not be unreasonably withheld, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Administrative Agent’s resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as Administrative Agent.

Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document, any related agreement or any document furnished hereunder or thereunder.

Notwithstanding anything herein to the contrary, the Sole Bookrunner and the Sole Lead Arranger and the Syndication Agent named on the cover page of this Agreement shall not have any duties or liabilities under this Agreement or any other Loan Document, except in their capacity, if any, as Lenders.

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ARTICLE IX

MISCELLANEOUS

SECTION 9.01. Notices. (a) Except in the case of notices and other communications expressly permitted to be given by telephone (and subject to paragraph (b) of this Section), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows:

(i) if to the Borrower, to it at Friedman, Billings Ramsey Group, Inc., 1001 Nineteenth Street North, Arlington, Virginia 22209, Attention of Kurt R. Harrington, Senior Vice President & Chief Financial Officer (Telephone No. (703) 312-9647; Telecopy No. (703) 312-9780);

(ii) if to the Administrative Agent, to JPMorgan Chase Bank, N.A., 1111 Fannin Street, 10^th Floor, Houston, Texas 77002-8069, Attention of Loan and Agency Services (Telephone No. (713) 750-3560; Telecopy No. (713) 750-2223), with a copy to JPMorgan Chase Bank, N.A., 277 Park Avenue, New York 10172, Attention of Thomas H. Mulligan (Telephone No. (212) 622-8620; Telecopy No. (646) 534-1720); and

(iii) if to any other Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire.

(b) Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communications pursuant to procedures approved by the Administrative Agent; provided that the foregoing shall not apply to notices pursuant to Article II unless otherwise agreed by the Administrative Agent and the applicable Lender. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.

(c) Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt.

SECTION 9.02. Waivers; Amendments. (a) No failure or delay by the Administrative Agent or any Lender in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be

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effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent or any Lender may have had notice or knowledge of such Default at the time.

(b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders or by the Borrower and the Administrative Agent with the consent of the Required Lenders; provided that no such agreement shall:

(i) increase the Commitment of any Lender without the written consent of such Lender;

(ii) reduce the principal amount of any Loan or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby;

(iii) postpone the scheduled date of payment of the principal amount of any Loan, or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby;

(iv) change Section 2.15(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, or alter the pro rata treatment requirements hereunder with respect to Borrowings, payments, prepayments or reductions of Commitments, in any such case, without the written consent of each Lender;

(v) change any of the provisions of this Section or the definition of “Required Lenders” or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender; or

(vi) change clause (o) of Article VII, without the consent of Lenders having Credit Exposures and unused Commitments representing not less than 75% of the sum of the total Credit Exposures and unused Commitments;

provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent hereunder and under the other Loan Documents without the prior written consent of the Administrative Agent.

Except as otherwise provided in this Section with respect to this Agreement, the Administrative Agent may, with the prior consent of the Required Lenders (but not otherwise), consent to any modification, supplement or waiver under any of the Security Documents; provided that, without the prior consent of each Lender, the Administrative Agent shall not (except as provided herein or in the Security Documents) release all or substantially all of the collateral or otherwise terminate all or substantially all of the Liens under any Security Document providing for collateral security, except that no such consent shall be required, and the Administrative Agent is hereby authorized, to release any Lien covering property that is the subject of either a disposition of property permitted hereunder or a disposition to which the Required Lenders have consented.

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SECTION 9.03. Expenses; Indemnity; Damage Waiver. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of this Agreement and the other Loan Documents or any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions contemplated hereby or thereby shall be consummated) and (ii) all out-of-pocket expenses incurred by the Administrative Agent or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, and the other Loan Documents or in connection with the Loans made hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or in connection with this Agreement or any other Loan Document; and (iii) and all reasonable costs, expenses, taxes, assessments and other charges incurred in connection with any filing, registration, recording or perfection of any security interest contemplated by any Security Document or any other document referred to therein.

(b) The Borrower shall indemnify the Administrative Agent and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an “Indemnitee”) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or thereunder or the consummation of the Transactions or any other transactions contemplated hereby or thereby, (ii) any Loan or the use of the proceeds therefrom, (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence, bad faith or willful misconduct of such Indemnitee.

(c) To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent such Lender’s Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent in its capacity as such.

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(d) To the extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the Transactions, any Loan or the use of the proceeds thereof.

(e) All amounts due under this Section shall be payable promptly but not later than 10 days after written demand therefor.

SECTION 9.04. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that (i) the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void) and (ii) no Lender may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section. Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants (to the extent provided in paragraph (c) of this Section) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.

(b)(i) Subject to the conditions set forth in paragraph (b)(ii) below, any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it) with the prior written consent (such consent not to be unreasonably withheld) of:

(A) the Borrower, provided that no consent of the Borrower shall be required for an assignment to a Lender, an Affiliate of a Lender or, if an Event of Default has occurred and is continuing, any other assignee; and

(B) the Administrative Agent, provided that no consent of the Administrative Agent shall be required for an assignment to a Lender.

(ii) Assignments shall be subject to the following additional conditions:

(A) except in the case of an assignment to a Lender or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender’s Commitment or Loans, the amount of the Commitment or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 unless each of the Borrower and the Administrative Agent otherwise consent, provided that no such consent of the Borrower shall be required if an Event of Default has occurred and is continuing;

(B) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement;

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(C) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500; and

(D) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.

(iii) Subject to acceptance and recording thereof pursuant to paragraph (b)(iv) of this Section, from and after the effective date specified in each Assignment and Assumption the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.12, 2.13, 2.14 and 9.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (c) of this Section.

(iv) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive absent manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

(v) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an assignee, the assignee’s completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Assumption and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph.

(c)(i) Any Lender may, without the consent of the Borrower and the Administrative Agent, sell participations to one or more banks or other entities (a “Participant”) in all or a portion of such Lender’s rights and obligations under this Agreement and the other Loan Documents (including all or a portion of its Commitment and the Loans owing to it); provided that (A) such Lender’s obligations under this Agreement shall remain unchanged, (B) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (C) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this

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Agreement and the other Loan Documents. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and the other Loan Documents and to approve any amendment, modification or waiver of any provision of this Agreement and the other Loan Documents; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. Subject to paragraph (c)(ii) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.12, 2.13 and 2.14 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.08 as though it were a Lender, provided that such Participant agrees to be subject to Section 2.15(c) as though it were a Lender.

(ii) A Participant shall not be entitled to receive any greater payment under Section 2.12 or 2.14 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.14 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.14(e) as though it were a Lender.

(d) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including without limitation any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

SECTION 9.05. Survival. All covenants, agreements, representations and warranties made by the Borrower herein and in the other Loan Documents and in the certificates or other instruments delivered in connection with or pursuant to this Agreement and the other Loan Documents shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the other Loan Documents and the making of any Loans, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid and so long as the Commitments have not expired or terminated. The provisions of Sections 2.12, 2.13, 2.14 and 9.03 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans or the termination of this Agreement or any provision hereof.

SECTION 9.06. Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement, the other Loan Documents and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the

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subject matter hereof and thereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof and thereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.

SECTION 9.07. Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.

SECTION 9.08. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by such Lender or Affiliate to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement and the other Loan Documents held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have.

SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York.

(b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement and the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against the Borrower or its properties in the courts of any jurisdiction.

(c) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement and any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

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(d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law.

SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

SECTION 9.11. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.

SECTION 9.12. Confidentiality. Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates’ directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or under any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower and its obligations, (g) with the consent of the Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than the Borrower. For the purposes of this Section, “Information” means all information received from the Borrower relating to the Borrower or its business, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by the Borrower; provided that, in the case of information received from the Borrower after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.

Credit Agreement

- 55 -

SECTION 9.13. USA PATRIOT Act. Each Lender hereby notifies the Borrower that pursuant to the requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)), such Lender may be required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender to identify the Borrower in accordance with said Act.

Credit Agreement

- 56 -

IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
By	/s/ Kurt Harrington
Name:	Kurt Harrington
Title:	CFO
U.S. Federal Tax Identification No.: 54-1873198

Credit Agreement

- 57 -

JPMORGAN CHASE BANK, N.A., individually and as Administrative Agent,
By	/s/ Thomas H. Mulligan
Name:	Thomas H. Mulligan
Title:	Managing Director

Credit Agreement

- 58 -

CALYON NEW YORK BRANCH
By	/s/ Ken Riccardi
Name:	Ken Riccardi
Title:	Director

CALYON NEW YORK BRANCH
By	/s/ Walter Jay Buckley
Name:	Walter Jay Buckley
Title:	Managing Director

Credit Agreement

- 59 -

BANK OF AMERICA, N.A.
By	/s/ Maryanne Fitzmaurice
Name:	Maryanne Fitzmaurice
Title:	Senior Vice President

Credit Agreement

- 60 -

THE BANK OF NEW YORK
By	/s/ Terence Law
Name:	Terence Law
Title:	Vice President

Credit Agreement

- 61 -

SOVEREIGN BANK
By	/s/ Kenneth Ahrens
Name:	Kenneth Ahrens
Title:	Senior Vice President

Credit Agreement

- 62 -

DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES
By	/s/ Sascha Kiaus
Name:	Sascha Kiaus
Title:	Managing Director

By	/s/ Brian Smith
Name:	Brian Smith
Title:	Managing Director

Credit Agreement

- 63 -

CHEVY CHASE BANK, F.S.B.
By	/s/ R.L. Amador
Name:	R.L. Amador
Title:	Group Vice President

Credit Agreement

- 64 -

PNC BANK, NATIONAL ASSOCIATION
By	/s/ Kirk Seagers
Name:	Kirk Seagers
Title:	Vice President

Credit Agreement

- 65 -

SCHEDULE 2.01

Commitments

Name of Lender	Commitment ($)
JPMORGAN CHASE BANK, N.A.	$	35,000,000
CALYON NEW YORK BRANCH	$	35,000,000
BANK OF AMERICA, N.A.	$	25,000,000
THE BANK OF NEW YORK	$	25,000,000
SOVEREIGN BANK	$	25,000,000
DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES	$	15,000,000
CHEVY CHASE BANK, F.S.B.	$	10,000,000
PNC BANK, NATIONAL ASSOCIATION	$	10,000,000
TOTAL	$	180,000,000

Schedule 2.01 to Credit Agreement

SCHEDULE 3.06

Disclosed Matters

1. Putative Class Action Securities Lawsuits. The Borrower and certain current and former senior officers and directors have been named in a series of putative class action securities lawsuits filed in the second quarter of 2005, all of which are pending in the United States District Court for the Southern District of New York. These cases have been consolidated under the name In re FBR Inc. Securities Litig. A consolidated amended complaint has been filed asserting claims under the Securities Exchange Act of 1934 and alleging misstatements and omissions concerning (i) the SEC and NASD investigations described below relating to the involvement of Friedman, Billings, Ramsey & Co., Inc. (“FBR & Co.”), a subsidiary of Borrower, in the private investment in public equity on behalf of CompuDyne, Inc. in October 2001 and (ii) the alleged conduct of the Borrower and certain of the Borrower’s officers and employees in allegedly facilitating certain sales of CompuDyne shares. The Borrower is contesting these lawsuits vigorously.

2. Shareholders’ Derivative Action. The Borrower has been named a nominal defendant, and certain current and former senior officers and directors have been named as defendants, in three shareholders’ derivative actions. Two of these actions, brought by Lemon Bay Partners LLC and Walter Boyle, are pending in the United States District Court for the Southern District of New York and have been consolidated, for pre-trial purposes only, with the pending putative class action securities lawsuits under the name In re FBR Securities and Derivative Litig. The third, brought by Gary Walter and Harry Goodstadt, has been filed in the Circuit Court for Arlington County, Virginia. All three cases claim that certain of the Borrower’s current and former officers and directors breached their duties to the Borrower based on allegations substantially similar to those in In re FBR Inc. Securities Litig. described above. The Borrower has not responded to any of these complaints and no discovery has commenced. The Borrower’s Board of Directors has established a special committee whose jurisdiction includes the Boyle and Walter/Goodstadt matters as well as consideration of shareholder demand letters which contain similar allegations, and the special committee has been authorized to make final decisions whether such litigation is in the Borrower’s best interests.

3. Regulatory Matters.

(a) On April 26, 2005, the Borrower announced that its broker-dealer subsidiary, FBR & Co., proposed settlement to the staffs of the SEC and the NASD’s Department of Market Regulation to resolve ongoing investigations by the SEC and NASD staffs. The proposed settlement concerns alleged insider trading, violations of antifraud provisions of the federal securities laws and applicable NASD rules and other charges concerning the FBR & Co.’s trading in a FBR & Co. account and the offering of a private investment in public equity on behalf of a public company in October 2001.

In the settlement offers, without admitting or denying any wrongdoing, FBR & Co. proposed to pay $3,500,000 to the SEC and $4,000,000 to the NASD and consent to injunctions, censure and additional undertakings to improve its administrative and compliance procedures. By agreement dated July 20, 2006, Borrower has agreed to indemnify FBR & Co. against these fines.

Schedule 3.06 to Credit Agreement

The proposed settlement is subject to review and approval by the SEC and the NASD, respectively, which may accept, reject or impose further conditions or other modifications to some or all of the terms of the proposed settlements. There are no assurances regarding the SEC’s and NASD’s consideration or determination of any offer of settlement, and no settlement is final unless and until approved by the SEC or NASD, as applicable.

(b) One of the Borrower’s investment adviser subsidiaries, Money Management Associates, Inc. (“MMA”), is involved in an investigation by the SEC with regard to the adequacy of disclosure of risks concerning the strategy of a sub-advisor to a now-closed bond fund. The SEC staff has advised MMA that it is considering recommending that the SEC bring a civil action/and or institute a public administrative proceeding against MMA and one of its officers (who is not an officer of the Borrower) for violating and/or aiding and abetting violations of the federal securities laws. MMA and its officer have made a Wells submission and, if necessary, intend to defend vigorously any charges brought by the SEC. Based on management’s review with counsel, resolution of this matter is not expected to have a material adverse effect on the Borrower’s financial condition or results of operations. It is possible that the SEC may initiate proceedings as a result of its investigations, and any such proceedings could result in adverse judgments, injunctions, fines, penalties or other relief against MMA or one or more of its officers or employees.

4. Sub-Prime Mortgage Loan Originator.

Borrower’s subsidiary, First NLC Financial Services, LLC (“First NLC”), has been named in a putative class action in the U.S. District Court for the Northern District of Illinois (Cerda v. First NLC Financial Services, LLC ), which alleges violations of the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq. First NLC is contesting this lawsuit vigorously.

Schedule 3.06 to Credit Agreement

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SCHEDULE 3.12

Subsidiaries

Name	Jurisdiction	Person holding equity interests	Nature of equity interests	Percentage ownership
FBR TRS Holdings, Inc. [“TRS”]	Virginia	Borrower	Stock	100	%
FBR Securitization, Inc.	Delaware	TRS	Stock	100	%
FBR Bancorp, Inc. [“Banc”]	Delaware	TRS	Stock	100	%
FBR Capital Markets Corporation [“CM”]	Virginia	TRS	Stock	72.6	%
Money Management Advisers, Inc.	Delaware	Banc	Stock	100	%
FNLC Financial Services, Inc.	Delaware	TRS	Stock	100	%
First NLC Financial Services, Inc.	Delaware	FNLC Financial Services, Inc.	Stock	100	%
First NLC Financial Services, LLC	Florida	FNLC Financial Services, Inc.	Member Interests	100	%
First NLC, Inc.	Minnesota	First NLC Financial Services, LLC	Stock	100	%
NLC, Inc.	Tennessee	First NLC Financial Services, LLC	Stock	100	%
MHC I, Inc.	Delaware	Borrower	Stock	100	%
FBR Trust Investments, LLC	Delaware	MHC I, Inc.	Member Interests	100	%
FBR Asset Management Holdings, Inc. (“Holdings”)	Virginia	CM	Stock	100	%
FBR Investment Management, Inc. (“Management”)	Delaware	Holdings	Stock	100	%
FBR Fund Advisers, Inc.	Delaware	Holdings	Stock	100	%
FBR Capital Markets Holdings, Inc. (“Capital”)	Delaware	CM	Stock	100	%
Friedman, Billings, Ramsey & Co., Inc. (“FBR & Co.”)	Delaware	Capital	Stock	100	%
FBRC Ltd.	Cayman Islands	FBR & Co. Management	Stock Stock	99 1	% %
FBR Capital Markets PT, Inc.	Virginia	CM	Stock	100	%
Friedman, Billings, Ramsey International, Ltd.	England	Capital	Stock	100	%
FBR Investment Services, Inc.	Delaware	TRS	Stock	100	%
FBR CCP Ltd. (“CCP”)	Cayman Islands	Borrower Management	Stock Stock	66.67 33.33	% %

Schedule 3.12 to Credit Agreement

Name	Jurisdiction	Person holding equity interests	Nature of equity interests	Percentage ownership
FBR Investments, L.L.C.	Virginia	CCP	Membership Interests	100	%
FBR Capital Crossover Partners, LLC	Delaware	CCP	Membership Interests	100	%
RNR II (FBR Employees) L.P.	Delaware	FBR Capital Crossover Partners, LLC	GP Interests	85.009	%
FBR Arbitrage Management Company, LLC	Delaware	Management	Membership Interests	100	%
FBR Ashton Management Company, LLC	Delaware	Management	Membership Interests	100	%
FBR Ashton Income Fund, LLC	Delaware	Management	Management Interests	100	%*
FBR Ashton Income Fund Management Company LLC	Delaware	Management	Membership Interests	100	%*
Dawnay Day Lander Management, LLC	Delaware	Management	Membership Interests	100	%
FBR Financial Fund Partners Management Company, LLC	Delaware	Management	Membership Interests	100	%
FBR Financial Fund Partners, L.L.C.	Delaware	FBR Financial Fund Partners Management Company, LLC	Special Limited Partner Interests	100	%
FBR Future Financial Fund Management Company, LLC	Delaware	Management	Membership Interests	100	%
FBR Future Financial Fund, L.P.	Delaware	FBR Future Financial Fund Management Company, LLC	General Partnership Interests	100	%*
FBR Financial Fund Management, L.L.C.	Delaware	Management	Membership Interests	100	%
FBR Financial Services Partners, L.P.	Delaware	FBR Financial Fund Management, L.L.C.	General Partnership Interests	100	%*
FBR Genomic, LLC	Delaware	Management	Membership Interests	100	%
FBR Infinity II Venture Partners Ltd. Management Company, LLC	Delaware	Management	Management Interest	100	%*
FBR Pegasus Fund of Funds Management Company, LLC	Delaware	Management	Membership Interests	100	%
FBR Pegasus Fund of Funds, L.L.C.	Delaware	FBR Pegasus Fund Management Company, LLC	Managing Member Interests	100	%*
FBR Pegasus Fund of Funds, Ltd.	Bermuda	Management	Management Interests	100	%*
FBR Private Equity Fund Management Company, LLC	Delaware	Management	Membership Interests	100	%
FBR Special Situations Fund, L.P.	Delaware	FBR Private Equity Fund Management Company, LLC	General Partnership Interests	100	%*
FBR Wolf Brook Management Company, LLC	Delaware	Management	Membership Interests	100	%

Schedule 3.12 to Credit Agreement

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Name	Jurisdiction	Person holding equity interests	Nature of equity interests	Percentage ownership
FBR Wolf Brook, Limited Partnership	Maryland	FBR Weston Management Company, LLC	General Partnership Interests	100	%*
FBR Wolf Brook Ltd.	British Virgin Islands	Management	Management Interests	100	%*
FBR Multi-Strategy Management Company, LLC	Delaware	Management	Membership Interests	100	%
FBR Multi-Strategy Fund, LLC	Delaware	FBR Multi-Strategy Management Company, LLC	Managing Member Interests	100	%*
FBR Life Science Master Fund, Ltd.	British Virgin Islands	Management	Management Shares	100	%*
FBR Life Sciences Fund, Ltd.	Bermuda	Management	Management Shares	100	%*
FBR Biotech Fund Management Company, LLC	Delaware	Management	Membership Interests	100	%
FBR Life Sciences Fund, LLC	Delaware	FBR Biotech Fund Management Company, LLC	Managing Member Interests	100	%*
FBR TVP Management Company, LLC (“TVP”)	Delaware	Management	Membership Interests	100	%
FBR Technology Venture Partners, L.P.	Delaware	TVP	General Partner Interests	100	%*
FBR Technology Venture Partners II (Q.P.), L.P.	Delaware	TVP	General Partner Interests	100	%*
FBR/TVP II Employee Fund, L.P.	Delaware	TVP	General Partner Interests	100	%*
FBR Technology Venture Partners II, L.L.C.	Delaware	TVP	General Partner Interests	100	%*
FBR Technology Venture Partners II, L.P.	Delaware	TVP	General Partner Interests	100	%*
FBR/TVP II Employee Fund II, L.P.	Delaware	TVP	General Partner Interests	100	%*
FBR TVP II Employee Fund III, L.P.	Delaware	TVP	General Partner Interests	100	%*
FBR Genomic Employees Fund I-A, L.P.	Delaware	Management	General Partner Interests	100	%*
FBR Genomic Employees Fund I-B, L.P.	Delaware	Management	General Partner Interests	100	%*

* Represents % of relevant class or type of interest

Schedule 3.12 to Credit Agreement

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SCHEDULE 6.01

Existing Indebtedness

1. TRS Holdings is a direct obligor with respect to certain trust preferred securities (the “Trust Preferred Securities”) which, as of September 30, 2006, have a balance of $317,500,000.00.

2. In connection with the issuance of the Trust Preferred Securities, TRS Holdings loaned to Borrower the proceeds of each such issuance.

3. Borrower guarantee of TRS Holdings’ obligations with respect to the Trust Preferred Securities.

Schedule 6.06 to Credit Agreement

SCHEDULE 6.02

Existing Liens

None.

Schedule 6.06 to Credit Agreement

SCHEDULE 6.06

Existing Restrictions

None.

Schedule 6.06 to Credit Agreement

EXHIBIT A

ASSIGNMENT AND ASSUMPTION

This Assignment and Assumption (the “Assignment and Assumption”) is dated as of the Effective Date set forth below and is entered into by and between [Insert name of Assignor] (the “Assignor”) and [Insert name of Assignee] (the “Assignee”). Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (as amended, the “Credit Agreement”), receipt of a copy of which is hereby acknowledged by the Assignee. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.

For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below (i) all of the Assignor’s rights and obligations in its capacity as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of the Assignor under the respective facilities identified below (including any letters of credit, guarantees, and swingline loans included in such facilities) and (ii) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Lender) against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned pursuant to clauses (i) and (ii) above being referred to herein collectively as the “Assigned Interest”). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor.

1.	Assignor:
2.	Assignee:
		[and is an Affiliate of [identify Lender]1]
3.	Borrower(s):
4.	Administrative Agent: JPMorgan Chase Bank, N.A., as the administrative                                              agent under the Credit Agreement

¹ Select as applicable.

Assignment and Assumption

5.	Credit Agreement:	Credit Agreement dated as of October 20, 2006 among Friedman, Billings, Ramsey Group, Inc., the Lenders parties thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent
6.	Assigned Interest:

Aggregate Amount of Commitment/Loans for all Lenders	Amount of Commitment/Loans Assigned	Percentage Assigned of Commitment/Loans2
$	$	%
$	$	%
$	$	%

Effective Date:                          , 20         [TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR.]

The terms set forth in this Assignment and Assumption are hereby agreed to:

ASSIGNOR

[NAME OF ASSIGNOR]

By:

Title:

ASSIGNEE

[NAME OF ASSIGNEE]

By:

Title:

² Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of all Lenders thereunder.

Assignment and Assumption

- 2 -

Consented to and Accepted:

JPMORGAN CHASE BANK, N.A.,

    as Administrative Agent

By

Title:

[Consented to:]³

FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.

By

Title:

³ To be added only if the consent of the Borrower is required by the terms of the Credit Agreement.

Assignment and Assumption

- 3 -

ANNEX 1 to

Assignment and Assumption

STANDARD TERMS AND CONDITIONS FOR

ASSIGNMENT AND ASSUMPTION

1. Representations and Warranties.

1.1 Assignor. The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement, any other Loan Document or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of the Credit Agreement or any other Loan Document or (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under the Credit Agreement and the other Loan Documents.

1.2. Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) it satisfies the requirements, if any, specified in the Credit Agreement that are required to be satisfied by it in order to acquire the Assigned Interest and become a Lender, (iii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section 5.01 thereof, as applicable, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, and (v) if it is a Foreign Lender, attached to (or delivered with) this Assignment and Assumption is any documentation required to be delivered by it pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee; and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.

2. Payments. From and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date.

Assignment and Assumption

3. General Provisions. This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of New York.

Assignment and Assumption

- 2 -

EXHIBIT B

[Form of Opinion of Counsel for the Borrower]

October 20, 2006

To the Lenders and the Administrative

Agent referred to below

c/o JPMorgan Chase Bank, N.A.

as Administrative Agent

270 Park Avenue

New York, New York 10017

Friedman, Billings, Ramsey Group, Inc.

Ladies and Gentlemen:

We have acted as counsel for Friedman, Billings, Ramsey Group, Inc., a Virginia corporation (the “Borrower”), in connection with the Credit Agreement dated as of October 20, 2006 (the “Credit Agreement”), among the Borrower, the banks and other financial institutions identified therein as Lenders, and JPMorgan Chase Bank, N.A., as Administrative Agent. This opinion is being delivered, at the request of the Borrower, pursuant to Section 4.01(b) of the Credit Agreement. Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned in the Credit Agreement.

In rendering the opinions set forth below, we have examined and relied on originals or copies, certified or otherwise identified to our satisfaction, of the following:

(a) the Amended and Restated Articles of Incorporation of the Borrower, as duly filed with the State Corporation Commission of the Commonwealth of Virginia;

(b) the Borrower’s Bylaws;

(c) the Credit Agreement;

(d) the Security Agreement dated as of October 20, 2006 (the “Security Agreement” among the Borrower, the banks and other financing institutions identified in the Credit Agreement as Lenders, and JPMorgan Chase Bank, N.A., as Administrative Agent;

(e) the promissory notes, if any, issued on the date hereof pursuant to the Credit Agreement (such promissory notes, if any, together with the Credit Agreement and the Security Agreement, collectively, the “Credit Documents”); and

(f) a UCC-1 financing statement in the form annexed hereto as Exhibit A (naming Friedman, Billings, Ramsey Group, Inc. as debtor) (the “Financing Statement”) to be filed in the UCC records of the State Corporation Commission of the Commonwealth of Virginia (the “Virginia Filing Office”).

Opinion of Counsel for the Borrower

We also have examined originals or copies, certified or otherwise identified to our satisfaction, of such other documents, corporate records, certificates of public officials and other instruments as we have deemed necessary or advisable for purposes of this opinion. Whenever the phrases “to our knowledge” or “known to us” are used herein, such phrases refer to the actual knowledge of the attorneys of this firm who are involved in the representation of the Borrower in this transaction (including the partner of this firm who coordinates this firm’s general representation of the Borrower).

For purposes of the opinions expressed below, we have assumed:

(a) the authenticity of all documents submitted to us as originals;

(b) the conformity to the originals of all documents submitted to us as certified or photostatic copies;

(c) the due authorization, execution and delivery by the Administrative Agent and each Lender of the Credit Documents, the validity and binding effect thereof upon the Administrative Agent and each Lender and the enforceability of the obligations of the Administrative Agent and each Lender thereunder;

(d) with respect to the opinion expressed in Paragraph 4 (c), the Transactions do not and will not violate the financial covenants contained in Section 1004 of the Senior Indenture listed as item 1 on Schedule 1 attached hereto;

(e) with respect to the opinion expressed in Paragraph 6 below:

(i) during its taxable year ending December 31, 2005 and subsequent taxable years, the Borrower will operate in such a manner that makes and will continue to make the representations as to factual matters contained in the certificate, dated October 20, 2006 and executed by a duly appointed officer of the Borrower, a copy of which is attached as Exhibit A hereto (the “Officer’s REIT Certificate”), true for such years;

(ii) the Borrower will not make any amendments to its organizational documents after the date of this opinion that would affect its qualification as a real estate investment trust (“REIT”) for any taxable year; and

(iii) no action will be taken by the Borrower or any of its Subsidiaries after the date hereof that would have the effect of altering the facts upon which the opinions set forth below are based; and

(f) with respect to the opinion expressed in Paragraph 5(a) below, the accuracy of the factual representations contained in the certificate dated October 20, 2006 and executed by a duly appointed officer of the Borrower, a copy of which is attached as Exhibit B hereto (the “Officer’s Investment Company Certificate”), without independent investigation.

In connection with the opinion rendered in Paragraph 6 below, we also have relied upon the correctness of the factual representations contained in the Officer’s REIT Certificate. Where such factual representations involve terms defined in the Internal Revenue Code of 1986, as

Opinion of Counsel for the Borrower

- 2 -

amended (the “Code”), the Treasury regulations thereunder (the “Regulations”), published rulings of the Internal Revenue Service (the “Service”), or other relevant authority, we have reviewed with the individuals making such representations the relevant provisions of the Code, the applicable Regulations, and published administrative interpretations thereof. After reasonable inquiry, we are not aware of any facts inconsistent with the representations set forth in the Officer’s REIT Certificate.

Upon the basis of the foregoing, and subject to the qualifications and assumptions set forth herein, we are of the opinion that:

1. The Borrower (a) is a corporation duly incorporated, validly existing and in good standing under the laws of the Commonwealth of Virginia and (b) has all requisite corporate power and authority to carry on its business as described in the most recently filed Annual Report on Form 10-K and Quarterly Report on Form 10-Q of the Borrower filed with the United States Securities and Exchange Commission (the “Current SEC Reports”). The Borrower has all legal right, power and authority under the laws of the Commonwealth of Virginia to qualify as a REIT under the Code.

2. The Transactions are within the Borrower’s corporate powers and have been duly authorized by all necessary corporate action.

3. Each of the Credit Documents has been duly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or other similar laws relating to or affecting the rights of creditors generally, and except as the enforceability of any Credit Document is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including without limitation (a) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of unconscionability materiality, reasonableness, good faith and fair dealing.

4. The Transactions do not and will not (a) require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority of the Commonwealth of Virginia, the State of New York, or the United States of America, except such as have been obtained or made and are in full force and effect, (b) violate the articles or certificate of incorporation or bylaws of the Borrower, any material provision of any statutory law or regulation of the Commonwealth of Virginia, the State of New York or the United States of America, or any order of any Governmental Authority known to us binding on the Borrower, (c) violate or result in a breach in any respect of any provision of, or constitute (with due notice or lapse of time or both) a default under, or (except for the Liens under the Security Agreement) result in the creation or imposition of any Lien upon any assets of the Borrower or any Subsidiary pursuant to any agreement described on Schedule 1 attached hereto.

5. Neither the Borrower nor any of its Subsidiaries is required to register as an “investment company” as defined in the Investment Company Act of 1940, as amended.

6. The Borrower qualified to be taxed as a REIT pursuant to sections 856 through 860 of the Code for its taxable year ended December 31, 2005, and the Borrower’s organization and current and proposed method of operation will enable it to continue to qualify as a REIT for its taxable year ending December 31, 2006, and in the future.

Opinion of Counsel for the Borrower

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7. The Security Agreement creates in favor of the Administrative Agent for the benefit of the Administrative Agent and the Lenders a valid security interest enforceable against the Borrower in those items and types of Collateral in which a security interest may be created pursuant to the provisions of the Uniform Commercial Code as in effect on the date hereof in the State of New York (the “New York UCC”, and such Collateral, the “UCC Collateral”), as security for the Secured Obligations.

8. Assuming that the Administrative Agent has taken the pledge of the Pledged Equity and the Pledged Debt (as defined in the Security Agreement) in good faith and without notice of any adverse claim within the meaning of Article 8 of the New York UCC, the execution and delivery of the Security Agreement by the Borrower and the delivery to, and the continuous possession by, the Administrative Agent of the certificates representing the Pledged Equity and the instruments representing the Pledged Debt, endorsed in blank or accompanied by an effective instrument of transfer, will create in favor of the Administrative Agent a perfected security interest in such Pledged Equity and Pledged Debt, provided that in the case of the issuance of additional shares or other distributions in respect of the Pledged Equity and the Pledged Debt of additional instruments, the security interest in such additional shares or instruments will be perfected only if possession of such additional shares or instruments is obtained in accordance with the provisions of Article 8 and Article 9 of the New York UCC.

9. The Financing Statement is in proper form for filing in the UCC records of the Virginia Filing Office. The filing of the Financing Statement in the Virginia Filing Office will be sufficient to perfect the security interest created by the Security Agreement in the UCC Collateral, to the extent that a security interest therein may be perfected by the filing of a financing statement under the New York UCC (the “Filing Collateral”), except that we express no opinion in this Paragraph 10 as to (and the term “Filing Collateral” does not include) any UCC Collateral that is a fixture, farm products, or “as extracted collateral” (as each such term is defined in the New York UCC) or timber. We call your attention to the fact that a security interest in certain items or types of the UCC Collateral may not be perfected by filing a financing statement in the Virginia Filing Office. The Filing Office is the only office in which a financing statement must be filed under the New York UCC in order to perfect the security interest in the Filing Collateral.

The foregoing opinions are also subject to the following comments and qualifications:

(a) The enforceability of provisions in the Credit Documents to the effect that terms may not be waived or modified except in writing may be limited under certain circumstances.

(b) The enforceability of Section 9.03 (and any similar provision in any of the other Credit Documents) may be limited by laws limiting the enforceability of provisions exculpating or exempting a party from, or requiring indemnification of a party for, liability for its own action or inaction, to the extent the action or inaction involves gross negligence, recklessness, willful misconduct or unlawful conduct.

Opinion of Counsel for the Borrower

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(c) We express no opinion as to (i) the effect of the laws of any jurisdiction in which any Lender is located (other than New York and Virginia) that limits the interest, fees or other charges it may impose for the loan or use of money or other credit, (ii) Section 9.08 of the Credit Agreement (and any similar provision in any of the other Credit Documents), (iii) the last sentence of each of Sections 2.15(c) and 9.04(c)(i) of the Credit Agreement, (iv) the first sentence of Section 9.09(b) of the Credit Agreement (and any similar provision in any of the other Credit Documents), insofar as such sentence relates to the subject-matter jurisdiction of the United States District Court for the Southern District of New York to adjudicate any controversy related to the Credit Agreement or (iv) the waiver of inconvenient forum set forth in Section 9.09(c) of the Credit Agreement (and any similar provision in any of the other Credit Documents) with respect to proceedings in the United States District Court for the Southern District of New York.

(d) We express no opinion whether the Loans made under the Credit Agreement comply with any statutory, regulatory or other loan limits applicable to any Lender, or comply with any statutes, laws, rules or regulations which prescribe permissible and lawful investments for any Lender.

(e) We express no opinion with respect to the enforceability of any waiver of a trial by jury (other than under the laws of New York), the waiver of any right to have service of process made in the manner presented by applicable law and the waiver of any requirement to have an agent for service of process appointed or the enforceability of the waiver of any right that would result in the restriction of the Borrower’s access to courts or to legal or equitable remedies otherwise available to the Borrower.

(f) Except as expressly provided in Paragraph 6, we express no opinion with respect any law or regulation relating to federal, state or local taxation, federal or state environmental regulation, labor laws, intellectual property laws, antitrust laws or those relating to zoning, land use or subdivision laws, ERISA and similar matters or any Federal or state securities laws or regulations.

(g) We express no opinion with respect to the enforceability of any right to receive interest on interest (other than under the laws of New York).

(h) We express no opinion as to whether a Virginia court or a federal court applying Virginia choice of law rules would select the laws of the State of New York to govern the Credit Agreement.

(i) With respect to our opinion expressed in Paragraph 6 above, we will not review on a continuing basis the Borrower’s compliance with the documents or assumptions set forth herein relating to such opinion, or the representations set forth in the Officer’s REIT Certificate. Accordingly, no assurance can be given that the actual results of the Borrower’s operations for its 2006 and subsequent taxable years will satisfy the requirements for qualification and taxation as a REIT. Our opinion is based on current provisions of the Code and the Regulations, published administrative interpretations thereof, and published court decisions. The Service has not issued Regulations or administrative interpretations with respect to various provisions of the Code relating to REIT qualification. No assurance can be given that the law will not change in a way that will prevent the Borrower from qualifying as a REIT.

Opinion of Counsel for the Borrower

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(j) We express no opinion as to the validity, perfection or enforceability of a security interest arising out of any transaction not subject to Article 9 of the Uniform Commercial Code as in effect on the date hereof in the Commonwealth of Virginia (the “Virginia UCC”), or Article 9 of the New York UCC, including those described in §§ 9 109^© and (d) of the New York UCC.

(k) We express no opinion with respect to any “commercial tort claim,” “letter-of-credit-right,” collateral arising from a “consumer transaction,” a “health-care-insurance-receivable,” an “agricultural lien,” “farm products” or “as extracted collateral,” or any “manufactured home collateral” (as those terms are defined in Article 9 of the New York UCC), collateral subject to a certificate of title, goods consigned by or to the Borrower, documents or goods covered by documents, electronic chattel paper (other than perfection by filing as set forth in Paragraph 7), or standing timber.

(l) Under § 9 315 of the New York UCC, the continuation of perfection of a security interest in proceeds is limited to the extent set forth in such section.

(m) Under § 9 316 of the New York UCC, the continuation of perfection of a security interest following a change in the jurisdiction, the laws of which govern perfection, the effect of perfection and non-perfection and priority, is limited to the extent set forth in such section.

(n) In the case of property that becomes Collateral after the date hereof, Section 552 of the Federal Bankruptcy Code limits the extent to which property acquired by a debtor after the commencement of a case under the Federal Bankruptcy Code may be subject to a security interest arising from a security agreement entered into by the debtor before the commencement of such a case.

(o) The Financing Statement might become ineffective due to events that cause it to be “seriously misleading” under §§ 9 506 through § 9 508 of the New York UCC and the Virginia UCC.

(p) We note that the rights of the Administrative Agent for the benefit of itself and the Lenders against account debtors will be subject to the terms of the assigned account, chattel paper or general intangible, to dealings between such account debtor and the Borrower, and to the other limitations provided in §§ 9 403, 9 404, 9 405 and 9 406 of the New York UCC, and will be subject to defenses as provided in § 9 404 of the New York UCC.

(q) We express no opinion as to the effect of any prohibitions against assignment that may be contained in any account, lease agreement, promissory note, chattel paper, payment intangible, health-care receivable or letter-of-credit-right included in the Collateral. We note that prohibitions on assignment contained in any account, lease agreement, promissory note, chattel paper, payment intangible, health-care-insurance-receivable and letter-of-credit-right are subject to the limitations contained in §§ 9 406, 9 407, 9 408 and 9 409 of the New York UCC.

(r) We express no opinion as to the effectiveness of the security interest of Administrative Agent for the benefit of itself and the Lenders as to any rights (including rights of payment) under any account or other obligation on which the United States government or any other federal, state, local, foreign or other government or any agency, department or subdivision thereof is an obligor.

Opinion of Counsel for the Borrower

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(s) We express no opinion as to whether provisions in the Credit Documents granting an absolute assignment of rights or interests will be construed as effecting an absolute assignment rather than a collateral assignment or security interest.

(t) We note that pursuant to §§ 9-203(f) and (g) and §§ 9-308(d) and (e) of the New York UCC, (i) perfection of a security interest in collateral also perfects a security interest in any supporting obligation (as defined in Article 9 of the New York UCC) for such collateral and (ii) perfection of a security interest in a right to payment or performance also perfects a security interest in any security interest, mortgage or other lien on personal or real property securing such right to payment or performance (a “Supporting Lien”). Except to the extent that any such supporting obligation or Supporting Lien constitutes UCC Collateral or Filing Collateral, we express no opinion as to the creation or perfection, respectively, of a security interest therein.

(u) We express no opinion with respect to the enforceability of a security interest in any security entitlement credited to a securities account or any commodity contract credited to a commodities account.

(v) We express no opinion as to the enforceability of any security interest in goods that are not manufactured in accordance with the provisions of the federal Fair Labor Standards Act.

(w) For the purposes of the opinions in Paragraphs 7 and 8, we have assumed that value has been given within the meaning of § 9-203(b)(1) of the New York UCC and the Virginia UCC, and at the time of the filing of the Financing Statement and at or after the time value was given the Borrower has or acquires, and continues to have, rights in the Collateral or the power to transfer rights in the Collateral to a secured party within the meaning of § 9-203(b)(2) of the New York UCC and the Virginia UCC.

(x) For the purposes of the opinions in Paragraph 9, we also have assumed that the Financing Statement correctly states (i) the name of the secured party (as required by Section 9-503(a) of the Virginia UCC), (ii) the mailing address of the debtor and an address of the secured party from which information concerning such financing statements can be obtained, and (iii) the debtor’s state organizational identification number (if any) and, if included, its federal employee identification number.

(y) We express no opinion with respect to the Borrower’s title to or rights in any property, including any Collateral, and we express no opinion with respect to the priority of any assignment, lien, security interest or other interest.

(z) We note that a portion of the Collateral and is represented by shares of a Cayman Islands subsidiary of the Borrower. We express no opinion on the effect of the laws of the Cayman Islands on any of the matters referenced herein.

We are members of the bar of the Commonwealth of Virginia and the State of New York and the foregoing opinion is limited to the laws of the Commonwealth of Virginia and the State of New York and the Federal laws of the United States of America. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you

Opinion of Counsel for the Borrower

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for any other purpose or relied upon by any other Person (other than your successors and assigns as Lenders and Persons that acquire participations in your Loans) without our prior written consent.

Very truly yours,

Opinion of Counsel for the Borrower

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Schedule 1

1. Revolving Subordinated Loan Agreement between FBR & Co. and Custodial Trust Company, dated August 4, 1998.

2. Securities Purchase Agreement, dated as of January 10, 2005, by and among Friedman, Billings, Ramsey Group, Inc., FNLC Financial Services, Inc., NLC Financial Services, LLC, Neal S. Henschel, Jeffrey M. Henschel, Benjamin Henschel, Andrew Henschel and Sun Mortgage Partners, L.P.

Opinion of Counsel for the Borrower

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EXHIBIT C

[Form of Opinion of Special New York Counsel to JPMCB]

October 20, 2006

To the Lenders and the Administrative

Agent referred to below

c/o JPMorgan Chase Bank, N.A.,

as Administrative Agent

270 Park Avenue

New York, New York 10017

Ladies and Gentlemen:

We have acted as special New York counsel to JPMorgan Chase Bank, N.A. (“JPMCB”) in connection with the Credit Agreement dated as of October 20, 2006 (the “Credit Agreement”) among Friedman, Billings, Ramsey Group, Inc. (the “Borrower”), the entities referred to as “Lenders” in the Credit Agreement (the “Lenders”) and the Administrative Agent. Terms defined in the Credit Agreement have the same respective defined meanings when used herein.

In rendering the opinions expressed below, we have examined executed counterparts of the Credit Agreement and Security Agreement (collectively, the “Credit Documents”). In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with authentic original documents of all documents submitted to us as copies. When relevant facts were not independently established, we have relied upon representations made in or pursuant to the Credit Documents. We have also assumed that each of the Credit Documents has been duly authorized, executed and delivered by, and (except, to the extent set forth below as to the Borrower) constitute legal, valid, binding and enforceable obligations of, all of the parties thereto, that all signatories thereto have been duly authorized, and that all such parties are duly organized and validly existing and have the power and authority (corporate or other) to execute, deliver and perform the same.

Based upon and subject to the foregoing and subject also to the comments and qualifications set forth below, and having considered such questions of law as we have deemed necessary as a basis for the opinions expressed below, we are of the opinion that each of the Credit Documents constitutes a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or other similar laws relating to or affecting the rights of creditors generally and except as the enforceability of the Credit Documents is subject to the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law), including without limitation (a) the possible unavailability of specific performance, injunctive relief or any other equitable remedy and (b) concepts of materiality, reasonableness, good faith and fair dealing.

Opinion of Special New York Counsel to JPMCB

The foregoing opinions are subject to the following comments and qualifications:

(A) The enforceability of Section 9.03 of the Credit Agreement (and any similar provisions in any of the other Credit Documents) may be limited by laws limiting the enforceability of provisions exculpating or exempting a party from, or requiring indemnification of a party for, liability for its own action or inaction, to the extent the action or inaction involves gross negligence, recklessness, willful misconduct or unlawful conduct.

(B) The enforceability of provisions in the Credit Documents to the effect that terms may not be waived or modified except in writing may be limited under certain circumstances.

(C) We express no opinion as to (i) the effect of the laws of any jurisdiction in which any Lender is located (other than the State of New York) that limit the interest, fees or other charges such Lender may impose for the loan or use of money or other credit, (ii) the last sentence of Sections 2.15(c) and 9.04(c)(i) of the Credit Agreement, (iii) Section 9.08 of the Credit Agreement, (iv) the first sentence of Section 9.09(b) of the Credit Agreement (and any similar provisions in any of the other Credit Documents), insofar as each such sentence relates to the subject-matter jurisdiction of the United States District Court for the Southern District of New York to adjudicate any controversy related to any of the Credit Documents or (vi) the waiver of inconvenient forum set forth in Section 10.09(c) of the Credit Agreement (and any similar provisions in any of the other Credit Documents) with respect to proceedings in the United States District Court for the Southern District of New York.

(D) We wish to point out that the obligations of the Borrower, and the rights and remedies of the Secured Parties (as defined in the Security Agreement), under the Security Agreement may be subject to possible limitations upon the exercise of remedial or procedural provisions contained therein; provided that such limitations do not, in our opinion (but subject to the other comments and qualifications set forth in this opinion letter), make the remedies and procedures that will be afforded to the Administrative Agent inadequate for the practical realization of the substantive benefits purported to be provided by the Security Agreement.

(E) We wish to point out that the acquisition by the Borrower after the initial extension of credit under the Credit Agreement of an interest in property that becomes subject to the Lien of the Security Agreement may constitute a voidable preference under Section 547 of the United States Bankruptcy Code.

(F) We express no opinion as to the existence of, or the right, title or interest of the Borrower in, to or under, any of the Collateral (as defined in the Security Agreement), and we express no opinion as to the creation, perfection or priority of any security interests in, or other Lien on, the Collateral (as defined in the Security Agreement).

The foregoing opinions are limited to matters involving the Federal laws of the United States of America and the law of the State of New York, and we do not express any opinion as to the laws of any other jurisdiction.

Opinion of Special New York Counsel to JPMCB

- 2 -

At the request of our client, this opinion letter is, pursuant to Section 4.01(c) of the Credit Agreement, provided to you by us in our capacity as special New York counsel to JPMCB and may not be relied upon by any other person or for any purpose other than in connection with the transactions contemplated by the Credit Documents without our prior written consent in each instance.

Very truly yours,

WJM/MJB

Opinion of Special New York Counsel to JPMCB

- 3 -

EXHIBIT D

Form of Security Agreement

see attached

Security Agreement

EXHIBIT E

Form of Subordination Agreement

see attached

Subordination Agreement

EX-12

Exhibit 12

FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(dollars in thousands)

	Nine Months Ended September 30, 2006			Years Ended December 31,
				2005			2004		2003		2002		2001
Pre-tax income (loss) from continuing operations adjusted to exclude income or loss from equity investees	$	(72,369	)	$	(144,289	)	$	399,536	$	225,165	$	42,229	$	(18,457	)
Distributed income of equity investees		4,266			32,334			2,141		553		14,089		10,747
Fixed charges:
Interest expense and amortization of debt discount and premium on all indebtedness		446,909			546,313			164,156		68,995		2,073		1,083
Rentals: Equipment and office rent expense—33.33%		5,314			6,057			2,798		1,719		1,692		1,657
Total fixed charges	$	452,223		$	552,370		$	166,954	$	70,714	$	3,765	$	2,740
Pre-tax income (loss) from continuing operations before adjustments for income or loss from equity investees plus fixed charges and distributed income of equity investees	$	384,120		$	440,415		$	568,631	$	296,432	$	60,083	$	(4,970	)
Ratio of earnings to fixed charges			(A)			(A)		3.4		4.2		16.0			(A)

(A) Due to the company’s losses in 2006, 2005 and 2001, the ratio coverage for these years was less than 1:1. The company would have had to generate additional earnings of $68,103, $111,955 and $7,710, respectively, to achieve coverage of 1:1 in these periods

EX-31.01

Exhibit 31.01

CERTIFICATION

I, Eric F. Billings, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 of Friedman, Billings, Ramsey Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2006	/s/    ERIC F. BILLINGS
	Eric F. Billings
	Chief Executive Officer

EX-31.02

Exhibit 31.02

CERTIFICATION

I, Kurt R. Harrington, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 of Friedman, Billings, Ramsey Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2006	/s/    KURT R. HARRINGTON
	Kurt R. Harrington
	Chief Financial Officer

EX-32.01

Exhibit 32.01

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Friedman, Billings, Ramsey Group, Inc. (the “Company”) for the period ending September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eric F. Billings, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 9, 2006	/s/    ERIC F. BILLINGS
	Eric F. Billings
	Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Friedman, Billings, Ramsey Group, Inc. and will be retained by Friedman, Billings, Ramsey Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.02

Exhibit 32.02

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Friedman, Billings, Ramsey Group, Inc. (the “Company”) for the period ending September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kurt R. Harrington, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 9, 2006	/s/    KURT R. HARRINGTON
	Kurt R. Harrington
	Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Friedman, Billings, Ramsey Group, Inc. and will be retained by Friedman, Billings, Ramsey Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.