-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GWFZDJcKF4ZzrwYigfWmaWGKl6teyyH72GgMFnrMSdNdFvim+IQEwycHT+wrkWH2 YKa1Wu+SKfSOhmmmw0BVYg== 0000914121-06-002557.txt : 20060809 0000914121-06-002557.hdr.sgml : 20060809 20060809165833 ACCESSION NUMBER: 0000914121-06-002557 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060809 DATE AS OF CHANGE: 20060809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN HOME MORTGAGE INVESTMENT CORP CENTRAL INDEX KEY: 0001256536 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 200103914 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31916 FILM NUMBER: 061018405 MAIL ADDRESS: STREET 1: 520 BROADHOLLOW ROAD CITY: MELVILLE STATE: NY ZIP: 11747 10-Q 1 am063006-10q.txt CURRENT REPORT 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 June 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: 001-31916 AMERICAN HOME MORTGAGE INVESTMENT CORP. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Maryland 20-0103914 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 538 Broadhollow Road, Melville, New York 11747 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (516) 949-3900 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 definition 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] As of August 4, 2006, there were 50,141,464 shares of the registrant's common stock, par value $0.01 per share, outstanding. AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES TABLE OF CONTENTS PART I-FINANCIAL INFORMATION
Page Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005.....................................1 Consolidated Statements of Income for the Three and Six Months Ended June 30, 2006 and 2005...............2 Consolidated Statements of Stockholders' Equity for the Six Months Ended June 30, 2006 and 2005..........3 Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2006 and 2005...........4 Notes to Consolidated Financial Statements ...............................................................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................32 Item 3. Quantitative and Qualitative Disclosures About Market Risk ..............................................58 Item 4. Controls and Procedures..................................................................................60 PART II-OTHER INFORMATION Item 1. Legal Proceedings........................................................................................61 Item 1A. Risk Factors.............................................................................................61 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..............................................61 Item 3. Defaults Upon Senior Securities..........................................................................61 Item 4. Submission of Matters to a Vote of Security Holders......................................................62 Item 5. Other Information........................................................................................62 Item 6. Exhibits ................................................................................................63
SIGNATURES INDEX TO EXHIBITS PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands, except per share amounts)
June 30, December 31, 2006 2005 ------------ ------------ Assets: Cash and cash equivalents $ 304,268 $ 575,650 Accounts receivable and servicing advances 342,244 329,132 Mortgage-backed securities (including securities pledged of $8,982,953 as of June 30, 2006 and $10,063,621 as of December 31, 2005) 9,299,224 10,602,104 Mortgage loans held for sale, net 1,243,702 2,208,749 Mortgage loans held for investment, net of allowance of $6,885 as of June 30, 2006 and $2,142 as of December 31, 2005 5,337,138 3,479,721 Derivative assets 139,397 44,594 Mortgage servicing rights 434,173 319,671 Premises and equipment, net 80,296 68,782 Goodwill 110,759 99,527 Other assets 34,398 26,815 ------------ ------------ Total assets $ 17,325,599 $ 17,754,745 ============ ============ Liabilities and Stockholders' Equity: Liabilities: Warehouse lines of credit $ 1,476,958 $ 3,474,191 Drafts payable 12,349 20,754 Commercial paper 888,476 1,079,179 Reverse repurchase agreements 8,939,786 9,806,144 Collateralized debt obligations 3,724,878 1,057,906 Payable for securities purchased - 261,539 Derivative liabilities 3,280 16,773 Trust preferred securities 252,780 203,688 Accrued expenses and other liabilities 355,009 277,476 Notes payable 337,700 319,309 Income taxes payable 80,529 30,770 ------------ ------------ Total liabilities 16,071,745 16,547,729 ------------ ------------ Commitments and contingencies - - Stockholders' Equity: Preferred Stock, par value $0.01 per share, 10,000,000 shares authorized: 9.75% Series A Cumulative Redeemable, 2,150,000 shares issued and outstanding as of June 30, 2006 and December 31, 2005, respectively 50,857 50,857 9.25% Series B Cumulative Redeemable, 3,450,000 shares issued and outstanding as of June 30, 2006 and December 31, 2005, respectively 83,183 83,183 Common Stock, par value $0.01 per share, 100,000,000 shares authorized, 50,107,214 and 49,639,646 shares issued and outstanding as of June 30, 2006 and December 31, 2005, respectively 501 496 Additional paid-in capital 960,995 947,512 Retained earnings 227,450 203,778 Accumulated other comprehensive loss (69,132) (78,810) ------------ ------------ Total stockholders' equity 1,253,854 1,207,016 ------------ ------------ Total liabilities and stockholders' equity $ 17,325,599 $ 17,754,745 ============ ============
See notes to consolidated financial statements (unaudited). - 1 - AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share amounts)
Three Months Six Months Ended June 30, Ended June 30, ---------------------- ---------------------- 2006 2005 2006 2005 --------- --------- --------- --------- Net interest income: Interest income $ 330,196 $ 135,318 $ 630,809 $ 282,212 Interest expense (279,992) (90,336) (534,027) (178,427) --------- --------- --------- --------- Total net interest income 50,204 44,982 96,782 103,785 --------- --------- --------- --------- Provision for loan losses (3,979) - (5,290) - --------- --------- --------- --------- Total net interest income after provision for loan losses 46,225 44,982 91,492 103,785 --------- --------- --------- --------- Non-interest income: Gain on sales of mortgage loans 224,594 77,377 396,501 112,630 Gain on sales of current period securitized mortgage loans - 104,377 - 174,296 (Loss) gain on sales of mortgage-backed securities and derivatives (47) 620 (897) 6,752 Unrealized (loss) gain on mortgage-backed securities and derivatives (7,730) (10,292) 1,585 47,207 Loan servicing fees 30,417 16,970 54,750 28,282 Amortization and impairment of mortgage servicing rights - (33,230) - (38,312) Change in fair value of mortgage servicing rights (18,830) - (37,451) - --------- --------- --------- --------- Net loan servicing fees (loss) 11,587 (16,260) 17,299 (10,030) --------- --------- --------- --------- Other non-interest income 2,125 2,543 3,894 4,009 --------- --------- --------- --------- Total non-interest income 230,529 158,365 418,382 334,864 --------- --------- --------- --------- Non-interest expenses: Salaries, commissions and benefits, net 103,157 94,859 202,424 163,334 Occupancy and equipment 19,763 14,397 37,733 27,068 Data processing and communications 6,733 5,957 13,859 11,907 Office supplies and expenses 5,145 5,657 9,477 10,086 Marketing and promotion 6,383 5,126 12,183 9,256 Travel and entertainment 7,793 5,427 14,546 9,355 Professional fees 5,013 3,432 10,344 6,902 Other 17,192 6,843 33,074 13,712 --------- --------- --------- --------- Total non-interest expenses 171,179 141,698 333,640 251,620 --------- --------- --------- --------- Net income before income tax expense (benefit) 105,575 61,649 176,234 187,029 Income tax expense (benefit) 33,224 (3,851) 49,424 (3,851) --------- --------- --------- --------- Net income $ 72,351 $ 65,500 $ 126,810 $ 190,880 ========= ========= ========= ========= Dividends on preferred stock 3,304 3,304 6,609 6,609 --------- --------- --------- --------- Net income available to common shareholders $ 69,047 $ 62,196 $ 120,201 $ 184,271 ========= ========= ========= ========= Per share data: Basic $ 1.38 $ 1.54 $ 2.41 $ 4.57 Diluted $ 1.37 $ 1.52 $ 2.39 $ 4.51 Weighted average number of shares - basic 50,056 40,384 49,887 40,346 Weighted average number of shares - diluted 50,487 40,886 50,270 40,849
See notes to consolidated financial statements (unaudited). - 2 - AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (In thousands)
Accumulated Additional Other Total Preferred Common Paid-in Retained Comprehensive Stockholders' Stock Stock Capital Earnings Loss Equity ------------------------------------------------------------------------- Balance at January 1, 2005 $134,040 $ 403 $631,530 $ 99,628 $(39,339) $ 826,262 -------- -------- -------- --------- -------- ----------- Comprehensive income: Net income - - - 190,880 - 190,880 Net change in unrealized loss on mortgage-backed securities available for sale - - - - (17,534) (17,534) Net change in unrealized gain on cash flow hedges, net of amortization - - - - 12,573 12,573 ----------- Comprehensive income 185,919 Issuance of common stock - earnouts - 2 5,851 - - 5,853 Issuance of common stock - 1999 Omnibus Stock Incentive Plan - - 1,214 - - 1,214 Dividends declared on Series A Preferred Stock - - - (2,620) - (2,620) Dividends declared on Series B Preferred Stock - - - (3,990) - (3,990) Dividends declared on Common Stock - - - (59,456) - (59,456) -------- -------- -------- --------- -------- ----------- Balance at June 30, 2005 $134,040 $ 405 $638,595 $ 224,442 $(44,300) $ 953,182 ======== ======== ======== ========= ======== =========== Balance at January 1, 2006 $134,040 $ 496 $947,512 $ 203,778 $(78,810) $ 1,207,016 -------- -------- -------- --------- -------- ----------- Comprehensive income: Net income - - - 126,810 - 126,810 Net change in unrealized loss on mortgage-backed securities available for sale - - - - (80,275) (80,275) Net change in unrealized gain on cash flow hedges, net of amortization - - - - 89,953 89,953 ----------- Comprehensive income 136,488 Cumulative effect adjustment as of beginning of year - - - (2,917) - (2,917) Issuance of common stock - earnouts - 3 9,555 - - 9,558 Issuance of common stock - 1999 Omnibus Stock Incentive Plan - 2 1,947 - - 1,949 Stock-based employee compensation expense - - 783 - - 783 Tax benefit for stock options exercised - - 1,198 - - 1,198 Dividends declared on Series A Preferred Stock - - - (2,620) - (2,620) Dividends declared on Series B Preferred Stock - - - (3,990) - (3,990) Dividends declared on Common Stock - - - (93,611) - (93,611) -------- -------- -------- --------- -------- ----------- Balance at June 30, 2006 $134,040 $ 501 $960,995 $ 227,450 $(69,132) $ 1,253,854 ======== ======== ======== ========= ======== ===========
See notes to consolidated financial statements (unaudited). - 3 - AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Cash flows from operating activities: Net income $ 72,351 $ 65,500 $ 126,810 $ 190,880 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 5,014 2,739 8,967 5,178 Provision for loan losses 3,979 - 5,290 - Change in fair value of mortgage servicing rights 18,830 - 37,451 - Amortization and impairment of mortgage servicing rights - 33,230 - 38,312 Accretion and amortization of mortgage-backed securities, net 2,006 (1,169) 4,337 3,424 Deferred cash flow hedge gain, net of amortization 10,509 1,738 14,418 18,790 Loss on sales of mortgage-backed securities and derivatives - 447 - 3,783 Unrealized loss (gain) on mortgage-backed securities 14,591 (4,533) 17,681 46,470 Unrealized (gain) loss on free standing derivatives (1,038) 25,903 (5,803) (14,409) (Decrease) increase in forward delivery contracts (6,036) 13,930 (30,077) 4,335 Capitalized mortgage servicing rights on securitized loans - (62,629) - (142,340) Capitalized mortgage servicing rights on sold loans (81,029) (4,027) (150,797) (6,374) (Increase) decrease in interest rate lock commitments (4,447) (6,264) 2,684 (6,054) (Increase) decrease in mortgage loan basis adjustments (2,156) (10,584) 2,575 20,370 Excess tax benefits from share-based payment arrangements (1,198) - (1,198) - Other (633) (2,155) (831) (978) (Increase) decrease in operating assets: Accounts receivable (13,506) (14,401) (6,677) (1,449) Servicing advances (1,152) 861 (4,433) 1,592 Income taxes receivable - 25,797 - 25,797 Other assets (3,582) 2,350 (5,033) 10,064 Increase (decrease) in operating liabilities: Accrued expenses and other liabilities (32,977) (1,269) 60,899 20,163 Income taxes payable 30,711 (6,497) 46,884 (6,589) Origination of mortgage loans held for sale (14,371,439) (10,647,029) (26,574,453) (17,902,429) Principal received from sales of mortgage loans held for sale 14,013,921 4,457,519 27,386,495 7,538,314 Proceeds from securitizations of mortgage loans held for sale - 5,855,914 - 13,192,526 Additions to mortgage-backed securities and derivatives - (466,522) - (3,306,781) Principal proceeds from sales of self-originated mortgage-backed securities 99,086 1,104,227 1,908,882 1,104,227 Cash received from residual assets in securitizations 20,947 23,539 48,300 40,095 Principal repayments of mortgage-backed securities 60,485 172,172 154,330 280,575 ------------ ------------ ------------ ------------ Net cash (used in) provided by operating activities (166,763) 558,787 3,046,701 1,157,492 ------------ ------------ ------------ ------------ Cash flows from investing activities: Purchases of premises and equipment (9,716) (8,194) (20,481) (15,043) Origination of mortgage loans held for investment (560,003) (133,757) (1,530,338) (133,757) Proceeds from repayments of mortgage loans held for investment 240,403 - 377,948 - Purchases of mortgage-backed securities (461,125) (933,929) (1,850,461) (933,929) Principal proceeds from sales of purchased mortgage-backed securities - 20,962 - 1,154,951 Principal repayments of purchased mortgage-backed securities 501,239 361,049 939,536 729,720 Net increase in investment in Federal Home Loan Bank stock, at cost (108) - (108) - Acquisition of business - - (550,077) - ------------ ------------ ------------ ------------ Net cash (used in) provided by investing activities (289,310) (693,869) (2,633,981) 801,942 ------------ ------------ ------------ ------------ Cash flows from financing activities: (Decrease) increase in warehouse lines of credit, net (277,623) 7,011 (1,997,233) (70,086) Increase (decrease) in reverse repurchase agreements, net 40,736 (382,537) (866,358) (733,538) Increase (decrease) in collateralized debt obligations 819,679 - 2,666,972 (2,022,218) Decrease in payable for securities purchased (215,114) - (261,539) - (Decrease) increase in commercial paper, net (185,154) 433,302 (190,703) 761,894 (Decrease) increase in drafts payable, net (4,028) (1,853) (8,405) 338 Increase in trust preferred securities 48,762 48,414 49,092 48,414 Increase in notes payable, net 6,986 96,721 18,391 120,299 Proceeds from issuance of Common Stock 1,127 587 1,779 898 Excess tax benefits from share-based payment arrangements 1,198 - 1,198 - Dividends paid (48,819) (31,950) (97,296) (60,881) ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 187,750 169,695 (684,102) (1,954,880) ------------ ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents (268,323) 34,613 (271,382) 4,554 Cash and cash equivalents, beginning of period 572,591 162,762 575,650 192,821 ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period $ 304,268 $ 197,375 $ 304,268 $ 197,375 ============ ============ ============ ============ Supplemental disclosure of cash flow information: Interest paid $ 340,142 $ 120,860 $ 522,097 $ 200,797 Income taxes paid 2,506 673 2,538 788 Supplemental disclosure of non-cash investing information: Net transfer of loans held for sale to loans held for investment $ 699,519 $ - $ 699,519 $ -
See notes to consolidated financial statements (unaudited). - 4 - AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization - American Home Mortgage Investment Corp. ("AHM Investment") is a mortgage REIT focused on earning net interest income from mortgage loans and securities, and through its taxable subsidiaries, on earning income from originating and selling mortgage loans and servicing mortgage loans for institutional investors. Mortgages are originated through a network of loan origination offices and mortgage brokers or are purchased from correspondents, and are serviced at the Company's Irving, Texas servicing center. As used herein, references to the "Company," "American Home," "we," "our" and "us" refer to AHM Investment collectively with its subsidiaries. Basis of Presentation - 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 liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's estimates and assumptions primarily arise from risks and uncertainties associated with interest rate volatility, prepayment volatility, credit exposure and regulatory changes. Although management is not currently aware of any factors that would significantly change its estimates and assumptions in the near term, future changes in market trends and conditions may occur which could cause actual results to differ materially. Due to the Company's exercising significant influence on the operations of its joint ventures, their balances and operations have been fully consolidated in the accompanying consolidated financial statements and all intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents - Cash and cash equivalents are demand deposits and short-term investments with a maturity of 90 days or less. The carrying amount of cash and cash equivalents approximates its fair value. Mortgage-backed Securities - Mortgage-backed securities are classified as either trading or available for sale. Trading securities are reported at fair value, and changes in fair value are reported in unrealized gain (loss) on mortgage-backed securities and derivatives in the consolidated statements of income. Available for sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income (loss). Realized gains and losses on sales of available for sale securities are determined on an average cost basis and included in gain (loss) on sales of mortgage-backed securities and derivatives. When the fair value of an available for sale security is less than amortized cost, management evaluates whether there is an other-than-temporary impairment in the value of the security (e.g., whether the security is likely to be sold prior to the recovery of fair value) based on estimated credit losses, prepayment speeds and the length of time in an unrealized loss position. If, in management's assessment, an other-than-temporary impairment exists, the cost basis of the security is written down to the then-current fair value, and the unrealized loss is transferred from accumulated other comprehensive income as an immediate reduction of current earnings (i.e., as if the loss had been realized in the period of impairment). Premiums and discounts on the Company's mortgage-backed securities held in available for sale are amortized to interest income using the level yield method over the estimated life of the security. Mortgage Loans Held for Sale - Mortgage loans held for sale are carried at the lower of cost or aggregate market value. The cost basis includes the capitalized value of the prior interest rate lock commitments ("IRLCs") related to the mortgage loans and any net deferred origination costs. For mortgage loans held for sale that are hedged with forward sale commitments, if the Company meets hedge accounting requirements, the carrying value is adjusted for the change in market during the time the hedge was deemed to be highly effective. The market value is determined by outstanding commitments from investors or current investor yield requirements calculated on the aggregate basis. Mortgage Loans Held for Investment - Mortgage loans held for investment represent loans securitized through transactions structured as financings, or pending securitization through transactions that are expected to be structured as financings. Mortgage loans held for investment are carried at the aggregate of their remaining unpaid principal balances, including the capitalized value of the prior IRLCs related to the mortgage loans, plus net deferred origination costs, less any related charge-offs and allowance for loan losses. Loan fees and direct origination costs are deferred and amortized into interest income over the contractual life of the loan using the level-yield method. Allowance for Losses on Mortgage Loans Held for Investment - The Company maintains an allowance for loan losses for its mortgage loans held for investment, based on the Company's estimate of current existing losses. Additions to the allowance for loan losses are based on assessments of certain factors, including historical loan loss experience of similar types of loans, the Company's loan loss experience, the - 5 - amount of past due and nonperforming loans, specific known risks, the value of collateral securing the loans, and current and anticipated economic and interest rate conditions. Evaluation of these factors involves subjective estimates and judgments that may change. Additions to the allowance for loan losses are provided through a charge to income and recorded within provision for loan losses in the consolidated statements of income. The allowance for loan losses is reduced by subsequent charge-offs, net of recoveries. Mortgage Servicing Rights - In March 2006, the Financial Accounting Standards Board ("FASB") released Statement of Financial Accounting Standards ("SFAS") No. 156, "Accounting for Servicing Financial Assets, an amendment of SFAS No. 140" ("SFAS No. 156"). SFAS No. 156 amends SFAS No. 140 to require that all separately recognized servicing assets and liabilities be initially measured at fair value, if practical. The effective date of this statement is as of the beginning of the entity's first fiscal year that begins after September 15, 2006; however, early adoption is permitted as of the beginning of any fiscal year, provided the entity has not issued financial statements for the interim period. The initial recognition and measurement of servicing assets and servicing liabilities are required to be applied prospectively to transactions occurring after the effective date. The Company elected to early adopt SFAS No. 156 as of January 1, 2006, and has recorded its mortgage servicing rights ("MSRs") at fair value. The Company's election increased MSRs by $1.2 million. Prior to January 1, 2006, MSRs were carried at the lower of cost or fair value, based on defined interest rate risk strata, and the gross MSR asset was amortized in proportion to and over the period of estimated net servicing income. The Company estimates the fair value of its MSRs by obtaining market information from one of the market's primary independent MSR brokers. Premises and Equipment - Premises and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated service lives of the premises and equipment. Leasehold improvements are amortized over the lesser of the life of the lease or service lives of the improvements using the straight-line method. Depreciation and amortization are recorded within occupancy and equipment expense in the consolidated statements of income. Goodwill - Goodwill represents the excess purchase price over the fair value of net assets acquired from business acquisitions. The Company tests for impairment at least annually and will test for impairment more frequently if events or circumstances indicate that an asset may be impaired. The Company tests for impairment by comparing the fair value of goodwill, as determined by using a discounted cash flow method, with its carrying value. Any excess of carrying value over the fair value of the goodwill would be recognized as an impairment loss in continuing operations. The discounted cash flow calculation related to the Company's loan origination segment includes a forecast of the expected future loan originations and the related revenues and expenses. The discounted cash flow calculation related to the Company's mortgage holdings segment includes a forecast of the expected future net interest income, gain on mortgage-backed securities and the related revenues and expenses. These cash flows are discounted using a rate that is estimated to be a weighted-average cost of capital for similar companies. We further test to ensure that the fair value of all of our business units does not exceed our total market capitalization. Reverse Repurchase Agreements - The Company has entered into reverse repurchase agreements to finance certain of its investments. These agreements are secured by a portion of the Company's investments and bear interest rates that have historically moved in close relationship to the London Inter-Bank Offer Rate ("LIBOR"). Reverse repurchase agreements are accounted for as borrowings and recorded as a liability on the consolidated balance sheet. Collateralized Debt Obligations - The Company has issued adjustable-rate collateralized debt obligations ("CDOs") to finance certain portions of its mortgage loans. The collateralized debt obligations are collateralized by adjustable-rate mortgage ("ARM") loans that have been placed in a trust and bear interest rates that have historically moved in close relationship to LIBOR. CDOs are accounted for as borrowings and recorded as a liability on the consolidated balance sheet. Commercial Paper - The Company maintains a wholly owned special purpose entity for the purpose of issuing commercial paper in the form of short-term Secured Liquidity Notes ("SLNs") to finance certain portions of the Company's mortgage loans held for sale and mortgage loans held for investment. The commercial paper may be secured by the Company's mortgage loans held for sale, mortgage loans held for investment, mortgage-backed securities and cash and bears interest at prevailing money market rates approximating LIBOR. Commercial paper is accounted for as a borrowing and recorded as a liability on the consolidated balance sheet. Trust Preferred Securities - The Company formed wholly owned statutory business trusts ("Trusts") for the purpose of issuing trust preferred securities. The Company does not consolidate its Trusts and results in a liability to the Trusts, which is recorded in trust preferred securities on the consolidated balance sheet. The securities begin to mature in 2035 and bear interest at rates ranging from LIBOR +255 basis points to LIBOR +300 basis points. Drafts Payable - Drafts payable represent outstanding mortgage loan disbursements that the Company has provided to its customers for the purchase of a home. The amounts outstanding do not bear interest and the obligation is transferred into one of the Company's warehouse facilities when the related draft is presented to a bank. Derivative Financial Instruments - The Company has developed risk management programs and processes designed to manage market risk associated with normal business activities. - 6 - Interest Rate Lock Commitments ("IRLCs"). The Company's mortgage committed pipeline includes IRLCs that have been extended to borrowers who have applied for loan funding and meet certain defined credit and underwriting criteria and have locked their terms and rates. The Company uses mortgage forward delivery contracts to economically hedge the IRLCs. The Company classifies and accounts for the IRLCs associated with loans expected to be sold as free-standing derivatives. Accordingly, IRLCs related to loans held for sale are recorded at fair value with changes in fair value recorded to current earnings. Forward Delivery Commitments Used to Economically Hedge IRLCs. The Company uses mortgage forward delivery contracts to economically hedge the IRLCs, which are also classified and accounted for as free-standing derivatives and thus are recorded at fair value with the changes in fair value recorded to current earnings. Forward Delivery Commitments Used to Hedge Mortgage Loans Held for Sale. The Company's risk management objective for its mortgage loans held for sale is to protect earnings from an unexpected charge due to a decline in value. The Company's strategy is to engage in a risk management program involving the use of mortgage forward delivery contracts designated as fair value hedging instruments to hedge 100% of its agency-eligible conforming loans and most of its non-conforming loans held for sale. At the inception of the hedge, to qualify for hedge accounting, the Company formally documents the relationship between the forward delivery contracts and the mortgage inventory as well as its objective and strategy for undertaking the hedge transaction. For conventional conforming fixed-rate loans, the notional amount of the forward delivery contracts, along with the underlying rate and terms of the contracts, are equivalent to the unpaid principal amount of the mortgage inventory being hedged; hence, the forward delivery contracts effectively fix the forward sales price and thereby substantially eliminate interest rate and price risk to the Company. The Company classifies and accounts for these forward delivery contracts as fair value hedges. The derivatives are carried at fair value with the changes in fair value recorded to current earnings. When the hedges are deemed highly effective, the book value of the hedged loans held for sale is adjusted for its change in fair value during the hedge period. Interest Rate Swap Agreements. The Company enters into interest rate swap agreements which require it to pay a fixed interest rate and receive a variable interest rate based on LIBOR. The fair value of interest rate swap agreements is based on the net present value of estimated future interest payments over the remaining life of the interest rate swap agreement. All changes in the unrealized gains and losses on swap agreements designated as cash flow hedges have been recorded in accumulated other comprehensive income (loss) and are reclassified to earnings as interest expense is recognized on the Company's hedged borrowings. For interest rate swap agreements accounted for as cash flow hedges, the net amount accrued for the variable interest receivable and fixed interest payable affects the amount recorded as interest expense. If it becomes probable that the forecasted transaction, which in this case refers to interest payments to be made under the Company's short-term borrowing agreements, will not occur by the end of the originally specified time period, as documented at the inception of the hedging relationship, or within an additional two-month time period thereafter, then the related gain or loss in accumulated other comprehensive income (loss) would be reclassified to income. Certain swap agreements are designated as cash flow hedges against the benchmark interest rate risk associated with the Company's borrowings. Although the terms and characteristics of the Company's swap agreements and hedged borrowings are nearly identical, due to the explicit requirements of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), the Company does not account for these hedges under a method defined in SFAS No. 133 as the "shortcut" method, but rather the Company calculates the effectiveness of these hedges on an ongoing basis, and, to date, has calculated effectiveness of approximately 100%. The Company classifies and accounts for interest rate swap agreements that are not designated as cash flow hedges as free-standing derivatives. Accordingly, these swap agreements are recorded at fair value with changes in fair value recorded to current earnings as a component of unrealized gain on mortgage-backed securities and derivatives as they are used to offset the price change exposure of mortgage-backed securities classified as trading. For interest rate swap agreements accounted for as free-standing derivatives, the net amount accrued for the variable interest receivable and fixed interest payable is recorded in current earnings as unrealized gain on mortgage-backed securities and derivatives. Termination of Hedging Relationships. The Company employs a number of risk management monitoring procedures to ensure that the designated hedging relationships are demonstrating, and are expected to continue to demonstrate, a high level of effectiveness. Hedge accounting is discontinued on a prospective basis if it is determined that the hedging relationship is no longer highly effective or expected to be highly effective in offsetting changes in fair value of the hedged item. Additionally, the Company may elect to de-designate a hedge relationship during an interim period and re-designate upon the rebalancing of a hedge profile and the corresponding hedge relationship. When hedge accounting is discontinued, the Company continues to carry the derivative instruments at fair value with changes in their value recorded in earnings. Gain on Sale of Loans - The Company recognizes gain on sale of loans for the difference between the sales price and the adjusted book value of the loans at the time of sale. The adjusted book value of the loans includes the original principal amount plus SFAS No. 133 basis adjustments plus deferrals of fees and points received and direct loan origination costs. Loan Origination Fees and Direct Origination Costs - The Company records loan fees, discount points and certain direct origination costs as an adjustment of the cost of the loan or security and such amounts are included in revenues when the loan or security is sold. When loans held for investment are securitized, net deferred origination costs are amortized over the life of the loan using the level-yield method and - 7 - such amounts adjust interest income. When loans are securitized and held as trading securities, net deferred origination costs are an adjustment to the cost of the security and such amounts affect the amount recorded as unrealized gain on mortgage-backed securities and derivatives. Interest Recognition - The Company accrues interest income as it is earned and interest expense as it is incurred. Loans are placed on a nonaccrual status when any portion of the principal or interest is 90 days past due or earlier when concern exists as to the ultimate collectibility of principal or interest. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible. The Company enters into interest rate swap agreements which require it to pay a fixed interest rate and receive a variable interest rate based on the LIBOR. For interest rate swap agreements accounted for as cash flow hedges, the net amount accrued for the variable interest receivable and fixed interest payable affects the amount recorded as interest expense. For interest rate swap agreements accounted for as free-standing derivatives, the net amount accrued for the variable interest receivable and fixed interest payable is recorded in current earnings as unrealized gain on mortgage-backed securities and derivatives. Servicing Fees - The Company recognizes servicing fees when the fees are collected. Marketing and Promotion - The Company charges the costs of marketing, promotion and advertising to expense in the period incurred. Income Taxes - The Company accounts for income taxes in conformity with SFAS No. 109, "Accounting for Income Taxes," which requires an asset and liability approach for accounting and reporting of income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences ("temporary differences") attributable to the differences between the carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. A valuation allowance is provided for deferred tax assets where realization is not considered "more likely than not." The Company recognizes the effect of changes in tax laws or rates on deferred tax assets and liabilities in the period that includes the enactment date. Stock Option Plans - In 1999, the Company established the 1999 Omnibus Stock Incentive Plan, as amended (the "Plan"). Prior to January 1, 2006, the Company accounted for the Plan using Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"), and provided pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value based method, as required by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS No. 148"), had been applied. Prior to January 1, 2006, in accordance with APB Opinion No. 25, no stock-based compensation cost was reflected in the Company's net income for grants of stock options to employees because the Company granted stock options with an exercise price equal to the market value of the stock on the date of grant. Had the Company used the fair value based accounting method for stock compensation expense prescribed by SFAS Nos. 123 and 148 for the three and six months ended June 30, 2005, the Company's consolidated net income and earnings per share would have been reduced to the pro-forma amounts presented in the following table: - 8 -
Three Months Ended Six Months Ended June 30, June 30, (In thousands, except per share data) 2005 2005 ----------- ----------- Net income available to common shareholders - as reported $ 62,196 $ 184,271 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (342) (685) ----------- ----------- Net income available to common shareholders - pro forma $ 61,854 $ 183,586 =========== =========== Earnings per share: Basic - as reported $ 1.54 $ 4.57 Basic - pro forma $ 1.53 $ 4.55 Diluted - as reported $ 1.52 $ 4.51 Diluted - pro forma $ 1.51 $ 4.49
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS No. 123R"), which requires that the compensation cost relating to share-based payment transactions (including employee stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans) be recognized as an expense in the Company's consolidated financial statements. Under SFAS No. 123R, the related compensation cost is measured based on the fair value of the award at the date of grant. In March 2005, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin ("SAB") No. 107, "Share-Based Payment," which expresses views of the SEC Staff about the application of SFAS No. 123R. SFAS No. 123 requires only that the expense relating to employee stock options be disclosed in the footnotes to the consolidated financial statements. SFAS No. 123R replaced SFAS No. 123 and superseded APB Opinion No. 25. While SFAS No. 123R was originally to have been effective for interim and annual reporting periods beginning after June 15, 2005, the SEC, in April 2005, deferred the compliance date to the first annual reporting period beginning after June 15, 2005. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, using the modified prospective method. Under this method, compensation cost in the six months ended June 30, 2006 includes the portion vesting in the period for (1) all share-based payments granted prior to, but not vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (2) all share-based payments granted subsequent to December 31, 2005, based on the grant date fair value estimated using a binomial lattice-based option valuation model. Results of prior periods do not reflect any restated amounts and the Company had no cumulative effect adjustment upon adoption of SFAS No. 123R under the modified prospective method. The Company's policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. Additionally, the Company's policy is to issue authorized but unissued shares of common stock to satisfy stock option exercises. During the three months ended June 30, 2006, the Company's adoption of SFAS No. 123R decreased income before income taxes by $373 thousand, decreased net income by $299 thousand, decreased basic net income per share by $.01 per share and decreased diluted net income per share by less than $.01 per share. The income tax benefit recognized in income for the three months ended June 30, 2006 for stock options was $74 thousand. During the six months ended June 30, 2006, the Company's adoption of SFAS No. 123R decreased income before income taxes by $783 thousand, decreased net income by $608 thousand and decreased basic and diluted net income per share by $.01 per share. The income tax benefit recognized in income for the six months ended June 30, 2006 for stock options was $175 thousand. The expense, before income tax effect, is included in salaries, commissions and benefits expense. Earnings Per Share - Basic earnings per share excludes dilution and is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Cash Flows - Cash and cash equivalents are demand deposits and short-term investments with a maturity of 90 days or less. - 9 - Recently Issued Accounting Standards - In July 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of SFAS No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the potential impact of FIN 48 on its consolidated financial position, results of operations and cash flows. NOTE 2 - MORTGAGE-BACKED SECURITIES The following tables present the Company's mortgage-backed securities available for sale as of June 30, 2006 and December 31, 2005:
June 30, 2006 ------------------------------------------------------------ Gross Unrealized Gross Unrealized Adjusted Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- (In thousands) Agency securities $ 119,329 $ - $ (5,983) $ 113,346 Privately issued: Rated 8,171,168 110 (125,312) 8,045,966 Unrated 5,974 309 - 6,283 ---------- ---------- ---------- ---------- Securities available for sale $8,296,471 $ 419 $ (131,295) $8,165,595 ========== ========== ========== ==========
December 31, 2005 ------------------------------------------------------------ Gross Unrealized Gross Unrealized Adjusted Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- (In thousands) Agency securities $ 135,545 $ - $ (5,225) $ 130,320 Privately issued: Rated 7,282,916 4,562 (49,963) 7,237,515 Unrated 7,176 25 - 7,201 ---------- ---------- ---------- ---------- Securities available for sale $7,425,637 $ 4,587 $ (55,188) $7,375,036 ========== ========== ========== ==========
- 10 - The following tables present the Company's mortgage-backed securities available for sale in an unrealized loss position as of June 30, 2006 and December 31, 2005:
June 30, 2006 ------------------------------------------------------------------------ Less Than 12 Months 12 Months or More Total --------------------- --------------------- ---------------------- Gross Gross Gross Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses --------------------- --------------------- ---------------------- (In thousands) Agency securities $ - $ - $ 113,346 $ (5,983) $ 113,346 $ (5,983) Privately issued: Rated 6,545,229 (87,312) 1,428,855 (38,000) 7,974,084 (125,312) --------------------- --------------------- ---------------------- Securities available for sale $6,545,229 $(87,312) $1,542,201 $(43,983) $8,087,430 $(131,295) ===================== ===================== ======================
December 31, 2005 ------------------------------------------------------------------------ Less Than 12 Months 12 Months or More Total --------------------- --------------------- ---------------------- Gross Gross Gross Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses --------------------- --------------------- ---------------------- (In thousands) Agency securities $ - $ - $ 130,320 $ (5,225) $ 130,320 $ (5,225) Privately issued: Rated 3,834,893 (29,230) 926,942 (20,733) 4,761,835 (49,963) --------------------- --------------------- ---------------------- Securities available for sale $3,834,893 $(29,230) $1,057,262 $(25,958) $4,892,155 $ (55,188) ===================== ===================== ======================
The Company has evaluated its mortgage-backed securities available for sale in an unrealized loss position for twelve months or more and determined there was no other-than-temporary impairment as of June 30, 2006. The Company has the ability and intent to hold its mortgage-backed securities available for sale in an unrealized loss position until a market price recovery or maturity. The following table presents the Company's mortgage-backed trading securities as of June 30, 2006 and December 31, 2005: June 30, December 31, 2006 2005 ------------ ------------ Fair Value -------------------------- (In thousands) Privately issued: Rated $ 917,607 $2,997,650 Unrated 216,022 229,418 ---------- ---------- Trading securities $1,133,629 $3,227,068 ========== ========== During the three months ended June 30, 2006, the Company recorded $14.6 million in unrealized losses on trading securities that related to trading securities held at June 30, 2006. During the three months ended June 30, 2005, the Company recorded $21.5 million in unrealized gains on trading securities that related to trading securities held at June 30, 2005. During the six months ended June 30, 2006, the Company recorded $13.6 million in unrealized losses on trading securities that related to trading securities held at June 30, 2006. During the six months ended June 30, 2005, the Company recorded $44.8 million in unrealized gains on trading securities that related to trading securities held at June 30, 2005. - 11 - During the three months ended June 30, 2006, the Company sold $99.1 million of mortgage-backed securities and realized $47 thousand in losses, net of hedges. The $99.1 million of mortgage-backed securities sold were self-originated. During the three months ended June 30, 2005, the Company sold $1.1 billion of mortgage-backed securities, excluding securities sold contemporaneously with the execution of securitization transactions, and realized $4.2 million in gains, net of hedges. The $1.1 billion of mortgage-backed securities sold were primarily self-originated. During the three months ended June 30, 2005, the Company securitized and held in its portfolio $463 million of mortgage-backed securities. During the six months ended June 30, 2006, the Company sold $1.9 billion of mortgage-backed securities and realized $0.9 million in losses, net of hedges. The $1.9 billion of mortgage-backed securities sold were self-originated. During the six months ended June 30, 2005, the Company sold $2.3 billion of mortgage-backed securities, excluding securities sold contemporaneously with the execution of securitization transactions, and realized $0.9 million in gains, net of hedges. During the six months ended June 30, 2005, the Company securitized and held in its portfolio $3.2 billion of mortgage-backed securities. The Company's mortgage-backed securities held at June 30, 2006 were primarily either agency obligations or were rated AAA or AA by Standard & Poor's. The Company has credit exposure on $12.7 billion and $15.1 billion of loans it has securitized privately as of June 30, 2006 and December 31, 2005, respectively. The following tables summarize the loan delinquency information as of June 30, 2006 and December 31, 2005:
June 30, 2006 ----------------------------------------------------- (Dollars in thousands) Loan Loan Percentage of Percentage of Delinquency Status Count Balance Total Portfolio Total Assets --------------------------------- ----------------------------------------------------- 60 to 89 days 45 $ 5,780 0.05% 0.03% 90 and greater days 71 14,652 0.12% 0.08% Pending foreclosure 837 201,584 1.58% 1.17% -------- -------- -------- -------- Loans 60 days and greater delinquent 953 $222,016 1.75% 1.28% ======== ======== ======== ======== December 31, 2005 ----------------------------------------------------- (Dollars in thousands) Loan Loan Percentage of Percentage of Delinquency Status Count Balance Total Portfolio Total Assets --------------------------------- ----------------------------------------------------- 60 to 89 days 49 $ 10,194 0.07% 0.06% 90 and greater days 82 13,596 0.09% 0.08% Pending foreclosure 451 119,181 0.79% 0.67% -------- -------- -------- -------- Loans 60 days and greater delinquent 582 $142,971 0.95% 0.81% ======== ======== ======== ========
As of June 30, 2006 and December 31, 2005, the fair value of residual assets from securitizations reported in mortgage-backed securities was $234.8 million and $276.0 million, respectively. The significant assumptions used in estimating the fair value of residual cash flows as of June 30, 2006 and December 31, 2005 were as follows: June 30, December 31, 2006 2005 ------ ------- Weighted-average prepayment speed (CPR) 29.93% 30.63% Weighted-average discount rate 16.44% 16.52% Weighted-average annual default rate 0.54% 0.54% - 12 - NOTE 3 - MORTGAGE LOANS, NET Mortgage Loans Held For Sale, Net The following table presents the Company's mortgage loans held for sale, net, as of June 30, 2006 and December 31, 2005: June 30, December 31, (In thousands) 2006 2005 ----------- ----------- Mortgage loans held for sale $ 1,237,841 $ 2,190,062 SFAS No. 133 basis adjustments (4,911) (2,099) Deferred origination costs, net 10,772 20,786 ----------- ----------- Mortgage loans held for sale, net $ 1,243,702 $ 2,208,749 =========== =========== During the three months ended June 30, 2006, the Company sold mortgage loans to third parties totaling $13.9 billion and realized $224.6 million in gains. During the six months ended June 30, 2006, the Company sold mortgage loans to third parties totaling $27.4 billion and realized $396.5 million in gains. During the three and six months ended June 30, 2006, the Company deferred $161.8 million and $289.7 million, respectively, of loan origination costs as an adjustment to the cost basis for additions to mortgage loans held for sale. The Company's gain on sale of loans was reduced by $164.9 million and $299.7 million of deferred origination costs associated with mortgage loans sold during the three and six months ended June 30, 2006, respectively. The following tables summarize delinquency information as of June 30, 2006 and December 31, 2005 for the Company's mortgage loans held for sale: June 30, 2006 -------------------------- (Dollars in thousands) Percentage Loan Loan of Total Delinquency Status Count Balance Portfolio ------------------------------------ ------- ------- ------- 60 to 89 days 16 $ 1,734 0.14% 90 and greater days 85 10,821 0.88% Pending foreclosure 112 14,452 1.17% ------- ------- ------- Loans 60 days and greater delinquent 213 $27,007 2.19% ======= ======= ======= December 31, 2005 -------------------------- (Dollars in thousands) Percentage Loan Loan of Total Delinquency Status Count Balance Portfolio ------------------------------------ ------- ------- ------- 60 to 89 days 15 $ 2,404 0.11% 90 and greater days 51 6,530 0.30% Pending foreclosure 32 4,824 0.22% ------- ------- ------- Loans 60 days and greater delinquent 98 $13,758 0.63% ======= ======= ======= - 13 - Mortgage Loans Held For Investment, Net The following table presents the Company's mortgage loans held for investment, net, as of June 30, 2006 and December 31, 2005: June 30, December 31, (In thousands) 2006 2005 ----------- ----------- Mortgage loans held for investment $ 5,290,334 $ 3,438,425 SFAS No. 133 basis adjustments (3,832) - Deferred origination costs, net 57,521 43,438 Allowance for loan losses (6,885) (2,142) ----------- ----------- Mortgage loans held for investment, net $ 5,337,138 $ 3,479,721 =========== =========== In June 2006, the Company transferred $964.9 million of its mortgage loans held for investment to American Home Mortgage Investment Trust 2006-2 (the "2006-2 Trust") in a securitization transaction accounted for as a financing of the loans held for investment. In March 2006, the Company transferred $2.0 billion of its mortgage loans held for investment to American Home Mortgage Investment Trust 2006-1 (the "2006-1 Trust") in a securitization transaction accounted for as a financing of the loans held for investment. During the three and six months ended June 30, 2006, the Company deferred $12.0 million and $20.4 million, respectively, of loan origination costs as an adjustment to the cost basis for mortgage loans added to its held for investment portfolio. The Company's interest income was reduced by $3.6 million and $6.3 million of deferred origination cost amortization on mortgage loans held for investment during the three and six months ended June 30, 2006, respectively. The following table presents the activity in the Company's allowance for loan losses for the three and six months ended June 30, 2006: Three Months Ended Six Months Ended June 30, 2006 June 30, 2006 --------------- --------------- (In thousands) Balance at beginning of period $ 3,453 $ 2,142 Provision for loan losses 3,979 5,290 Charge-offs (547) (547) --------------- --------------- Balance at end of period $ 6,885 $ 6,885 =============== =============== - 14 - The following tables summarize delinquency information as of June 30, 2006 and December 31, 2005 for the Company's mortgage loans held for investment: June 30, 2006 -------------------------- (Dollars in thousands) Percentage Loan Loan of Total Delinquency Status Count Balance Portfolio ------------------------------------ ------- ------- ------- 60 to 89 days 20 $ 2,094 0.04% 90 and greater days 37 4,780 0.09% Pending foreclosure 200 36,042 0.68% ------- ------- ------- Loans 60 days and greater delinquent 257 $42,916 0.81% ======= ======= ======= December 31, 2005 -------------------------- (Dollars in thousands) Percentage Loan Loan of Total Delinquency Status Count Balance Portfolio ------------------------------------ ------- ------- ------- 60 to 89 days 23 $ 2,898 0.08% 90 and greater days 26 2,489 0.07% Pending foreclosure 49 8,797 0.26% ------- ------- ------- Loans 60 days and greater delinquent 98 $14,184 0.41% ======= ======= ======= NOTE 4 - DERIVATIVE ASSETS AND LIABILITIES The following table presents the Company's derivative assets and liabilities as of June 30, 2006 and December 31, 2005: June 30, December 31, (In thousands) 2006 2005 ---------- ---------- Derivative Assets Interest rate swaps $ 111,113 $ 30,508 Interest rate lock commitments 14,682 14,086 Forward delivery contracts - loan commitments 7,480 -- Forward delivery contracts - loans held for sale 5,824 -- Interest rate caps 298 -- ---------- ---------- Derivative assets $ 139,397 $ 44,594 ========== ========== Derivative Liabilities Interest rate lock commitments $ 3,280 $ -- Forward delivery contracts - loan commitments -- 8,659 Forward delivery contracts - loans held for sale -- 8,114 ---------- ---------- Derivative liabilities $ 3,280 $ 16,773 ========== ========== As of June 30, 2006, the notional amount of forward delivery contracts and interest rate swap agreements was approximately $2.9 billion and $10.9 billion, respectively. As of December 31, 2005, the notional amount of forward delivery contracts and interest rate swap agreements was approximately $2.2 billion and $8.7 billion, respectively. - 15 - During the three months ended June 30, 2006, the Company recognized in earnings $6.8 million in unrealized gains on free standing derivatives. During the three months ended June 30, 2005, the Company recognized in earnings $31.8 million in unrealized losses on free standing derivatives. During the six months ended June 30, 2006, the Company recognized in earnings $15.2 million in unrealized gains on free standing derivatives. During the six months ended June 30, 2005, the Company recognized in earnings $2.4 million in unrealized gains on free standing derivatives. These gains are recorded in unrealized gain on mortgage-backed securities and derivatives in the consolidated statements of income. During the three months ended June 30, 2005, the Company realized $3.6 million in losses on sales of interest rate swap agreements associated with its securitizations of mortgage loans. During the six months ended June 30, 2005, the Company realized $5.9 million in gains on sales of interest rate swap agreements associated with its securitizations of mortgage loans. These gains are recorded in (loss) gain on sales of mortgage-backed securities and derivatives in the consolidated statements of income. The Company's forward delivery contracts have a high correlation to the price movement of the loans being hedged. The ineffectiveness in hedging loans held for sale recorded on the consolidated balance sheets was insignificant as of June 30, 2006 and December 31, 2005. As of June 30, 2006, the unrealized gain on interest rate swap agreements relating to cash flow hedges recorded in accumulated other comprehensive loss was $61.7 million. As of December 31, 2005, the unrealized loss on interest rate swap agreements relating to cash flow hedges recorded in accumulated other comprehensive loss was $28.2 million. The following table presents the Company's estimate of amounts that will be reclassified from accumulated other comprehensive loss to interest expense: (In thousands) Twelve months ended June 30, 2007 $ 12,355 Twelve months ended June 30, 2008 3,423 Twelve months ended June 30, 2009 1,790 Twelve months ended June 30, 2010 (130) NOTE 5 - MORTGAGE SERVICING RIGHTS The Company elected to early adopt SFAS No. 156 as of January 1, 2006, and has recorded its MSRs at fair value. The Company's adoption of SFAS No. 156 resulted in a cumulative-effect adjustment as of January 1, 2006, which increased MSRs by $1.2 million. Prior to January 1, 2006, MSRs were carried at the lower of cost or fair value, based on defined interest rate risk strata, and the gross MSR asset was amortized in proportion to and over the period of estimated net servicing income. Prior to the Company's adoption of SFAS No. 156, the Company evaluated MSRs for impairment based on risk strata and a valuation allowance was recognized for MSRs that had an amortized balance in excess of the estimated fair value for the individual risk stratification. - 16 - The following table presents the activity in the Company's MSRs for the three and six months ended June 30, 2006 and 2005:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- (In thousands) 2006 2005 2006 2005 --------- --------- --------- --------- Balance at beginning of period $ 371,974 $ 236,931 $ 340,377 $ 163,374 Cumulative-effect adjustment as of beginning of year -- -- 1,156 -- Fair value measurement method adjustment -- -- (20,706) -- Additions 81,029 66,657 150,797 148,715 Amortization -- (12,832) -- (21,333) Changes in fair value resulting from: Changes in valuation inputs or assumptions 10,783 -- 22,094 -- Other changes in fair value (1) (29,613) -- (59,545) -- --------- --------- --------- --------- Balance at end of period $ 434,173 $ 290,756 $ 434,173 $ 290,756 --------- --------- --------- --------- Impairment allowance: Balance at beginning of period $ -- $ (8,519) $ (20,706) $ (11,938) Fair value measurement method adjustment -- -- 20,706 -- Impairment provision -- (20,398) -- (16,979) --------- --------- --------- --------- Balance at end of period $ -- $ (28,917) $ -- $ (28,917) --------- --------- --------- --------- Mortgage servicing rights $ 434,173 $ 261,839 $ 434,173 $ 261,839 ========= ========= ========= =========
(1) Includes changes due to servicing runoff totaling $26.3 million and $45.1 million for the three and six months ended June 30, 2006 The amount of contractually specified servicing fees earned by the Company during the three months ended June 30, 2006 and 2005 were $19.7 million and $15.4 million, respectively. The amount of contractually specified servicing fees earned by the Company during the six months ended June 30, 2006 and 2005 were $40.1 million and $25.5 million, respectively. The Company reports contractually specified servicing fees in loan servicing fees in the consolidated statements of income. The estimated fair value of MSRs is determined by obtaining a market valuation from one of the market's primary independent MSR brokers. To determine the market value of MSRs, the MSR broker uses a valuation model which incorporates assumptions relating to the estimate of the cost of servicing the loan, a discount rate, a float value, an inflation rate, ancillary income per loan, prepayment speeds and default rates that market participants use for similar MSRs. Market assumptions are held constant over the life of the portfolio. The key risks inherent in MSRs are changes in interest rates and prepayment speeds. The significant assumptions used in estimating the fair value of MSRs at June 30, 2006 and December 31, 2005 were as follows:
June 30, 2006 December 31, 2005 ----------------- ----------------- Weighted-average prepayment speed (PSA) 375 315 Weighted-average discount rate 11.66% 11.94% Weighted-average default rate 2.11% 2.78%
- 17 - The following table presents certain information regarding the Company's servicing portfolio of loans serviced for others at June 30, 2006 and December 31, 2005:
June 30, 2006 December 31, 2005 --------------------- ---------------------- (Dollars in thousands) Loan servicing portfolio - loans sold or securitized $32,624,889 $25,044,676 ARM loans as a percentage of total loans 73% 73% Average loan size $ 212 $ 194 Weighted-average servicing fee 0.336% 0.330% Weighted-average note rate 6.38% 5.79% Weighted-average remaining term (in months) 353 337 Weighted-average age (in months) 14 15
NOTE 6 - GOODWILL The following table presents the activity in the Company's goodwill for the six months ended June 30, 2006 and 2005: Loan Mortgage Origination Holdings (In thousands) Segment Segment Total -------- -------- -------- Balance at January 1, 2005 $ 66,037 $ 24,840 $ 90,877 Earnouts from previous acquisitions 7,949 - 7,949 -------- -------- -------- Balance at June 30, 2005 $ 73,986 $ 24,840 $ 98,826 ======== ======== ======== Balance at January 1, 2006 $ 74,687 $ 24,840 $ 99,527 Acquisitions 899 - 899 Earnouts from previous acquisitions 10,333 - 10,333 -------- -------- -------- Balance at June 30, 2006 $ 85,919 $ 24,840 $110,759 ======== ======== ======== As of December 31, 2005, the Company completed a goodwill impairment test by comparing the fair value of goodwill with its carrying value and did not recognize impairment. NOTE 7 - WAREHOUSE LINES OF CREDIT, REVERSE REPURCHASE AGREEMENTS AND COMMERCIAL PAPER Warehouse Lines of Credit To originate a mortgage loan, the Company draws against either a $3.3 billion SLN commercial paper program, a $2.0 billion pre-purchase facility with UBS Real Estate Securities Inc., a facility of $2.0 billion with Bear Stearns, a $1.0 billion bank syndicated facility led by Bank of America, N.A. (which includes a $350 million term loan facility which the Company uses to finance its MSRs), a facility of $750 million with Morgan Stanley Bank ("Morgan Stanley"), a facility of $125 million with J.P. Morgan Chase, a $450 million facility with IXIS Real Estate Capital, Inc. (formerly CDC Mortgage Capital Inc.) ("IXIS"), and a $1.4 billion syndicated facility led by Calyon New York Branch ("Calyon"). The Bank of America, IXIS, Morgan Stanley and Calyon facilities are committed facilities. The interest rate on outstanding balances fluctuates daily based on a spread to the LIBOR and interest is paid monthly. The facilities are secured by mortgage loans and other assets of the Company. The facilities contain various covenants pertaining to maintenance of net worth, working capital and maximum leverage. At June 30, 2006, the Company was in compliance with respect to the loan covenants. - 18 - Included within the Bank of America line of credit, the Company has a working capital sub-limit that allows for borrowings up to $50 million at a rate based on a spread to the LIBOR that may be adjusted for earnings on compensating balances on deposit at creditors' banks. As of June 30, 2006, borrowings under the working capital line of credit were $29.7 million. As of June 30, 2006, the Company had $1.5 billion of warehouse lines of credit outstanding with a weighted-average borrowing rate of 5.57%. As of December 31, 2005, the Company had $3.5 billion of warehouse lines of credit outstanding with a weighted-average borrowing rate of 4.78%. Reverse Repurchase Agreements The Company has arrangements to enter into reverse repurchase agreements, a form of collateralized short-term borrowing, with seventeen different financial institutions and on June 30, 2006 had borrowed funds from eleven of these firms. Because the Company borrows money under these agreements based on the fair value of its mortgage-backed securities, and because changes in interest rates can negatively impact the valuation of mortgage-backed securities, the Company's borrowing ability under these agreements could be limited and lenders could initiate margin calls in the event interest rates change or the value of the Company's mortgage-backed securities declines for other reasons. As of June 30, 2006, the Company had $8.9 billion of reverse repurchase agreements outstanding with a weighted-average borrowing rate of 5.29% and a weighted-average remaining maturity of six months. As of December 31, 2005, the Company had $9.8 billion of reverse repurchase agreements outstanding with a weighted-average borrowing rate of 4.40% and a weighted-average remaining maturity of four months. As of June 30, 2006 and December 31, 2005, the Company's reverse repurchase agreements had the following remaining maturities: June 30, December 31, 2006 2005 ---------- ---------- (In thousands) Within 30 days $1,349,228 $ 689,469 31 to 89 days 4,572,249 4,817,885 90 to 365 days 713,540 4,298,790 Greater than 1 year 2,304,769 - ---------- ---------- Reverse repurchase agreements $8,939,786 $9,806,144 ========== ========== The Company's average reverse repurchase agreements outstanding were $9.0 billion and $6.3 billion for the three months ended June 30, 2006 and 2005, respectively. The Company's average reverse repurchase agreements outstanding were $9.1 billion and $6.6 billion for the six months ended June 30, 2006 and 2005, respectively. Commercial Paper The Company maintains a wholly owned special purpose entity for the purpose of issuing commercial paper in the form of short-term SLNs to finance certain portions of the Company's mortgage loans. The special purpose entity allows for issuance of short-term notes with maturities of up to 180 days, extendable up to 300 days. The SLNs bear interest at prevailing money market rates approximating the LIBOR. The SLN program capacity, based on aggregate commitments of underlying credit enhancers, was $3.3 billion at June 30, 2006. As of June 30, 2006, the Company had $888.5 million of SLNs outstanding, with an average interest cost of 5.14%. The SLNs were collateralized by mortgage loans held for sale, mortgage loans held for investment and cash with a balance of $1.0 billion as of June 30, 2006. As of December 31, 2005, the Company had $1.1 billion of SLNs outstanding, with an average interest cost of 4.35%. The SLNs were collateralized by mortgage loans held for sale, mortgage loans held for investment and cash with a balance of $1.2 billion as of December 31, 2005. As of June 30, 2006 and December 31, 2005, the Company's SLNs had remaining maturities within 30 days. - 19 - NOTE 8 - COLLATERALIZED DEBT OBLIGATIONS In June 2006, the Company transferred $964.9 million of its mortgage loans held for investment to the 2006-2 Trust in a securitization transaction. In this transaction, the Company issued $944.7 million of CDOs in the form of AAA and AA-rated floating-rate pass-through certificates to third-party investors and the Company retained $20.2 million of subordinated certificates, which provide credit support to the certificates issued to third parties. The Company's CDOs are collateralized by loans held for investment transferred to the 2006-2 Trust. The interest rates on the floating-rate pass-through certificates reset monthly and are indexed to one-month LIBOR. In the second quarter of 2006, the Company incurred CDO issuance costs of $2.1 million, which were deducted from the proceeds of the transactions and are being amortized over the expected life of the CDOs. This securitization transaction was accounted for as a financing of the mortgage loans held for investment. In March 2006, the Company transferred $2.0 billion of its mortgage loans held for investment to the 2006-1 Trust in a securitization transaction. In this transaction, the Company issued $1.9 billion of CDOs in the form of AAA and AA-rated floating-rate pass-through certificates to third-party investors and the Company retained $61.3 million of subordinated certificates, which provide credit support to the certificates issued to third parties. The Company's CDOs are collateralized by loans held for investment transferred to the 2006-1 Trust. The interest rates on the floating-rate pass-through certificates reset monthly and are indexed to one-month LIBOR. In the first quarter of 2006, the Company incurred CDO issuance costs of $4.0 million, which were deducted from the proceeds of the transactions and are being amortized over the expected life of the CDOs. This securitization transaction was accounted for as a financing of the mortgage loans held for investment. In the fourth quarter of 2005, the Company transferred $1.2 billion of its mortgage loans held for investment to two American Home Mortgage Investment Trusts (the "2005 Trusts") in two securitization transactions. In these transactions, the Company issued $1.1 billion of CDOs in the form of AAA and AA-rated floating-rate pass-through certificates to third-party investors and the Company retained $134.6 million of subordinated certificates, which provide credit support to the certificates issued to third parties. The Company's CDOs are collateralized by loans held for investment transferred to the 2005 Trusts. The interest rates on the floating-rate pass-through certificates reset monthly and are indexed to one-month LIBOR. In the fourth quarter of 2005, the Company incurred CDO issuance costs of $5.5 million, which were deducted from the proceeds of the transactions and are being amortized over the expected life of the CDOs. These securitization transactions were accounted for as financings of the mortgage loans held for investment. In December 2004, the Company transferred $3.5 billion of its mortgage loans held for sale to American Home Mortgage Investment Trust 2004-4 (the "2004-4 Trust") in a securitization transaction. In the transaction, the Company issued $2.0 billion of CDOs, which were collateralized by loans held for sale transferred to the 2004-4 Trust. This securitization transaction was accounted for as a financing of the mortgage loans held for sale. This securitization transaction qualified for sale treatment under SFAS No. 140 in the first quarter of 2005, and consequently the loans were derecognized. As of June 30, 2006, the Company's CDOs had a balance of $3.7 billion and an effective interest cost of 5.54%. As of June 30, 2006, the CDOs were collateralized by mortgage loans held for investment of $3.7 billion. As of December 31, 2005, the Company's CDOs had a balance of $1.1 billion and an effective interest cost of 4.54%. As of December 31, 2005, the CDOs were collateralized by mortgage loans held for investment of $1.1 billion. As of June 30, 2006 and December 31, 2005, the Company's CDOs had the following remaining maturities: June 30, December 31, 2006 2005 ---------- ---------- (In thousands) 15 to 20 years $ 47,923 $ 68,214 20 to 25 years 199,029 177,016 25 to 30 years 817,698 34,316 Greater than 30 years 2,660,228 778,360 ---------- ---------- Collateralized debt obligations $3,724,878 $1,057,906 ========== ========== - 20 - NOTE 9 - NOTES PAYABLE Notes payable primarily consist of amounts borrowed under a term loan facility with a bank syndicate led by Bank of America. Under the terms of this facility, the Company may borrow the lesser of 70% of the value of its MSRs, or $350.0 million. As of June 30, 2006, borrowings under the term loan were $221.3 million. This term loan expires on August 11, 2006, but the Company has an option to extend the term for twelve additional months at a higher interest rate. Interest is based on a spread to the LIBOR and may be adjusted for earnings on compensating balances. As of June 30, 2006, the interest rate was 6.15%. In 2005, the Company sold $85.0 million in Mortgage Warehouse Subordinated Notes ("Subordinated Notes"). The Company received a premium, net of issuance costs, of $1.5 million related to the Subordinated Notes offering, which is being amortized to interest expense over the expected life of the Subordinated Notes. As of June 30, 2006, the balance of Subordinated Notes outstanding, net of unamortized premium and issuance costs, was $86.1 million. The Subordinated Notes mature on May 20, 2009. The interest rates on the Subordinated Notes reset monthly and are indexed to one-month LIBOR. As of June 30, 2006, the interest rate was 7.27%. As of June 30, 2006, included in notes payable is a mortgage note of $25.7 million on an office building located in Melville, New York at a rate of 5.82%, and a mortgage note of $1.0 million on an office building located in Mount Prospect, Illinois at a rate of 7.18%. As of June 30, 2006, the Company had $3.6 million of Federal Home Loan Bank ("FHLB") advances with an interest rate of 5.60% and with remaining maturities within 30 days. Advances from the FHLB are collateralized by pledges of one-to-four family first mortgage loans with an aggregate principal balance of $7.3 million. The following table presents the Company's notes payable as of June 30, 2006 and December 31, 2005: June 30, December 31, 2006 2005 (In thousands) ---------- ---------- Term loan $ 221,345 $ 206,188 Subordinated note 86,102 86,322 Notes - office buildings 26,653 26,799 FHLB advances 3,600 - ---------- ---------- Notes payable $ 337,700 $ 319,309 ========== ========== The following table presents the maturities of the Company's notes payable as of June 30, 2006 and December 31, 2005: June 30, December 31, 2006 2005 ---------- ---------- (In thousands) Within 1 year $ 225,802 $ 207,009 1 to 2 years 1,223 843 2 to 3 years 43,577 1,540 3 to 4 years 43,010 85,606 4 to 5 years 461 447 Greater than 5 years 23,627 23,864 ---------- ---------- Notes payable $ 337,700 $ 319,309 ========== ========== - 21 - NOTE 10 - COMMON STOCK AND PREFERRED STOCK In August 2005, the Company issued 9,000,000 shares of its common stock, par value $0.01 per share ("Common Stock") at a price of $35.50 per share. The total proceeds to the Company were $319.5 million, before underwriting discounts, commissions and other offering expenses. Under the Company's charter, the Company's Board of Directors is authorized to issue 110,000,000 shares of stock, of which up to 100,000,000 shares may be Common Stock and up to 10,000,000 shares may be Preferred Stock. As of June 30, 2006, there were 50,107,214 shares of Common Stock issued and outstanding, 2,150,000 shares of 9.75% Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock") issued and outstanding and 3,450,000 shares of 9.25% Series B Cumulative Redeemable Preferred Stock ("Series B Preferred Stock") issued and outstanding. On or after July 7, 2009, the Company may, at its option, redeem the Series A Preferred Stock, in whole or part, at any time and from time to time, for cash at a price of $25 per share, plus accumulated or unpaid dividends (whether or not declared), if any, to the date of redemption. On or after December 15, 2009, the Company may, at its option, redeem the Series B Preferred Stock, in whole or part, at any time and from time to time, for cash at a price of $25 per share, plus accumulated or unpaid dividends (whether or not declared), if any, to the date of redemption. During the three months ended June 30, 2006, the Company declared dividends totaling $48.1 million, or $0.96 per share of Common Stock, which were paid on July 27, 2006. During the three months ended June 30, 2005, the Company declared dividends totaling $30.8 million, or $0.76 per share of Common Stock, which were paid on July 27, 2005. During the six months ended June 30, 2006, the Company declared dividends totaling $93.6 million, or $1.87 per share of Common Stock. During the six months ended June 30, 2005, the Company declared dividends totaling $59.5 million, or $1.47 per share of Common Stock. During the three months ended June 30, 2006, the Company declared dividends totaling $1.3 million, or $0.609375 per share of Series A Preferred Stock, which were paid on July 31, 2006. During the three months ended June 30, 2005, the Company declared dividends totaling $1.3 million, or $0.609375 per share of Series A Preferred Stock, which were paid on August 1, 2005. During the six months ended June 30, 2006, the Company declared dividends totaling $2.6 million, or $1.21875 per share of Series A Preferred Stock. During the six months ended June 30, 2005, the Company declared dividends totaling $2.6 million, or $1.21875 per share of Series A Preferred Stock. During the three months ended June 30, 2006, the Company declared dividends totaling $2.0 million, or $0.578125 per share of Series B Preferred Stock, which were paid on July 31, 2006. During the three months ended June 30, 2005, the Company declared dividends totaling $2.0 million, or $0.578125 per share of Series B Preferred Stock, which were paid on August 1, 2005. During the six months ended June 30, 2006, the Company declared dividends totaling $4.0 million, or $1.15625 per share of Series B Preferred Stock. During the six months ended June 30, 2005, the Company declared dividends totaling $4.0 million, or $1.15625 per share of Series B Preferred Stock. NOTE 11 - INCOME TAXES A reconciliation of the statutory income tax provision to the effective income tax expense (benefit) is as follows:
Three Months Ended June 30, Six Months Ended June 30, ---------------------- --------------------- ------------------------ ----------------------- 2006 2005 2006 2005 ---------------------- --------------------- ------------------------ ----------------------- (Dollars in thousands) Tax provision at statutory rate $ 36,950 35.0% $ 21,579 35.0% $ 61,681 35.0% $ 65,459 35.0% Non-taxable REIT income (9,130) (8.6) (26,050) (42.2) (20,119) (11.4) (69,852) (37.4) State and local taxes, net of federal income tax benefit 5,081 4.8 (28) - 7,078 4.0 (300) (0.2) Meals and entertainment 406 0.4 316 0.5 867 0.5 510 0.3 Other (83) (0.1) 332 0.5 (83) (0.1) 332 0.2 -------- -------- -------- -------- -------- -------- -------- -------- Income tax expense (benefit) $ 33,224 31.5% $ (3,851) (6.2)% $ 49,424 28.0% $ (3,851) (2.1)% ======== ======== ======== ======== ======== ======== ======== ========
- 22 - The major sources of temporary differences and their deferred tax effect at June 30, 2006 and December 31, 2005 are as follows: June 30, December 31, 2006 2005 ---------- ---------- (In thousands) Deferred income tax liabilities: Capitalized cost of mortgage servicing rights $ 193,244 $ 150,926 Loan origination costs 20,424 8,973 Depreciation 3,083 3,083 Deferred state income taxes - 1,465 Other 360 11 ---------- ---------- Deferred income tax liabilities 217,111 164,458 ---------- ---------- Deferred income tax assets: Tax loss carryforwards 120,051 109,145 Allowance for bad debts and foreclosure reserve 5,351 2,817 Deferred state income taxes 1,446 - Mark-to-market adjustments 4,589 10,721 AMT credit 1,745 1,745 Broker fees 282 958 Bonus accrual 347 8,399 Deferred compensation 5,419 3,436 ---------- ---------- Deferred income tax assets 139,230 137,221 ---------- ---------- Net deferred income tax liabilities $ 77,881 $ 27,237 ========== ========== American Home Mortgage Servicing, Inc. has approximately $40 million of separate company federal net operating loss carryforwards which begin to expire in 2008. In addition, American Home Mortgage Holdings, Inc. has approximately $359 million of federal and approximately $420 million of state net operating loss carryforwards which begin to expire in 2024 and 2009, respectively. The weighted average of the expiration of the state net operating loss carryforwards is approximately sixteen years. At June 30, 2006 and December 31, 2005, no valuation allowance has been established against deferred tax assets since it is more likely than not that the deferred tax assets will be realized. The Company has been audited by various state tax jurisdictions which have settled with a "no change" decision. In addition, the Company is currently under examination by other tax jurisdictions which the Company expects to result in no material assessments. The Company regularly assesses the likelihood of additional assessments in each of the tax jurisdictions in the calculation of its provision and maintains an appropriate reserve as needed. - 23 - NOTE 12 - EARNINGS PER SHARE The following is a reconciliation of the denominators used in the computations of basic and diluted earnings per share for the three and six months ended June 30, 2006 and 2005:
Three Months Ended June 30, Six Months Ended June 30, -------------------------- -------------------------- (Dollars in thousands, except per share amounts) 2006 2005 2006 2005 ----------- ----------- ----------- ----------- Numerator for basic earnings per share - Net income available to common shareholders $ 69,047 $ 62,196 $ 120,201 $ 184,271 =========== =========== =========== =========== Denominator: Denominator for basic earnings per share Weighted average number of common shares outstanding during the period 50,056,479 40,383,799 49,886,529 40,345,919 Net effect of dilutive stock options 430,033 502,464 383,743 502,703 ----------- ----------- ----------- ----------- Denominator for diluted earnings per share 50,486,512 40,886,263 50,270,272 40,848,622 =========== =========== =========== =========== Net income per share available to common shareholders: Basic $ 1.38 $ 1.54 $ 2.41 $ 4.57 =========== =========== =========== =========== Diluted $ 1.37 $ 1.52 $ 2.39 $ 4.51 =========== =========== =========== ===========
NOTE 13 - STOCK INCENTIVE PLAN Pursuant to the Plan, eligible employees, officers and directors may be offered the opportunity to acquire the Company's Common Stock through the grant of options and the award of restricted stock under the Plan. The total number of shares that may be optioned or awarded under the Plan is 4,000,000 shares of Common Stock. The Plan provides for the granting of options at the fair market value on the date of grant. The options issued primarily vest 50% on the two-year anniversary of the grant date and 50% on the three-year anniversary of the grant date, and expire ten years from the grant date. Effective January 1, 2006, the Company adopted SFAS No. 123R, which requires that the compensation cost relating to share-based payment transactions (including employee stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans) be recognized as an expense in the Company's consolidated financial statements. Under SFAS No. 123R, the related compensation cost is measured based on the fair value of the award at the date of grant. The Company adopted the fair value recognition provisions of SFAS No. 123R, using the modified prospective method. Under this method, compensation cost in the six months ended June 30, 2006 includes the portion vesting in the period for (1) all share-based payments granted prior to, but not vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (2) all share-based payments granted subsequent to December 31, 2005, based on the grant date fair value estimated using a binomial lattice-based option valuation model. During the three and six months ended June 30, 2006, the Company recognized compensation expense of $373 thousand and $783 thousand, respectively, relating to stock options granted under the Plan. The expense, before income tax effect, is included in salaries, commissions and benefits expense. The income tax benefit recognized in income for the three and six months ended June 30, 2006 for stock options was $74 thousand and $175 thousand, respectively. No compensation cost was recognized for the six months ended June 30, 2005. During the six months ended June 30, 2006, the fair value of the options granted was estimated using the binomial lattice option-pricing model. Under the binomial lattice option-pricing model, the fair value of each option award is estimated, with the assistance of an outside consulting service, on the date of grant, which incorporates ranges of assumptions for inputs as shown in the following table. The assumptions are as follows: Dividend yield range: The expected dividend yield assumption is based on the Company's current dividend yield as the best estimate of projected dividend yield for periods within the contractual life of the option. - 24 - Expected volatility: The expected volatility assumption is a blend of implied volatility based on market-traded options on the Company's Common Stock and historical volatility of the Company's Common Stock over the contractual life of the options. Risk-free interest rate range: The risk-free interest rate assumption is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the option. Expected term range: The Company uses historical data to estimate option exercise and employee termination behavior within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected life of options granted is derived from the output of the option valuation model and represents the period of time the options are expected to be outstanding. The weighted-average fair value per share of options granted during the three and six months ended June 30, 2006 was $4.94 and $4.65, respectively. The fair value of the options granted during the three and six months ended June 30, 2006 was estimated using the binomial lattice option-pricing model with the following assumptions used for the grants: Three Months Ended Six Months Ended June 30, June 30, 2006 2006 ------------------------------------------- Dividend yield range 11.9 % 11.9% - 13.1% Expected volatility 36.0 % 39.1 % Risk-free interest rate range 4.8% - 5.0% 4.3% - 5.0% Expected term range (in years) 7.9 7.0 - 7.9 Prior to adoption of SFAS No. 123R as of January 1, 2006, the Company's pro forma disclosures reflected the fair value of each option grant estimated on the date of grant using the Black-Scholes option-pricing model. Under the Black-Scholes option-pricing model, the Company estimated volatility using only its historical share price performance over the expected life of the option. The weighted-average fair value per share of options granted during the three and six months ended June 30, 2005 was $3.83 and $3.75, respectively. The fair value of the options granted during the three and six months ended June 30, 2005 was estimated using the Black-Scholes option-pricing model with the following assumptions used for the grants: Three Months Ended Six Months Ended June 30, June 30, 2005 2005 ------------------------------------------- Dividend yield 8.9 % 9.1 % Expected volatility 29.4 % 28.7 % Risk-free interest rate 5.0 % 5.0 % Expected term (in years) 3.0 3.0 - 25 - The following table presents a summary of the Company's stock option activity for the three and six months ended June 30, 2006 and 2005:
Three Months Ended June 30, Six Months Ended June 30, -------------------------------------------- -------------------------------------------- 2006 2005 2006 2005 -------------------------------------------- -------------------------------------------- Weighted Weighted Weighted Weighted Number Average Number Average Number Average Number Average of Exercise of Exercise of Exercise of Exercise Options Price Options Price Options Price Options Price -------------------------------------------- -------------------------------------------- Options outstanding - beginning of period 1,749,192 $24.52 1,499,638 $21.39 1,501,384 $23.09 1,248,102 $18.65 Granted 100,000 30.72 90,000 31.74 452,159 28.45 367,419 32.56 Exercised (96,259) 11.70 (45,504) 12.93 (147,610) 12.04 (71,387) 12.59 Canceled (5,500) 31.41 (8,813) 15.67 (58,500) 17.62 (8,813) 15.67 ---------- ---------- ---------- ---------- Options outstanding - end of period 1,747,433 $25.56 1,535,321 $22.28 1,747,433 $25.56 1,535,321 $22.28 ========== ========== ========== ========== Options exercisable - end of period 440,755 $15.82 440,755 $15.82 ========== ==========
The intrinsic value of an option is defined as the difference between an option's current market value and the grant price. The intrinsic value of options exercised during the three and six months ended June 30, 2006 was $2.1 million and $3.0 million, respectively. As of June 30, 2006, the intrinsic value and weighted-average remaining life of the Company's options outstanding were $19.8 million and 8.3 years, respectively. As of June 30, 2006, the intrinsic value of the Company's exercisable options outstanding was $9.3 million. As of June 30, 2006, the total remaining unrecognized compensation expense related to the Company's unvested stock options was $2.8 million. This unrecognized compensation expense is expected to be recognized over a weighted-average period of 2.4 years. As of June 30, 2006, the Company has awarded 221,934 shares of restricted stock under the Plan. During the three months ended June 30, 2006 and 2005, the Company recognized compensation expense of $123 thousand and $174 thousand, respectively, relating to shares of restricted stock granted under the Plan. During the six months ended June 30, 2006 and 2005, the Company recognized compensation expense of $170 thousand and $315 thousand, respectively, relating to shares of restricted stock granted under the Plan. As of June 30, 2006, 192,560 shares are vested. In general, unvested restricted stock is forfeited upon the recipient's termination of employment. NOTE 14 - CONCENTRATIONS OF CREDIT RISK Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers with similar characteristics, which would cause their ability to meet contractual obligations to be similarly impacted by economic or other conditions. The Company invests in negative amortization ARM, interest-only ARM, HELOC and certain other types of loans described in FSP SOP 94-6-1, "Terms of Loan Products that May Give Rise to a Concentration of Credit Risk." The Company, however, generally has purchased supplemental credit insurance for the loans of these types retained in the Company's portfolio if such loans have an initial loan-to-value ratio between 75% and 80%. In addition, the Company generally is the beneficiary of a borrower paid insurance policy on these types of loans if the initial loan-to-value ratio is greater than 80%. A substantial portion of the Company's mortgage loans held for investment at June 30, 2006 are the types of loans described in FSP SOP 94-6-1. The Company had originations of loans during the six months ended June 30, 2006 exceeding 5% of total originations in the following states: Six Months Ended June 30, 2006 ---------------- California 25.1% Florida 11.7 Illinois 7.0 Virginia 5.1 - 26 - During the six months ended June 30, 2006, the three institutions that bought the most loans from the Company accounted for 37% of the Company's total loan sales. NOTE 15 - ACQUISITIONS Waterfield Financial Corporation On January 12, 2006, American Home Mortgage Corp. ("AHM"), a wholly-owned subsidiary of the Company, entered into a Stock and Mortgage Loan Purchase Agreement with Union Federal Bank of Indianapolis ("Union Federal") and Waterfield Financial Corporation ("WFC"), pursuant to which AHM agreed to purchase from Union Federal 100% of the outstanding capital stock of WFC and certain mortgage loans held by Union Federal, comprised of warehouse loans held for sale by Union Federal as of December 31, 2005 (the "Warehouse Loans"), construction loans held by Union Federal as of the closing (the "Construction Loans") and certain other loans held by Union Federal as of the closing, for a cash purchase price equal to the net book value of such assets, as modified by certain agreed upon adjustments, as of the respective closing dates (or, in the case of the Warehouse Loans, as of January 12, 2006). The following table summarizes the fair value of the assets acquired and liabilities assumed as of the date of the acquisition: (In thousands) Mortgage loans held for sale, net $559,340 Accounts receivable 2,002 Other assets 2,442 -------- Total assets acquired 563,784 -------- Other liabilities 13,707 -------- Total liabilities assumed 13,707 -------- Net assets acquired 550,077 Cash paid 550,077 -------- Goodwill $ - ======== NOTE 16 - SEGMENTS AND RELATED INFORMATION The Company has three segments, the Mortgage Holdings segment, the Loan Origination segment and the Loan Servicing segment. The Mortgage Holdings segment uses the Company's equity capital and borrowed funds to invest in mortgage-backed securities and mortgage loans held for investment, thereby producing net interest income. The Loan Origination segment originates mortgage loans through the Company's retail and wholesale loan production offices and its correspondent channel, as well as its direct-to-consumer channel supported by its call center. The Loan Servicing segment includes investments in MSRs as well as servicing operations primarily for other financial institutions. The Company's segments are presented on a consolidated basis and do not include the effects of separately recording intercompany transactions. The Mortgage Holdings segment includes realized gains or losses on sales of mortgage-backed securities and unrealized mark-to-market gains or losses subsequent to the securitization date on mortgage-backed securities classified as trading securities. The Loan Origination segment includes unrealized gains or losses that exist on the date of securitization of self-originated loans that are classified as trading securities. - 27 -
Three Months Ended June 30, 2006 ------------------------------------------------------------ (In thousands) Mortgage Loan Origination Loan Servicing Holdings Segment Segment Segment Total ------------------------------------------------------------ Net interest income: Interest income $ 181,266 $ 148,930 $ - $ 330,196 Interest expense (153,197) (122,989) (3,806) (279,992) ------------ ------------ ------------ ------------ Net interest income 28,069 25,941 (3,806) 50,204 ------------ ------------ ------------ ------------ Provision for loan losses (2,389) (1,590) - (3,979) ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 25,680 24,351 (3,806) 46,225 ------------ ------------ ------------ ------------ Non-interest income: Gain on sales of mortgage loans - 224,594 - 224,594 Loss on sales of mortgage-backed securities and derivatives (47) - - (47) Unrealized loss on mortgage-backed securities and derivatives (7,730) - - (7,730) Loan servicing fees - - 30,417 30,417 Change in fair value of mortgage servicing rights - - (18,830) (18,830) ------------ ------------ ------------ ------------ Net loan servicing fees - - 11,587 11,587 ------------ ------------ ------------ ------------ Other non-interest income - 1,668 457 2,125 ------------ ------------ ------------ ------------ Total non-interest income (7,777) 226,262 12,044 230,529 ------------ ------------ ------------ ------------ Non-interest expenses: Salaries, commissions and benefits, net 2,585 96,683 3,889 103,157 Occupancy and equipment 1 19,472 290 19,763 Data processing and communications 44 6,689 - 6,733 Office supplies and expenses 13 5,027 105 5,145 Marketing and promotion 3 6,141 239 6,383 Travel and entertainment 2 7,762 29 7,793 Professional fees 924 4,077 12 5,013 Other 320 14,319 2,553 17,192 ------------ ------------ ------------ ------------ Total non-interest expenses 3,892 160,170 7,117 171,179 ------------ ------------ ------------ ------------ Net income before income tax expense 14,011 90,443 1,121 105,575 ------------ ------------ ------------ ------------ Income tax expense - 33,079 145 33,224 ------------ ------------ ------------ ------------ Net income $ 14,011 $ 57,364 $ 976 $ 72,351 ============ ============ ============ ============ Dividends on preferred stock 3,304 - - 3,304 ------------ ------------ ------------ ------------ Net income available to common shareholders $ 10,707 $ 57,364 $ 976 $ 69,047 ============ ============ ============ ============ June 30, 2006 ------------------------------------------------------------ Segment assets $ 13,154,573 $ 3,577,819 $ 593,207 $ 17,325,599 ============ ============ ============ ============
- 28 -
Three Months Ended June 30, 2005 ------------------------------------------------------------ (In thousands) Mortgage Loan Origination Loan Servicing Holdings Segment Segment Segment Total ------------------------------------------------------------ Net interest income: Interest income $ 77,041 $ 58,277 $ - $ 135,318 Interest expense (52,238) (36,127) (1,971) (90,336) ------------ ------------ ------------ ------------ Total net interest income 24,803 22,150 (1,971) 44,982 ------------ ------------ ------------ ------------ Non-interest income: Gain on sales of mortgage loans - 77,377 - 77,377 Gain on sales of current period securitized mortgage loans - 104,377 - 104,377 Gain (loss) on sales of mortgage-backed securities and derivatives 4,246 (3,626) - 620 Unrealized (loss) gain on mortgage-backed securities and derivatives (14,755) 4,463 - (10,292) Loan servicing fees - - 16,970 16,970 Amortization and impairment of mortgage servicing rights - - (33,230) (33,230) ------------ ------------ ------------ ------------ Net loan servicing loss - - (16,260) (16,260) ------------ ------------ ------------ ------------ Other non-interest income - 1,945 598 2,543 ------------ ------------ ------------ ------------ Total non-interest income (10,509) 184,536 (15,662) 158,365 ------------ ------------ ------------ ------------ Non-interest expenses: Salaries, commissions and benefits, net 3,493 87,837 3,529 94,859 Occupancy and equipment 1 14,118 278 14,397 Data processing and communications 20 5,766 171 5,957 Office supplies and expenses - 5,214 443 5,657 Marketing and promotion - 5,091 35 5,126 Travel and entertainment 5 5,158 264 5,427 Professional fees 1,049 2,063 320 3,432 Other 2,043 3,881 919 6,843 ------------ ------------ ------------ ------------ Total non-interest expenses 6,611 129,128 5,959 141,698 ------------ ------------ ------------ ------------ Net income before income tax expense (benefit) 7,683 77,558 (23,592) 61,649 ------------ ------------ ------------ ------------ Income tax expense (benefit) - 4,998 (8,849) (3,851) ------------ ------------ ------------ ------------ Net income $ 7,683 $ 72,560 $ (14,743) $ 65,500 ============ ============ ============ ============ Dividends on preferred stock 3,304 - - 3,304 ------------ ------------ ------------ ------------ Net income available to common shareholders $ 4,379 $ 72,560 $ (14,743) $ 62,196 ============ ============ ============ ============ June 30, 2005 ------------------------------------------------------------ Segment assets $ 7,018,101 $ 2,460,260 $ 332,553 $ 9,810,914 ============ ============ ============ ============
- 29 -
Six Months Ended June 30, 2006 ------------------------------------------------------------ (In thousands) Mortgage Loan Origination Loan Servicing Holdings Segment Segment Segment Total ------------------------------------------------------------ Net interest income: Interest income $ 336,212 $ 294,597 $ - $ 630,809 Interest expense (281,752) (245,316) (6,959) (534,027) ------------ ------------ ------------ ------------ Net interest income 54,460 49,281 (6,959) 96,782 ------------ ------------ ------------ ------------ Provision for loan losses (4,896) (394) - (5,290) ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 49,564 48,887 (6,959) 91,492 ------------ ------------ ------------ ------------ Non-interest income: Gain on sales of mortgage loans - 396,501 - 396,501 Loss on sales of mortgage-backed securities and derivatives (897) - - (897) Unrealized gain on mortgage-backed securities and derivatives 1,310 275 - 1,585 Loan servicing fees - - 54,750 54,750 Change in fair value of mortgage servicing rights - - (37,451) (37,451) ------------ ------------ ------------ ------------ Net loan servicing fees - - 17,299 17,299 ------------ ------------ ------------ ------------ Other non-interest income - 2,450 1,444 3,894 ------------ ------------ ------------ ------------ Total non-interest income 413 399,226 18,743 418,382 ------------ ------------ ------------ ------------ Non-interest expenses: Salaries, commissions and benefits, net 7,610 187,020 7,794 202,424 Occupancy and equipment 3 37,122 608 37,733 Data processing and communications 60 13,638 161 13,859 Office supplies and expenses 13 9,305 159 9,477 Marketing and promotion 7 11,932 244 12,183 Travel and entertainment 2 14,463 81 14,546 Professional fees 2,378 7,954 12 10,344 Other 2,323 19,335 11,416 33,074 ------------ ------------ ------------ ------------ Total non-interest expenses 12,396 300,769 20,475 333,640 ------------ ------------ ------------ ------------ Net income before income tax expense (benefit) 37,581 147,344 (8,691) 176,234 ------------ ------------ ------------ ------------ Income tax expense (benefit) - 52,939 (3,515) 49,424 ------------ ------------ ------------ ------------ Net income $ 37,581 $ 94,405 $ (5,176) $ 126,810 ============ ============ ============ ============ Dividends on preferred stock 6,609 - - 6,609 ------------ ------------ ------------ ------------ Net income available to common shareholders $ 30,972 $ 94,405 $ (5,176) $ 120,201 ============ ============ ============ ============ June 30, 2006 ------------------------------------------------------------ Segment assets $ 13,154,573 $ 3,577,819 $ 593,207 $ 17,325,599 ============ ============ ============ ============
- 30 -
Six Months Ended June 30, 2005 ------------------------------------------------------------ (In thousands) Mortgage Loan Origination Loan Servicing Holdings Segment Segment Segment Total ------------------------------------------------------------ Net interest income: Interest income $ 135,346 $ 146,866 $ - $ 282,212 Interest expense (91,223) (83,862) (3,342) (178,427) ------------ ------------ ------------ ------------ Total net interest income 44,123 63,004 (3,342) 103,785 ------------ ------------ ------------ ------------ Non-interest income: Gain on sales of mortgage loans - 112,630 - 112,630 Gain on sales of current period securitized mortgage loans - 174,296 - 174,296 Gain on sales of mortgage-backed securities and derivatives 909 5,843 - 6,752 Unrealized gain on mortgage-backed securities and derivatives 2,085 45,122 - 47,207 Loan servicing fees - - 28,282 28,282 Amortization and impairment of mortgage servicing rights - - (38,312) (38,312) ------------ ------------ ------------ ------------ Net loan servicing loss - - (10,030) (10,030) ------------ ------------ ------------ ------------ Other non-interest income - 2,608 1,401 4,009 ------------ ------------ ------------ ------------ Total non-interest income 2,994 340,499 (8,629) 334,864 ------------ ------------ ------------ ------------ Non-interest expenses: Salaries, commissions and benefits, net 4,569 153,441 5,324 163,334 Occupancy and equipment 3 26,660 405 27,068 Data processing and communications 42 11,580 285 11,907 Office supplies and expenses 1 9,339 746 10,086 Marketing and promotion 2 9,193 61 9,256 Travel and entertainment 5 9,001 349 9,355 Professional fees 2,022 4,307 573 6,902 Other 4,605 6,316 2,791 13,712 ------------ ------------ ------------ ------------ Total non-interest expenses 11,249 229,837 10,534 251,620 ------------ ------------ ------------ ------------ Net income before income tax expense (benefit) 35,868 173,666 (22,505) 187,029 ------------ ------------ ------------ ------------ Income tax expense (benefit) - 4,998 (8,849) (3,851) ------------ ------------ ------------ ------------ Net income $ 35,868 $ 168,668 $ (13,656) $ 190,880 ============ ============ ============ ============ Dividends on preferred stock 6,609 - - 6,609 ------------ ------------ ------------ ------------ Net income available to common shareholders $ 29,259 $ 168,668 $ (13,656) $ 184,271 ============ ============ ============ ============ June 30, 2005 ------------------------------------------------------------ Segment assets $ 7,018,101 $ 2,460,260 $ 332,553 $ 9,810,914 ============ ============ ============ ============
- 31 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL NOTES OF CAUTION Cautionary Note Regarding Forward-Looking Statements This report contains certain forward-looking statements within the meaning of the federal securities laws. Some of the forward-looking statements can be identified by the use of forward-looking words. When used in this report, statements that are not historical in nature, including, but not limited to, the words "anticipate," "may," "estimate," "should," "seek," "expect," "plan," "believe," "intend," and similar words, or the negatives of those words, are intended to identify forward-looking statements. In addition, statements that contain a projection of revenues, earnings (loss), capital expenditures, dividends, capital structure or other financial terms are intended to be forward-looking statements. Certain statements regarding the following particularly are forward-looking in nature: o our business strategy; o future performance, developments, market forecasts or projected dividends; o projected acquisitions or joint ventures; and o projected capital expenditures. It is important to note that the description of our business in general, and our mortgage-backed securities holdings in particular, is a statement about our operations as of a specific point in time. It is not meant to be construed as an investment policy, and the types of assets we hold, the amount of leverage we use, the liabilities we incur and other characteristics of our assets and liabilities are subject to reevaluation and change without notice. The forward-looking statements in this report are based on our management's beliefs, assumptions and expectations of our future economic performance, taking into account the information currently available to it. These statements are not statements of historical fact and are not guarantees of future performance, events or results. Forward-looking statements are subject to a number of factors, risks and uncertainties, some of which are not currently known to us, that may cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial position. These factors include, without limitation, those factors set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005, entitled "Risk Factors," as well as general economic, political, market, financial or legal conditions and any other factors, risks and uncertainties discussed in filings we make with the Securities and Exchange Commission ("SEC"). In light of these risks, uncertainties and assumptions, any forward-looking events discussed in this report might not occur, and we qualify any and all of our forward-looking statements entirely by these cautionary factors. You are cautioned not to place undue reliance on forward-looking statements. Such forward-looking statements are inherently uncertain, and you must recognize that actual results may differ from expectations. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. Critical Accounting Policies and Estimates Our accounting policies are described in Note 1 to the Consolidated Financial Statements. We have identified the following accounting policies that are critical to the presentation of our financial statements and that require critical accounting estimates by management. Mortgage-Backed Securities - We record our mortgage-backed securities at fair value. The fair values of our mortgage-backed securities are generally based on market prices provided by certain dealers who make markets in these financial instruments. Mortgage Loans Held for Sale - Mortgage loans held for sale are carried at the lower of cost or aggregate market value. For mortgage loans held for sale that are hedged with forward sale commitments, the carrying value is adjusted for the change in market during the time the hedge was deemed to be highly effective. The market value is determined by outstanding commitments from investors or current yield requirements calculated on an aggregate basis. Mortgage Loans Held for Investment - Mortgage loans held for investment are carried at the aggregate of their remaining unpaid principal balances, plus net deferred origination costs, less any related charge-offs and allowance for loan losses. Our periodic evaluation of the adequacy of the allowance for loan losses is based on our past loan loss experience, known and inherent risks in the loan portfolio, adverse - 32 - circumstances which may affect the borrowers' ability to repay, the estimated value of the underlying real estate collateral and current market conditions within the geographic areas surrounding the underlying real estate. The allowance for loan losses is increased by provision to loan losses charged to income and reduced by charge-offs, net of recoveries. Mortgage Servicing Rights ("MSRs") - When we acquire servicing assets through either purchase or origination of loans and sell or securitize those loans with servicing assets retained, the fair value attributable to the servicing assets is capitalized as MSRs on the consolidated balance sheets. We estimate the fair value of the servicing assets by obtaining market information from one of the market's primary independent MSR brokers. Derivative Assets and Derivative Liabilities - Our mortgage-committed pipeline includes interest rate lock commitments ("IRLCs") that have been extended to borrowers who have applied for loan funding and meet certain defined credit and underwriting criteria and have locked their terms and rates. IRLCs associated with loans expected to be sold are recorded at fair value with changes in fair value recorded to current earnings. We use other derivative instruments, including mortgage forward delivery contracts and treasury futures options, to economically hedge the IRLCs, which are also classified and accounted for as free-standing derivatives and thus are recorded at fair value with the changes in fair value recorded to current earnings. We use mortgage forward delivery contracts designated as fair value hedging instruments to hedge 100% of our agency-eligible conforming fixed-rate loans and most of our non-conforming fixed-rate loans held for sale. At the inception of the hedge, we formally document the relationship between the forward delivery contracts and the mortgage inventory, as well as our objective and strategy for undertaking the hedge transactions. In the case of our conventional conforming fixed-rate loan products, the notional amount of the forward delivery contracts, along with the underlying rate and terms of the contracts, are equivalent to the unpaid principal amount of the mortgage inventory being hedged; hence, the forward delivery contracts effectively fix the forward sales price and thereby substantially eliminate interest rate and price risk to us. We classify and account for these forward delivery contracts as fair value hedges. The derivatives are carried at fair value with the changes in fair value recorded to current earnings. When the hedges are deemed to be highly effective, the book value of the hedged loans held for sale is adjusted for its change in fair value during the hedge period. We enter into interest rate swap agreements to manage our interest rate exposure when financing our mortgage-backed securities and certain ARM loans. Certain swap agreements accounted for as cash flow hedges and certain swap agreements not designated as cash flow hedges are both carried on the balance sheet at fair value. The fair values of our swap agreements are generally based on market prices provided by certain dealers who make markets in these financial instruments or by third-party pricing services. Goodwill - Goodwill represents the excess purchase price over the fair value of net assets stemming from business acquisitions, including identifiable intangibles. We test for impairment, at least annually, by comparing the fair value of goodwill, as determined by using a discounted cash flow method, with its carrying value. Any excess of carrying value over the fair value of the goodwill would be recognized as an impairment loss in continuing operations. The discounted cash flow calculation related to our loan origination segment includes a forecast of the expected future loan originations and the related revenues and expenses. The discounted cash flow calculation related to our Mortgage Holdings segment includes a forecast of the expected future net interest income, gain on mortgage-backed securities and the related revenues and expenses. These cash flows are discounted using a rate that is estimated to be a weighted-average cost of capital for similar companies. We further test to ensure that the fair value of all our business units does not exceed our total market capitalization. - 33 - Financial Condition The following table presents the Company's consolidated balance sheets as of June 30, 2006 and December 31, 2005: AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) June 30, December 31, 2006 2005 ------------ ------------ Assets: Cash and cash equivalents $ 304,268 $ 575,650 Accounts receivable and servicing advances 342,244 329,132 Mortgage-backed securities 9,299,224 10,602,104 Mortgage loans held for sale, net 1,243,702 2,208,749 Mortgage loans held for investment, net 5,337,138 3,479,721 Derivative assets 139,397 44,594 Mortgage servicing rights 434,173 319,671 Premises and equipment, net 80,296 68,782 Goodwill 110,759 99,527 Other assets 34,398 26,815 ------------ ------------ Total assets $ 17,325,599 $ 17,754,745 ============ ============ Liabilities and Stockholders' Equity: Liabilities: Warehouse lines of credit $ 1,476,958 $ 3,474,191 Drafts payable 12,349 20,754 Commercial paper 888,476 1,079,179 Reverse repurchase agreements 8,939,786 9,806,144 Collateralized debt obligations 3,724,878 1,057,906 Payable for securities purchased - 261,539 Derivative liabilities 3,280 16,773 Trust preferred securities 252,780 203,688 Accrued expenses and other liabilities 355,009 277,476 Notes payable 337,700 319,309 Income taxes payable 80,529 30,770 ------------ ------------ Total liabilities 16,071,745 16,547,729 ------------ ------------ Stockholders' Equity: Preferred Stock 134,040 134,040 Common Stock 501 496 Additional paid-in capital 960,995 947,512 Retained earnings 227,450 203,778 Accumulated other comprehensive loss (69,132) (78,810) ------------ ------------ Total stockholders' equity 1,253,854 1,207,016 ------------ ------------ Total liabilities and stockholders' equity $ 17,325,599 $ 17,754,745 ============ ============ - 34 - Total assets at June 30, 2006 were $17.3 billion, a $429.1 million decrease from $17.8 billion at December 31, 2005. The decrease in total assets primarily reflects a decrease in mortgage-backed securities of $1.3 billion and a decrease in mortgage loans held for sale of $1.0 billion, partly offset by an increase in mortgage loans held for investment of $1.9 billion. At June 30, 2006, 53.7% of our total assets were mortgage-backed securities, 30.8% were mortgage loans held for investment and 7.2% were mortgage loans held for sale, compared to 59.7%, 19.6% and 12.4%, respectively, at December 31, 2005. The following tables summarize our mortgage-backed securities owned at June 30, 2006 and December 31, 2005, classified by type of issuer and by ratings categories:
June 30, 2006 ----------------------------------------------------------------------------- Trading Securities Securities Available for Sale Total ----------------------- ----------------------- ----------------------- Carrying Carrying Carrying Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix ----------------------- ----------------------- ----------------------- (Dollars in thousands) Agency securities $ - -% $ 113,346 1.4% $ 113,346 1.2% Privately issued: AAA 563,436 49.7 8,029,798 98.3 8,593,234 92.6 AA 47,596 4.2 8,485 0.1 56,081 0.6 A 166,610 14.7 5,398 0.1 172,008 1.8 BB 4,587 0.4 - - 4,587 0.0 BBB 135,378 11.9 2,285 0.0 137,663 1.4 Unrated 216,022 19.1 6,283 0.1 222,305 2.4 ---------- ---------- ---------- ---------- ---------- ---------- Total $1,133,629 100.0% $8,165,595 100.0% $9,299,224 100.0% ========== ========== ========== ========== ========== ==========
December 31, 2005 ----------------------------------------------------------------------------- Trading Securities Securities Available for Sale Total ----------------------- ----------------------- ----------------------- Carrying Carrying Carrying Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix ----------------------- ----------------------- ----------------------- (Dollars in thousands) Agency securities $ - -% $ 130,320 1.8% $ 130,320 1.2% Privately issued: AAA 2,619,546 81.1 7,216,527 97.9 9,836,073 92.8 AA 47,253 1.5 9,989 0.1 57,242 0.5 A 166,507 5.2 7,558 0.1 174,065 1.6 BBB 164,344 5.1 3,441 0.0 167,785 1.7 Unrated 229,418 7.1 7,201 0.1 236,619 2.2 ---------- ---------- ---------- ---------- ---------- ---------- Total $3,227,068 100.0% $7,375,036 100.0% $10,602,104 100.0% ========== ========== ========== ========== ========== ==========
- 35 - The following tables classify our mortgage-backed securities portfolio by type of interest rate index at June 30, 2006 and December 31, 2005:
June 30, 2006 ----------------------------------------------------------------------------- Trading Securities Securities Available for Sale Total ----------------------- ----------------------- ----------------------- Carrying Carrying Carrying Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix ----------------------- ----------------------- ----------------------- (Dollars in thousands) Index: One-month LIBOR $ 386,683 34.1% $ 88,827 1.1% $ 475,510 5.1% Six-month LIBOR 470,992 41.6 4,733,291 57.9 5,204,283 56.0 One-year LIBOR 221,602 19.5 2,871,629 35.2 3,093,231 33.2 One-year constant maturity treasury 446 0.0 471,848 5.8 472,294 5.1 One-year monthly treasury average 53,906 4.8 - - 53,906 0.6 ---------- ---------- ---------- ---------- ---------- ---------- Total $1,133,629 100.0% $8,165,595 100.0% $9,299,224 100.0% ========== ========== ========== ========== ========== ==========
December 31, 2005 ----------------------------------------------------------------------------- Trading Securities Securities Available for Sale Total ----------------------- ----------------------- ----------------------- Carrying Carrying Carrying Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix ----------------------- ----------------------- ----------------------- (Dollars in thousands) Index: One-month LIBOR $ 402,311 12.5% $ 10,836 0.1% $ 413,147 3.9% Six-month LIBOR 2,538,016 78.6 4,838,532 65.6 7,376,548 69.6 One-year LIBOR 218,530 6.8 2,128,376 28.9 2,346,906 22.1 One-year constant maturity treasury 2,054 0.1 397,292 5.4 399,346 3.8 One-year monthly treasury average 66,157 2.0 - - 66,157 0.6 ---------- ---------- ---------- ---------- ----------- ---------- Total $3,227,068 100.0% $7,375,036 100.0% $10,602,104 100.0% ========== ========== ========== ========== =========== ==========
- 36 - The following tables classify our mortgage loans held for investment and mortgage-backed securities portfolio by product type at June 30, 2006 and December 31, 2005:
June 30, 2006 ------------------------------------------------------------------------------------------------------ Securities Loans Held Trading Securities Available for Sale for Investment Total ------------------------ ------------------------- ------------------------ -------------------------- Carrying Carrying Carrying Carrying Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix ------------------------ ------------------------- ------------------------ -------------------------- (Dollars in thousands) Product: ARMs less than 3 years $ 650,509 57.4% $ 327,400 4.0% $2,938,906 55.1% $ 3,916,815 26.8% 3/1 Hybrid ARM 167,427 14.8 196,930 2.4 6,919 0.1 371,276 2.5 5/1 Hybrid ARM 315,693 27.8 7,641,265 93.6 321,073 6.1 8,278,031 56.6 Home equity/Second - - - - 237,502 4.4 237,502 1.6 Other ARM - - - - 251,032 4.7 251,032 1.7 Fixed rate - - - - 1,581,706 29.6 1,581,706 10.8 ---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- Total $1,133,629 100.0% $8,165,595 100.0% $5,337,138 100.0% $14,636,362 100.0% ========== ========== ========== ========== ========== ========== =========== ==========
December 31, 2005 ------------------------------------------------------------------------------------------------------ Securities Loans Held Trading Securities Available for Sale for Investment Total ------------------------ ------------------------- ------------------------ -------------------------- Carrying Carrying Carrying Carrying Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix ------------------------ ------------------------- ------------------------ -------------------------- (Dollars in thousands) Product: ARMs less than 3 years $ 700,164 21.7% $ 487,122 6.6% $2,628,977 75.6% $ 3,816,263 27.1% 3/1 Hybrid ARM 194,313 6.0 262,598 3.6 11,563 0.3 468,474 3.3 5/1 Hybrid ARM 2,332,591 72.3 6,625,316 89.8 121,227 3.5 9,079,134 64.5 Home equity/Second - - - - 611,370 17.6 611,370 4.3 Other ARM - - - - 31,862 0.9 31,862 0.2 Fixed rate - - - - 74,722 2.1 74,722 0.6 ---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- Total $3,227,068 100.0% $7,375,036 100.0% $3,479,721 100.0% $14,081,825 100.0% ========== ========== ========== ========== ========== ========== =========== ==========
During the three and six months ended June 30, 2006, we purchased $461.1 million and $1.9 billion of mortgage-backed securities, respectively. During the three and six months ended June 30, 2006, we sold $99.1 million and $1.9 billion of mortgage-backed securities, respectively. During the three and six months ended June 30, 2006, we added $1.0 billion and $1.9 billion of loans held for investment to our portfolio, respectively. Loan Delinquency and Reserves We are exposed to credit losses due to defaults on the loans underlying our residual assets, and from our loans held for investment and loans held for sale. As of June 30, 2006, credit losses have been nominal, primarily due to our loans held for investment and loans underlying our residual assets being originated within the past 30 months and, consequently, have not yet seasoned to the point in time where losses are expected to occur. We expect losses to increase as our loans season. - 37 - We hold reserves and allowances for expected losses, as well as other credit related expenses, including losses due to loan repurchases. Reserves and allowances include embedded loss assumptions, which reduce the projected future cash flows and carrying value of our residual assets, in addition to specific reserves. The following table presents our total reserves and allowances compared to our loans that are 60 or more days delinquent: June 30, December 31, (In thousands) 2006 2005 ---------- ---------- Loans 60 days and greater delinquent: Loans underlying residual assets $ 222,016 $ 142,971 Loans held for investment 42,916 14,184 Loans held for sale 27,007 13,758 ---------- ---------- Loans 60 days and greater delinquent $ 291,939 $ 170,913 ========== ========== Credit impairment reserves and allowances including forecasted losses included in carrying value of residual assets $ 88,415 $ 72,743 ---------- ---------- Credit impairment reserves and allowances as a percentage of loans 60 days or greater delinquent 30.29% 42.56% ========== ========== We generally target our reserves to equal our expected losses from our delinquent loans. Currently, our expected losses are approximately 22% of our loans that are 60 days or greater delinquent, but this expected loss percentage is expected to decline because we began purchasing supplemental credit insurance on a greater percentage of loans beginning in the second half of 2005. - 38 - Results of Operations The following tables present our consolidated and segment statements of income: AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)
Three Months Ended --------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, 2006 2006 2005 2005 2005 --------- --------- --------- --------- --------- Net interest income: Interest income $ 330,196 $ 300,613 $ 265,435 $ 180,038 $ 135,318 Interest expense (279,992) (254,035) (215,057) (133,169) (90,336) --------- --------- --------- --------- --------- Net interest income 50,204 46,578 50,378 46,869 44,982 --------- --------- --------- --------- --------- Provision for loan losses (3,979) (1,311) (2,142) - - --------- --------- --------- --------- --------- Net interest income after provision for loan losses 46,225 45,267 48,236 46,869 44,982 --------- --------- --------- --------- --------- Non-interest income: Gain on sales of mortgage loans 224,594 171,907 98,777 123,658 77,377 Gain on sales of current period securitized mortgage loans - - - 19,960 104,377 (Loss) gain on sales of mortgage-backed securities and derivatives (47) (850) 38,068 6,116 620 Unrealized (loss) gain on mortgage-backed securities and derivatives (7,730) 9,315 (44,778) (10,965) (10,292) Loan servicing fees 30,417 24,333 26,715 21,099 16,970 Amortization and impairment of mortgage servicing rights - - (18,745) (3,478) (33,230) Change in fair value of mortgage servicing rights (18,830) (18,621) - - - --------- --------- --------- --------- --------- Net loan servicing fees (loss) 11,587 5,712 7,970 17,621 (16,260) --------- --------- --------- --------- --------- Other non-interest income 2,125 1,769 2,181 1,585 2,543 --------- --------- --------- --------- --------- Non-interest income 230,529 187,853 102,218 157,975 158,365 --------- --------- --------- --------- --------- Non-interest expenses: Salaries, commissions and benefits, net 103,157 99,267 95,237 101,378 94,859 Occupancy and equipment 19,763 17,970 16,459 15,328 14,397 Data processing and communications 6,733 7,126 6,402 6,479 5,957 Office supplies and expenses 5,145 4,332 4,612 5,024 5,657 Marketing and promotion 6,383 5,800 5,951 5,104 5,126 Travel and entertainment 7,793 6,753 6,982 4,670 5,427 Professional fees 5,013 5,331 3,586 3,744 3,432 Other 17,192 15,882 10,946 7,360 6,843 --------- --------- --------- --------- --------- Non-interest expenses 171,179 162,461 150,175 149,087 141,698 --------- --------- --------- --------- --------- Net income before income tax expense (benefit) 105,575 70,659 279 55,757 61,649 Income tax expense (benefit) 33,224 16,200 (16,419) 2,549 (3,851) --------- --------- --------- --------- --------- Net income $ 72,351 $ 54,459 $ 16,698 $ 53,208 $ 65,500 ========= ========= ========= ========= ========= Dividends on preferred stock 3,304 3,305 3,304 3,304 3,304 --------- --------- --------- --------- --------- Net income available to common shareholders $ 69,047 $ 51,154 $ 13,394 $ 49,904 $ 62,196 ========= ========= ========= ========= ========= Per share data: Basic $ 1.38 $ 1.03 $ 0.27 $ 1.10 $ 1.54 Diluted $ 1.37 $ 1.02 $ 0.27 $ 1.09 $ 1.52 Weighted average number of shares - basic 50,056 49,715 49,605 45,174 40,384 Weighted average number of shares - diluted 50,487 50,070 49,998 45,669 40,886
- 39 - AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)
Six Months Ended June 30, ---------------------- 2006 2005 --------- --------- Net interest income: Interest income $ 630,809 $ 282,212 Interest expense (534,027) (178,427) --------- --------- Total net interest income 96,782 103,785 --------- --------- Provision for loan losses (5,290) - --------- --------- Total net interest income after provision for loan losses 91,492 103,785 --------- --------- Non-interest income: Gain on sales of mortgage loans 396,501 112,630 Gain on sales of current period securitized mortgage loans - 174,296 (Loss) gain on sales of mortgage-backed securities and derivatives (897) 6,752 Unrealized gain on mortgage-backed securities and derivatives 1,585 47,207 Loan servicing fees 54,750 28,282 Amortization and impairment of mortgage servicing rights - (38,312) Change in fair value of mortgage servicing rights (37,451) - --------- --------- Net loan servicing fees (loss) 17,299 (10,030) --------- --------- Other non-interest income 3,894 4,009 --------- --------- Total non-interest income 418,382 334,864 --------- --------- Non-interest expenses: Salaries, commissions and benefits, net 202,424 163,334 Occupancy and equipment 37,733 27,068 Data processing and communications 13,859 11,907 Office supplies and expenses 9,477 10,086 Marketing and promotion 12,183 9,256 Travel and entertainment 14,546 9,355 Professional fees 10,344 6,902 Other 33,074 13,712 --------- --------- Total non-interest expenses 333,640 251,620 --------- --------- Net income before income tax expense (benefit) 176,234 187,029 Income tax expense (benefit) 49,424 (3,851) --------- --------- Net income $ 126,810 $ 190,880 ========= ========= Dividends on preferred stock 6,609 6,609 --------- --------- Net income available to common shareholders $ 120,201 $ 184,271 ========= ========= Per share data: Basic $ 2.41 $ 4.57 Diluted $ 2.39 $ 4.51 Weighted average number of shares - basic 49,887 40,346 Weighted average number of shares - diluted 50,270 40,849
- 40 - AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME MORTGAGE HOLDINGS SEGMENT (In thousands)
Six Months Ended June 30, ---------------------- 2006 2005 --------- --------- Net interest income: Interest income $ 336,212 $ 135,346 Interest expense (281,752) (91,223) --------- --------- Net interest income 54,460 44,123 --------- --------- Provision for loan losses (4,896) - --------- --------- Net interest income after provision for loan losses 49,564 44,123 --------- --------- Non-interest income: (Loss) gain on sales of mortgage-backed securities and derivatives (897) 909 Unrealized gain on mortgage-backed securities and derivatives 1,310 2,085 --------- --------- Non-interest income 413 2,994 --------- --------- Non-interest expenses: Salaries, commissions and benefits, net 7,610 4,569 Occupancy and equipment 3 3 Data processing and communications 60 42 Office supplies and expenses 13 1 Marketing and promotion 7 2 Travel and entertainment 2 5 Professional fees 2,378 2,022 Other 2,323 4,605 --------- --------- Non-interest expenses 12,396 11,249 --------- --------- Net income before income tax expense 37,581 35,868 Income tax expense - - --------- --------- Net income $ 37,581 $ 35,868 ========= ========= Dividends on preferred stock 6,609 6,609 --------- --------- Net income available to common shareholders $ 30,972 $ 29,259 ========= =========
- 41 - AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME LOAN ORIGINATION SEGMENT (In thousands)
Six Months Ended June 30, ---------------------- 2006 2005 --------- --------- Net interest income: Interest income $ 294,597 $ 146,866 Interest expense (245,316) (83,862) --------- --------- Net interest income 49,281 63,004 --------- --------- Provision for loan losses (394) - --------- --------- Net interest income after provision for loan losses 48,887 63,004 --------- --------- Non-interest income: Gain on sales of mortgage loans 396,501 112,630 Gain on sales of current period securitized mortgage loans - 174,296 Gain on sales of mortgage-backed securities and derivatives - 5,843 Unrealized gain on mortgage-backed securities and derivatives 275 45,122 Other non-interest income 2,450 2,608 --------- --------- Non-interest income 399,226 340,499 --------- --------- Non-interest expenses: Salaries, commissions and benefits, net 187,020 153,441 Occupancy and equipment 37,122 26,660 Data processing and communications 13,638 11,580 Office supplies and expenses 9,305 9,339 Marketing and promotion 11,932 9,193 Travel and entertainment 14,463 9,001 Professional fees 7,954 4,307 Other 19,335 6,316 --------- --------- Non-interest expenses 300,769 229,837 --------- --------- Net income before income tax expense 147,344 173,666 Income tax expense 52,939 4,998 --------- --------- Net income $ 94,405 $ 168,668 ========= ========= Dividends on preferred stock - - --------- --------- Net income available to common shareholders $ 94,405 $ 168,668 ========= =========
- 42 - AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME LOAN SERVICING SEGMENT (In thousands)
Six Months Ended June 30, --------------------- 2006 2005 -------- -------- Net interest income: Interest income $ - $ - Interest expense (6,959) (3,342) -------- -------- Net interest income (6,959) (3,342) -------- -------- Non-interest income: Loan servicing fees 54,750 28,282 Amortization and impairment of mortgage servicing rights - (38,312) Change in fair value of mortgage servicing rights (37,451) - -------- -------- Net loan servicing fees (loss) 17,299 (10,030) -------- -------- Other non-interest income 1,444 1,401 -------- -------- Non-interest income 18,743 (8,629) -------- -------- Non-interest expenses: Salaries, commissions and benefits, net 7,794 5,324 Occupancy and equipment 608 405 Data processing and communications 161 285 Office supplies and expenses 159 746 Marketing and promotion 244 61 Travel and entertainment 81 349 Professional fees 12 573 Other 11,416 2,791 -------- -------- Non-interest expenses 20,475 10,534 -------- -------- Net income before income tax benefit (8,691) (22,505) Income tax benefit (3,515) (8,849) -------- -------- Net income $ (5,176) $(13,656) ======== ======== Dividends on preferred stock - - -------- -------- Net income available to common shareholders $ (5,176) $(13,656) ======== ========
- 43 - Comparison of the Three Months Ended June 30, 2006 and 2005 Overview Net income for the three months ended June 30, 2006 was $72.4 million compared to $65.5 million for the three months ended June 30, 2005, an increase of $6.9 million, or 10.5%. The increase in net income was the result of a $72.2 million increase in non-interest income and a $5.2 million increase in net interest income, partly offset by a $37.0 million increase in income tax expense, a $29.5 million increase in non-interest expenses and a $4.0 million increase in provision for loan losses. The $72.2 million increase in non-interest income consists of a $147.2 million increase in gain on sales of mortgage loans, a $27.9 million increase in net loan servicing fees and a $1.9 million increase in realized and unrealized gains on mortgage-backed securities and derivatives, partly offset by a $104.4 million decrease in gain on sales of current period securitized mortgage loans and a $0.4 million decrease in other non-interest income in the three months ended June 30, 2006 versus the three months ended June 30, 2005. Net Interest Income The following table presents the average balances for our interest-earning assets, interest-bearing liabilities, corresponding annualized effective rates of interest and the related interest income or expense for the three months ended June 30, 2006 compared to the three months ended June 30, 2005:
(Dollars in thousands) Three Months Ended June 30, --------------------------------------------------------------------------- 2006 2005 ------------------------------------ ------------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ----------- -------- ---------- ----------- -------- ---------- Interest earning assets: Mortgage-backed securities, net (1) $ 9,503,262 $130,498 5.49% $ 6,804,436 $ 77,042 4.53% Mortgage loans held for sale 7,577,871 127,084 6.71% 3,861,999 58,276 6.04% Mortgage loans held for investment 4,172,288 72,614 6.96% - - - ----------- -------- ----------- -------- 21,253,421 330,196 6.21% 10,666,435 135,318 5.07% ----------- -------- ----------- -------- Interest bearing liabilities: Warehouse lines of credit (2) 6,140,929 85,990 5.60% 1,790,318 20,587 4.55% Commercial paper (3) 2,410,639 29,751 4.94% 1,845,695 14,760 3.16% Reverse repurchase agreements (4) 8,950,889 114,497 5.12% 6,296,377 52,237 3.28% Collateralized debt obligations (5) 2,902,206 39,281 5.41% - - - Trust preferred securities 245,165 5,270 8.60% 26,923 482 7.08% Notes payable 358,066 5,203 5.81% 189,313 2,270 4.74% ----------- -------- ----------- -------- 21,007,894 279,992 5.33% 10,148,626 90,336 3.52% ----------- -------- ----------- -------- Net interest income $ 50,204 $ 44,982 ======== ======== Interest rate spread 0.88% 1.55% ========== ========== Net interest margin 0.94% 1.72% ========== ==========
(1) The average yield does not give effect to changes in the fair value that are reflected as a component of stockholders' equity. (2) Includes $103 thousand of net interest expense on interest rate swap agreements for the 2005 period. (3) Includes $258 thousand of net interest income on interest rate swap agreements for the 2006 period. (4) Includes $1.0 million and $4.5 million of net interest expense on interest rate swap agreements for the 2006 and 2005 periods, respectively. (5) Includes $407 thousand of net interest expense on interest rate swap agreements for the 2006 period. - 44 - The following table presents the effects of changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities on our interest income and interest expense for the three months ended June 30, 2006 compared to the three months ended June 30, 2005: Three Months Ended June 30, 2006 Compared to (In thousands) Three Months Ended June 30, 2005 ------------------------------- Average Average Rate Volume Total -------- -------- -------- Mortgage-backed securities, net $ 18,615 $ 34,841 $ 53,456 Mortgage loans held for sale 7,113 61,695 68,808 Mortgage loans held for investment - 72,614 72,614 -------- -------- -------- Interest income 25,728 169,150 194,878 -------- -------- -------- Warehouse lines of credit 5,678 59,725 65,403 Commercial paper 9,702 5,289 14,991 Reverse repurchase agreements 35,519 26,741 62,260 Collateralized debt obligations - 39,281 39,281 Trust preferred securities 420 4,368 4,788 Notes payable 591 2,342 2,933 -------- -------- -------- Interest expense 51,910 137,746 189,656 -------- -------- -------- Net interest income $(26,182) $ 31,404 $ 5,222 ======== ======== ======== Interest Income: Interest income on mortgage-backed securities for the three months ended June 30, 2006 was $130.5 million, compared to $77.0 million for the three months ended June 30, 2005, a $53.5 million, or 69.4%, increase. This increase reflects primarily the growth of our mortgage-backed securities portfolio and higher interest rates in the second quarter of 2006 versus the second quarter of 2005. Interest income on our mortgage loans held for sale for the three months ended June 30, 2006 was $127.1 million, compared to $58.3 million for the three months ended June 30, 2005, an increase of $68.8 million, or 118.1%. The increase in interest income on mortgage loans held for sale was primarily the result of an increase in average volume in 2006 versus 2005 due to higher mortgage origination volume, and higher interest rates in the second quarter of 2006 versus the second quarter of 2005. For the three months ended June 30, 2006, we recognized $72.6 million of interest income on loans held for investment, related to our strategy of holding certain loans in our investment portfolio beginning in June 2005. Interest Expense: As of June 30, 2006, we have entered into reverse repurchase agreements, a form of collateralized short-term borrowing, with seventeen different financial institutions and had borrowed funds from eleven of these counterparties. We borrow funds under these arrangements based on the fair value of our mortgage-backed securities and loans held for investment. Total interest expense on reverse repurchase agreements for the three months ended June 30, 2006 was $114.5 million, compared to interest expense for the three months ended June 30, 2005 of $52.2 million, a $62.3 million increase. The increase in reverse repurchase agreements interest expense in 2006 versus 2005 was primarily the result of an increase in average rate due to generally higher short-term interest rates in the second quarter of 2006 versus the second quarter of 2005, and an increase in borrowings used to fund the growth of our mortgage-backed securities and loans held for investment portfolio. We fund our loan inventory primarily through borrowing facilities with several mortgage warehouse lenders and through a $3.3 billion commercial paper, or secured liquidity note ("SLN"), program. Interest expense on warehouse lines of credit for the three months ended June 30, 2006 was $86.0 million, compared to interest expense for the three months ended June 30, 2005 of $20.6 million, a $65.4 million increase. The increase in warehouse lines of credit interest expense was primarily the result of an increase in average volume due to higher - 45 - mortgage origination volume and an increase in average rate due to generally higher short-term interest rates in the second quarter of 2006 versus the second quarter of 2005. In May 2004, we formed a wholly-owned special purpose entity for the purpose of issuing commercial paper in the form of SLNs to finance certain portions of our mortgage loans. Interest expense on commercial paper for the three months ended June 30, 2006 was $29.8 million, versus $14.8 million for the three months ended June 30, 2005, a $15.0 million increase. The increase in commercial paper interest expense was the result of an increase in average interest rates in the second quarter of 2006 versus the second quarter of 2005 and an increase in average volume. The increase in average volume in the second quarter of 2006 versus the second quarter of 2005 related to higher borrowings used to fund our loan inventory. By funding a portion of our loan inventory through the commercial paper program, we were able to reduce our average funding cost versus borrowing exclusively through warehouse lenders. For the three months ended June 30, 2006, we recognized $39.3 million of interest expense on collateralized debt obligations, related to borrowings used to fund our securitizations which were accounted for as financings. Gain on Mortgage Loans, Mortgage-Backed Securities and Derivatives Gain on Sales and Securitizations of Mortgage Loans: During the three months ended June 30, 2006, gain on sales and securitizations of mortgage loans in our Loan Origination segment totaled $224.6 million, or 1.62%, of mortgage loans sold or securitized compared to $182.6 million, or 1.78%, of mortgage loans sold or securitized during the three months ended June 30, 2005. The increase primarily reflects a $3.5 billion increase in mortgage loans sold or securitized to $13.8 billion in the second quarter of 2006 from $10.3 billion in the second quarter of 2005. The following table presents the components of gain on sales and securitizations of mortgage loans in our Loan Origination segment during the three months ended June 30, 2006 and 2005:
Gains on Sales and Securitizations of Mortgage Loans Three Months Ended June 30, --------------------------- 2006 2005 ----------- ------------ (Dollars in thousands) Gain on sales of mortgage loans $ 224,594 $ 77,377 Gain on sales of current period securitized mortgage loans - 104,377 Loss on sales of free standing derivatives - (3,626) Unrealized gain on self-originated mortgage-backed securities retained in period - 8,493 Unrealized loss on free standing derivatives - (4,030) ----------- ------------ Total gain on sales and securitizations of mortgage loans $ 224,594 $ 182,591 =========== ============ Total mortgage loans sold or securitized $13,828,120 $ 10,273,356 =========== ============ Total gain on sales and securitizations of mortgage loans as a % of total mortgage loans sold or securitized 1.62% 1.78%
Portfolio Gains and Losses: During the three months ended June 30, 2006, portfolio gains and losses in our Mortgage Holdings segment were a portfolio loss of $7.8 million compared to a portfolio loss of $10.5 million during the three months ended June 30, 2005. The decrease in portfolio losses in the second quarter of 2006 compared to the second quarter of 2005 was the result of a $7.0 million net decrease in unrealized loss on mortgage-backed securities and free standing derivatives partly offset by a $4.3 million decrease in gain on sales of mortgage-backed securities. The following table presents the components of portfolio gains and losses in our Mortgage Holdings segment during the three months ended June 30, 2006 and 2005: - 46 -
Portfolio Gains and Losses Three Months Ended June 30, --------------------- 2006 2005 -------- -------- (In thousands) (Loss) gain on sales of mortgage-backed securities $ (47) $ 4,246 Unrealized (loss) gain on mortgage-backed securities (14,571) 13,031 Unrealized gain (loss) on free standing derivatives 6,841 (27,786) -------- -------- Net unrealized loss on mortgage-backed securities and free standing derivatives (7,730) (14,755) -------- -------- Total portfolio loss $ (7,777) $(10,509) ======== ========
The following table presents the components of gains and losses on sales of mortgage-backed securities and derivatives shown in our consolidated statements of income:
Components of (Loss) Gain on Sales of Mortgage-backed Securities and Derivatives Three Months Ended June 30, ------------------- 2006 2005 ------- ------- (In thousands) (Loss) gain on sales of mortgage-backed securities $ (47) $ 4,246 Loss on sales of free standing derivatives - (3,626) ------- ------- (Loss) gain on sales of mortgage-backed securities and derivatives $ (47) $ 620 ======= =======
The following table presents the components of unrealized loss on mortgage-backed securities and derivatives shown in our consolidated statements of income:
Components of Unrealized Loss on Mortgage-backed Securities and Derivatives Three Months Ended June 30, ------------------------------- 2006 2005 ------------------------------- (In thousands) Unrealized gain on self-originated mortgage-backed securities retained in period $ - $ 8,493 Unrealized (loss) gain on mortgage-backed securities (14,571) 13,031 Unrealized gain (loss) on free standing derivatives 6,841 (31,816) -------- -------- Unrealized loss on mortgage-backed securities and derivatives $ (7,730) $(10,292) ======== ========
Net Loan Servicing Fees Net loan servicing fees were $11.6 million for the three months ended June 30, 2006 compared to a loss of $16.3 million for the three months ended June 30, 2005. Loan Servicing Fees: Loan servicing fees increased to $30.4 million for the three months ended June 30, 2006 from $17.0 million for the three months ended June 30, 2005, an increase of $13.4 million, or 79.2%. The increase in loan servicing fees in the second quarter of 2006 versus the second quarter of 2005 was primarily the result of an increase in loans serviced for others. At June 30, 2006, the principal amount of loans serviced for others, including loans held for sale and loans held for investment, was $39.1 billion, compared to $24.7 billion at June 30, 2005. Change in Fair Value of MSRs: Effective at the beginning of the first quarter of 2006, we adopted Statement of Financial Accounting Standards No. 156 "Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140" ("SFAS 156"), and elected the fair value option to subsequently measure our MSRs. Under the fair value option, all changes in the fair value of MSRs are reported in the consolidated statements of income. For the three months ended June 30, 2006, the change in fair value of MSRs was $18.8 million. The - 47 - change in fair value of MSRs in the second quarter of 2006 includes $10.8 million of gain due to changes in valuation inputs or assumptions, and $29.6 million of other changes in fair value, which primarily includes a $26.3 million reduction in fair value due to servicing runoff. Amortization and Impairment of MSRs: Amortization and impairment of MSRs includes amortization of MSRs of $12.8 million and a temporary impairment provision of $20.4 million for the three months ended June 30, 2005. Effective at the beginning of the first quarter of 2006, we adopted the SFAS 156 fair value option and did not recognize amortization and impairment of MSRs during the second quarter of 2006. The following table presents the components of net loan servicing fees (loss) for the three months ended June 30, 2006 and 2005:
Three Months Ended June 30, ------------------------------- 2006 2005 ------------------------------- (In thousands) Loan servicing fees $ 30,417 $ 16,970 Amortization and impairment of mortgage servicing rights - (33,230) Change in fair value of mortgage servicing rights (18,830) - -------- -------- Net loan servicing fees (loss) $ 11,587 $(16,260) ======== ========
Other Non-Interest Income Other non-interest income totaled $2.1 million for the three months ended June 30, 2006 compared to $2.5 million for the three months ended June 30, 2005. For the three months ended June 30, 2006, other non-interest income primarily includes reinsurance premiums earned totaling approximately $1.3 million, rental income of $0.3 million and revenue from title services of $0.2 million. For the three months ended June 30, 2005, other non-interest income primarily includes reinsurance premiums earned totaling approximately $1.5 million, rental income of $0.4 million and revenue from title services of $0.3 million. Non-Interest Expenses Our non-interest expenses for the three months ended June 30, 2006 were $171.2 million compared to $141.7 million for the three months ended June 30, 2005, an increase of $29.5 million, or 20.8%. The increase primarily reflects a $31.1 million rise in our Loan Origination segment non-interest expenses to $160.2 million, or 1.07% of total loan originations in the second quarter of 2006, from $129.1 million, or 1.20% of total loan originations in the second quarter of 2005. Our operating expenses represent costs that are not eligible to be added to the book value of the loans because they are not considered to be certain direct origination costs under the rules of Statement of Financial Accounting Standards ("SFAS") No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Costs of Leases." Direct origination costs are added to the book value of loans and either reduce the gain on sale of loans if the loans are sold or are amortized over the life of the loan. Salaries, Commissions and Benefits, net: Salaries, commissions and benefits, net, for the three months ended June 30, 2006 were $103.2 million, compared to $94.9 million for the three months ended June 30, 2005, an increase of $8.3 million, or 8.7%. The increase in expenses reflects higher origination volume and a resulting higher commission expense and higher salaries due to an increase in employees to 7,221 at June 30, 2006 from 6,075 at June 30, 2005. Other Operating Expenses: Operating expenses, excluding salaries, commissions and benefits, were $68.0 million for the three months ended June 30, 2006, compared to $46.8 million for the three months ended June 30, 2005, an increase of $21.2 million, or 45.2%. The increase in operating expenses in the second quarter of 2006 versus the second quarter of 2005 includes a $10.3 million increase in other non-interest expense and a $5.4 million increase in occupancy and equipment expense. The increase in other non-interest expenses in the second quarter of 2006 versus the second quarter of 2005 was primarily due to a $3.0 million increase in reserves associated with our servicing assets, a $3.0 million increase in lender paid private mortgage insurance and the remainder was primarily associated with our acquisition of Waterfield Financial Corporation in January 2006. The increase in occupancy and equipment expense was due to higher lease obligations and certain fixed asset expenses relating to the increased number of branches in the 2006 period. We recognized $33.2 million of income tax expense for the three months ended June 30, 2006, compared to a $3.9 million income tax benefit for the three months ended June 30, 2005. The increase in income tax expense in the second quarter of 2006 versus the second quarter of 2005 reflects an increase in income before income taxes relating to our taxable REIT subsidiary ("TRS"). - 48 - Loan Originations We originate and sell or securitize one-to-four family residential mortgage loans. Total loan originations for the three months ended June 30, 2006 were $14.9 billion compared to $10.8 billion for the three months ended June 30, 2005, a 38.5% increase. Mortgage brokers, through our wholesale loan production offices, accounted for 56% of our loan originations in the three months ended June 30, 2006 compared to 52% of our originations in the three months ended June 30, 2005. Originations conducted through our retail loan production offices and internet call center were 38% of our loan originations in the three months ended June 30, 2006 compared to 48% of our originations in the three months ended June 30, 2005. During the three months ended June 30, 2006, 6% of our loan originations were purchased from correspondents. - 49 - Comparison of the Six Months Ended June 30, 2006 and 2005 Overview Net income for the six months ended June 30, 2006 was $126.8 million compared to $190.9 million for the six months ended June 30, 2005, a decrease of $64.1 million, or 33.6%. Through the third quarter of 2005, we securitized a substantial portion of our mortgage loans held for sale each quarter and had intended for each of these transactions to qualify as a sale under Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 140"). Our December 2004 securitization ("Q4-04 Securitization") did not qualify as a sale at December 31, 2004 and was accounted for as a financing in accordance with SFAS 140 because we retained a small amount of securities which were benefited by derivative contracts embedded in the securitization trust. These securities were sold during the first quarter of 2005, qualifying the Q4-04 Securitization as a sale at March 31, 2005 in accordance with SFAS 140. Net income for the six months ended June 30, 2005 includes approximately $71.4 million of revenues related to the delay in recognizing the Q4-04 Securitization as a sale into the first quarter of 2005. The decrease in net income was the result of an $82.0 million increase in non-interest expenses, a $53.3 million increase in income tax expense, a $7.0 million decrease in net interest income and a $5.3 million increase in provision for loan losses, partly offset by an $83.5 million increase in non-interest income. The $83.5 million increase in non-interest income consists of a $283.9 million increase in gain on sales of mortgage loans and a $27.3 million increase in net loan servicing fees, partly offset by a $174.3 million decrease in gain on sales of current period securitized mortgage loans, a $53.3 million decrease in realized and unrealized gains on mortgage-backed securities and derivatives and a $0.1 million decrease in other non-interest income in the six months ended June 30, 2006 versus the six months ended June 30, 2005. Net Interest Income The following table presents the average balances for our interest-earning assets, interest-bearing liabilities, corresponding annualized effective rates of interest and the related interest income or expense for the six months ended June 30, 2006 compared to the six months ended June 30, 2005:
(Dollars in thousands) Six Months Ended June 30, --------------------------------------------------------------------------- 2006 2005 ------------------------------------ ------------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ----------- -------- ---------- ----------- -------- ---------- Interest earning assets: Mortgage-backed securities, net (1) $ 9,707,642 $265,591 5.47% $ 6,331,504 $135,347 4.28% Mortgage loans held for sale 7,273,487 229,455 6.31% 5,044,356 146,865 5.82% Mortgage loans held for investment 3,979,999 135,763 6.82% - - - ----------- -------- ----------- -------- 20,961,128 630,809 6.02% 11,375,860 282,212 4.96% ----------- -------- ----------- -------- Interest bearing liabilities: Warehouse lines of credit (2) 6,425,396 171,213 5.33% 1,623,620 37,543 4.60% Commercial paper (3) 2,537,945 60,798 4.79% 1,520,347 20,818 2.72% Reverse repurchase agreements (4) 9,129,085 230,002 5.04% 6,595,756 98,961 2.99% Collateralized debt obligations (5) 2,009,414 52,861 5.26% 988,053 16,766 3.37% Trust preferred securities 227,680 9,515 8.36% 13,536 482 7.08% Notes payable 338,139 9,638 5.70% 169,816 3,857 4.52% ----------- -------- ----------- -------- 20,667,659 534,027 5.17% 10,911,128 178,427 3.25% ----------- -------- ----------- -------- Net interest income $ 96,782 $103,785 ======== ======== Interest rate spread 0.85% 1.71% ========== =========== Net interest margin 0.92% 1.84% ========== ===========
(1) The average yield does not give effect to changes in the fair value that are reflected as a component of stockholders' equity. (2) Includes $2.8 million of net interest expense on interest rate swap agreements for the 2005 period. (3) Includes $258 thousand of net interest income on interest rate swap agreements for the 2006 period. (4) Includes $9.4 million and $10.5 million of net interest expense on interest rate swap agreements for the 2006 and 2005 periods, respectively. (5) Includes $407 thousand of net interest expense on interest rate swap agreements for the 2006 period. - 50 - The following table presents the effects of changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities on our interest income and interest expense for the six months ended June 30, 2006 compared to the six months ended June 30, 2005:
Six Months Ended June 30, 2006 Compared to (In thousands) Six Months Ended June 30, 2005 ---------------------------------- Average Average Rate Volume Total --------- --------- --------- Mortgage-backed securities, net $ 44,637 $ 85,607 $ 130,244 Mortgage loans held for sale 13,217 69,373 82,590 Mortgage loans held for investment - 135,763 135,763 --------- --------- --------- Interest income 57,854 290,743 348,597 --------- --------- --------- Warehouse lines of credit 6,817 126,853 133,670 Commercial paper 21,242 18,738 39,980 Reverse repurchase agreements 83,886 47,155 131,041 Collateralized debt obligations 12,661 23,434 36,095 Trust preferred securities 354 8,679 9,033 Notes payable 1,208 4,573 5,781 --------- --------- --------- Interest expense 126,168 229,432 355,600 --------- --------- --------- Net interest income $ (68,314) $ 61,311 $ (7,003) ========= ========= =========
Interest Income: Interest income on mortgage-backed securities for the six months ended June 30, 2006 was $265.6 million, compared to $135.4 million for the six months ended June 30, 2005, a $130.2 million, or 96.2%, increase. This increase reflects primarily the growth of our mortgage-backed securities portfolio and higher interest rates in 2006 versus 2005. Interest income on our mortgage loans held for sale for the six months ended June 30, 2006 was $229.5 million, compared to $146.9 million for the six months ended June 30, 2005, an increase of $82.6 million, or 56.2%. The increase in interest income on mortgage loans held for sale was primarily the result of an increase in average volume in 2006 versus 2005 due to higher mortgage origination volume, and higher interest rates in 2006 versus 2005. For the six months ended June 30, 2006, we recognized $135.8 million of interest income on loans held for investment, related to our strategy of holding certain loans in our investment portfolio beginning in June 2005. Interest Expense: As of June 30, 2006, we have entered into reverse repurchase agreements, a form of collateralized short-term borrowing, with seventeen different financial institutions and had borrowed funds from eleven of these counterparties. We borrow funds under these arrangements based on the fair value of our mortgage-backed securities and loans held for investment. Total interest expense on reverse repurchase agreements for the six months ended June 30, 2006 was $230.0 million, compared to interest expense for the six months ended June 30, 2005 of $99.0 million, a $131.0 million increase. The increase in reverse repurchase agreements interest expense in 2006 versus 2005 was primarily the result of an increase in average rate due to generally higher short-term interest rates in 2006 versus 2005, and an increase in borrowings used to fund the growth of our mortgage-backed securities and loans held for investment portfolio. We fund our loan inventory primarily through borrowing facilities with several mortgage warehouse lenders and through a $3.3 billion commercial paper, or secured liquidity note ("SLN"), program. Interest expense on warehouse lines of credit for the six months ended June 30, 2006 was $171.2 million, compared to interest expense for the six months ended June 30, 2005 of $37.5 million, a $133.7 million increase. The increase in warehouse lines of credit interest expense was primarily the result of an increase in average volume due to higher mortgage origination volume and an increase in average rate due to generally higher short-term interest rates in 2006 versus 2005. - 51 - In May 2004, we formed a wholly-owned special purpose entity for the purpose of issuing commercial paper in the form of SLNs to finance certain portions of our mortgage loans. Interest expense on commercial paper for the six months ended June 30, 2006 was $60.8 million, versus $20.8 million for the six months ended June 30, 2005, a $40.0 million increase. The increase in commercial paper interest expense was the result of an increase in average interest rates in 2006 versus 2005 and an increase in average volume. The increase in average volume in 2006 versus 2005 related to higher borrowings used to fund our loan inventory. By funding a portion of our loan inventory through the commercial paper program, we were able to reduce our average funding cost versus borrowing exclusively through warehouse lenders. Interest expense on collateralized debt obligations for the six months ended June 30, 2006 was $52.9 million, compared to interest expense for the six months ended June 30, 2005 of $16.8 million, a $36.1 million increase. The increase in collateralized debt obligation interest expense was the result of an increase in average volume and an increase in average interest rates in 2006 versus 2005. The increase in average volume in 2006 versus 2005 related to higher borrowings used to fund our securitizations which were accounted for as financings. Gain on Mortgage Loans, Mortgage-Backed Securities and Derivatives Gain on Sales and Securitizations of Mortgage Loans: During the six months ended June 30, 2006, gain on sales and securitizations of mortgage loans in our Loan Origination segment totaled $396.8 million, or 1.45%, of mortgage loans sold or securitized compared to $337.9 million, or 1.63%, of mortgage loans sold or securitized during the six months ended June 30, 2005. The increase primarily reflects a $6.7 billion increase in mortgage loans sold or securitized to $27.4 billion in the first six months of 2006 from $20.7 billion in the first six months of 2005. The 2005 period includes $43.4 million recognized in connection with the Q4-04 Securitization. The following table presents the components of gain on sales and securitizations of mortgage loans in our Loan Origination segment during the six months ended June 30, 2006 and 2005:
Gains on Sales and Securitizations of Mortgage Loans Six Months Ended June 30, ---------------------------- 2006 2005 ---------------------------- (Dollars in thousands) Gain on sales of mortgage loans $ 396,501 $ 112,630 Gain on sales of current period securitized mortgage loans - 174,296 Gain on sales of free standing derivatives - 5,843 Unrealized gain on self-originated mortgage-backed securities retained in period - 50,202 Unrealized gain (loss) on free standing derivatives 275 (5,080) ------------ ------------ Total gain on sales and securitizations of mortgage loans $ 396,776 $ 337,891 ============ ============ Total mortgage loans sold or securitized $ 27,361,709 $ 20,703,986 ============ ============ Total gain on sales and securitizations of mortgage loans as a % of total mortgage loans sold or securitized 1.45% 1.63%
Portfolio Gains and Losses: During the six months ended June 30, 2006, portfolio gains and losses in our Mortgage Holdings segment were a portfolio gain of $0.4 million compared to a portfolio gain of $3.0 million during the six months ended June 30, 2005. The decrease in portfolio gains in the first six months of 2006 compared to the first six months of 2005 was the result of a $1.8 million decrease in gain on sales of mortgage-backed securities, and a $0.8 million net decrease in unrealized gain on mortgage-backed securities and free standing derivatives. - 52 - The following table presents the components of portfolio gains and losses in our Mortgage Holdings segment during the six months ended June 30, 2006 and 2005:
Portfolio Gains and Losses Six Months Ended June 30, --------------------- 2006 2005 --------------------- (In thousands) (Loss) gain on sales of mortgage-backed securities $ (897) $ 909 Unrealized loss on mortgage-backed securities (13,597) (5,429) Unrealized gain on free standing derivatives 14,907 7,514 -------- -------- Net unrealized gain on mortgage-backed securities and free standing derivatives 1,310 2,085 -------- -------- Total portfolio gain $ 413 $ 2,994 ======== ========
The following table presents the components of gains and losses on sales of mortgage-backed securities and derivatives shown in our consolidated statements of income:
Components of (Loss) Gain on Sales of Mortgage-backed Securities and Derivatives Six Months Ended June 30, --------------------- 2006 2005 --------------------- (In thousands) (Loss) gain on sales of mortgage-backed securities $ (897) $ 909 Gain on sales of free standing derivatives - 5,843 -------- -------- (Loss) gain on sales of mortgage-backed securities and derivatives $ (897) $ 6,752 ======== ========
The following table presents the components of unrealized gain on mortgage-backed securities and derivatives shown in our consolidated statements of income:
Components of Unrealized Gain on Mortgage-backed Securities and Derivatives Six Months Ended June 30, ------------------------------- 2006 2005 ------------------------------- (In thousands) Unrealized gain on self-originated mortgage-backed securities retained in period $ - $ 50,202 Unrealized loss on mortgage-backed securities (13,597) (5,429) Unrealized gain on free standing derivatives 15,182 2,434 -------- -------- Unrealized gain on mortgage-backed securities and derivatives $ 1,585 $ 47,207 ======== ========
Net Loan Servicing Fees Net loan servicing fees were $17.3 million for the six months ended June 30, 2006 compared to a loss of $10.0 million for the six months ended June 30, 2005. Loan Servicing Fees: Loan servicing fees increased to $54.8 million for the six months ended June 30, 2006 from $28.3 million for the six months ended June 30, 2005, an increase of $26.5 million, or 93.6%. The increase in loan servicing fees in the first six months of 2006 versus the first six months of 2005 was primarily the result of an increase in loans serviced for others. At June 30, 2006, the principal amount of loans serviced for others, including loans held for sale and loans held for investment, was $39.1 billion, compared to $24.7 billion at June 30, 2005. - 53 - Change in Fair Value of MSRs: Effective at the beginning of the first quarter of 2006, we adopted Statement of Financial Accounting Standards No. 156 "Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140" ("SFAS 156"), and elected the fair value option to subsequently measure our MSRs. Under the fair value option, all changes in the fair value of MSRs are reported in the consolidated statements of income. For the six months ended June 30, 2006, the change in fair value of MSRs was $37.5 million. The change in fair value of MSRs in the first six months of 2006 includes $22.1 million of gain due to changes in valuation inputs or assumptions, and $59.6 million of other changes in fair value, which primarily includes a $45.1 million reduction in fair value due to servicing runoff. Amortization and Impairment of MSRs: Amortization and impairment of MSRs includes amortization of MSRs of $21.3 million and a temporary impairment provision of $17.0 million for the six months ended June 30, 2005. Effective at the beginning of the first quarter of 2006, we adopted the SFAS 156 fair value option and did not recognize amortization and impairment of MSRs during the first six months of 2006. The following table presents the components of net loan servicing fees (loss) for the six months ended June 30, 2006 and 2005:
Six Months Ended June 30, --------------------- 2006 2005 --------------------- (In thousands) Loan servicing fees $ 54,750 $ 28,282 Amortization and impairment of mortgage servicing rights - (38,312) Change in fair value of mortgage servicing rights (37,451) - -------- -------- Net loan servicing fees (loss) $ 17,299 $(10,030) ======== ========
Other Non-Interest Income Other non-interest income totaled $3.9 million for the six months ended June 30, 2006 compared to $4.0 million for the six months ended June 30, 2005. For the six months ended June 30, 2006, other non-interest income primarily includes reinsurance premiums earned totaling approximately $2.0 million, rental income of $0.6 million, other fee income of $0.4 million and revenue from title services of $0.3 million. For the six months ended June 30, 2005, other non-interest income primarily includes reinsurance premiums earned totaling approximately $2.4 million, rental income of $0.8 million and revenue from title services of $0.5 million. Non-Interest Expenses Our non-interest expenses for the six months ended June 30, 2006 were $333.6 million compared to $251.6 million for the six months ended June 30, 2005, an increase of $82.0 million, or 32.6%. The increase primarily reflects a $70.9 million rise in our Loan Origination segment non-interest expenses to $300.7 million, or 1.07% of total loan originations in the first six months of 2006, from $229.8 million, or 1.27% of total loan originations in the first six months of 2005. Our operating expenses represent costs that are not eligible to be added to the book value of the loans because they are not considered to be certain direct origination costs under the rules of Statement of Financial Accounting Standards ("SFAS") No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Costs of Leases." Direct origination costs are added to the book value of loans and either reduce the gain on sale of loans if the loans are sold or are amortized over the life of the loan. Salaries, Commissions and Benefits, net: Salaries, commissions and benefits, net, for the six months ended June 30, 2006 were $202.4 million, compared to $163.3 million for the six months ended June 30, 2005, an increase of $39.1 million, or 23.9%. The increase in expenses reflects higher origination volume and a resulting higher commission expense and higher salaries due to an increase in employees to 7,221 at June 30, 2006 from 6,075 at June 30, 2005. Other Operating Expenses: Operating expenses, excluding salaries, commissions and benefits, were $131.2 million for the six months ended June 30, 2006, compared to $88.3 million for the six months ended June 30, 2005, an increase of $42.9 million, or 48.6%. The increase in operating expenses in the first six months of 2006 versus the first six months of 2005 includes a $19.4 million increase in other non-interest expense and a $10.7 million increase in occupancy and equipment expense. The increase in other non-interest expenses in the first six months of 2006 versus the first six months of 2005 was primarily due to an $8.0 million increase in reserves associated with our servicing assets, a $4.1 million increase in lender paid private mortgage insurance and the remainder was primarily associated with our acquisition of Waterfield Financial Corporation in January 2006. The increase in occupancy and equipment expense was due to higher lease obligations and certain fixed asset expenses relating to the increased number of branches in the 2006 period. - 54 - We recognized $49.4 million of income tax expense for the six months ended June 30, 2006, compared to a $3.9 million income tax benefit for the six months ended June 30, 2005. The increase in income tax expense in the first six months of 2006 versus the first six months of 2005 reflects an increase in income before income taxes relating to our taxable REIT subsidiary ("TRS"). Loan Originations We originate and sell or securitize one-to-four family residential mortgage loans. Total loan originations for the six months ended June 30, 2006 were $28.1 billion compared to $18.0 billion for the six months ended June 30, 2005, an 55.8% increase. Mortgage brokers, through our wholesale loan production offices, accounted for 55% of our loan originations in the six months ended June 30, 2006 compared to 51% of our originations in the six months ended June 30, 2005. Originations conducted through our retail loan production offices and internet call center were 39% of our loan originations in the six months ended June 30, 2006 compared to 49% of our originations in the six months ended June 30, 2005. During the six months ended June 30, 2006, 6% of our loan originations were purchased from correspondents. Liquidity and Capital Resources As of June 30, 2006, we had arrangements to enter into reverse repurchase agreements, a form of collateralized short-term borrowing, with seventeen different financial institutions and had borrowed funds from eleven of these counterparties. Because we borrow money under these agreements based on the fair value of our mortgage-backed securities, and because changes in interest rates can negatively impact the valuation of mortgage-backed securities, our borrowing ability under these agreements could be limited and lenders could initiate margin calls in the event interest rates change or the value of our mortgage-backed securities declines for other reasons. As of June 30, 2006, we had $8.9 billion of reverse repurchase agreements outstanding with a weighted-average borrowing rate of 5.29% before the impact of interest rate swaps and a weighted-average remaining maturity of six months. To originate a mortgage loan, we draw against either a $3.3 billion SLN commercial paper program, a $2.0 billion pre-purchase facility with UBS Real Estate Securities Inc. ("UBS"), a facility of $2.0 billion with Bear Stearns, a $1.0 billion bank syndicated facility led by Bank of America, N.A. (which includes a $350 million term loan facility which we use to finance our MSRs), a facility of $750 million with Morgan Stanley Bank ("Morgan Stanley"), a facility of $125 million with J.P. Morgan Chase, a $450 million facility with IXIS Real Estate Capital, Inc. (formerly CDC Mortgage Capital Inc.) ("IXIS"), an early purchase program facility with Countrywide Home Loans, Inc. ("Countrywide") and a $1.4 billion syndicated facility led by Calyon New York Branch ("Calyon"). The Bank of America, IXIS, Morgan Stanley and Calyon facilities are committed facilities. In addition, we have gestation facilities with Greenwich Capital Financial Products, Inc. ("Greenwich") and Deutsche Bank ("Deutsche"). These facilities are secured by the mortgages owned by us and by certain of our other assets. Advances drawn under these facilities bear interest at rates that vary depending on the type of mortgages securing the advances. These loans are subject to sublimits, advance rates and terms that vary depending on the type of securing mortgages and the ratio of our liabilities to our tangible net worth. At August 4, 2006, the aggregate outstanding balance under the commercial paper program was $2.6 billion, the aggregate outstanding balance under the warehouse facilities was $3.6 billion, the aggregate outstanding balance in drafts payable was $18.3 million and the aggregate maximum amount available for additional borrowings was $4.6 billion. The documents governing our warehouse facilities contain a number of compensating balance requirements and restrictive financial and other covenants that, among other things, require us to adhere to a maximum ratio of total liabilities to tangible net worth and maintain a minimum level of tangible net worth and liquidity, as well as to comply with applicable regulatory and investor requirements. The facility agreements also contain covenants limiting the ability of our subsidiaries to transfer or sell assets other than in the ordinary course of business and to create liens on the collateral without obtaining the prior consent of the lenders, which consent may not be unreasonably withheld. In addition, under our warehouse facilities, we cannot continue to finance a mortgage loan that we hold if: o the loan is rejected as "unsatisfactory for purchase" by the ultimate investor and has exceeded its permissible 120-day warehouse period; o we fail to deliver the applicable mortgage note or other documents evidencing the loan within the requisite time period; o the underlying property that secures the loan has sustained a casualty loss in excess of 5% of its appraised value; or o the loan ceases to be an eligible loan (as determined pursuant to the applicable facility agreement). As of June 30, 2006, our aggregate warehouse facility borrowings were $1.5 billion (including $29.7 million of borrowings under a working capital sub-limit) and our outstanding drafts payable were $12.3 million, compared to $3.5 billion in aggregate warehouse facility borrowings - 55 - (including $21.6 million of borrowings under a working capital sub-limit) and outstanding drafts payable of $20.8 million as of December 31, 2005. As of June 30, 2006, our loans held for investment were $5.3 billion and our loans held for sale were $1.2 billion compared to loans held for investment of $3.5 billion and loans held for sale of $2.2 billion as of December 31, 2005. In addition to the warehouse facilities, we have purchase and sale agreements with UBS, Greenwich, Deutsche and Countrywide. These agreements allow us to accelerate the sale of our mortgage loan inventory, resulting in a more effective use of the warehouse facility. Aggregate amounts sold and being held under these agreements as of June 30, 2006 and December 31, 2005 were $4.5 billion and $3.2 billion, respectively. Aggregate amounts so held under these agreements at August 4, 2006 were $1.6 billion. These agreements are not committed facilities and may be terminated at the discretion of the counterparties. We make certain representations and warranties under the purchase and sale agreements regarding, among other things, the loans' compliance with laws and regulations, their conformity with the ultimate investors' underwriting standards and the accuracy of information. In the event of a breach of these representations or warranties or in the event of an early payment default, we may be required to repurchase the loans and/or indemnify the investor for damages caused by that breach. We have implemented strict procedures to ensure quality control and conformity to underwriting standards and minimize the risk of being required to repurchase loans. From time to time we have been required to repurchase loans that we sold; however, the liability for the fair value of those obligations has been immaterial. We also have a $350.0 million term loan facility with a bank syndicate led by Bank of America which we use to finance our MSRs. The term loan facility expires on August 11, 2006, but we have an option to extend the term for twelve additional months at a higher interest rate. We expect to renew the term loan facility at similar or better terms prior to the expiration date. Interest is based on a spread to the LIBOR and may be adjusted for earnings on escrow balances. At June 30, 2006 and December 31, 2005, borrowings under our term loan facility were $221.3 million and $206.2 million, respectively. Cash and cash equivalents decreased to $304.3 million as of June 30, 2006 from $575.7 million as of December 31, 2005. Our primary sources of cash and cash equivalents during the six months ended June 30, 2006 were as follows: o $27.4 billion of proceeds from principal received from sales of mortgage loans held for sale; o $2.7 billion increase in collateralized debt obligations; o $1.9 billion of principal proceeds from sales of mortgage-backed securities; and o $1.1 billion of principal repayments of mortgage-backed securities. Our primary uses of cash and cash equivalents during the six months ended June 30, 2006 were as follows: o $28.1 billion of origination of mortgage loans; o $2.0 billion decrease in warehouse lines of credit, net; o $1.9 billion of purchases of mortgage-backed securities; and o $866.4 million decrease in reverse repurchase agreements, net. - 56 - Commitments The Company had the following commitments (excluding derivative financial instruments) at June 30, 2006:
Less than 1 Total Year 1 - 3 Years 3 - 5 Years After 5 Years ---------------------------------------------------------------------------------- (In thousands) Warehouse liabilities $1,476,958 $1,476,958 $ - $ - $ - Commercial paper 888,476 888,476 - - - Reverse repurchase agreements 8,939,786 6,635,017 2,304,769 - - Collateralized debt obligations 3,724,878 429,966 2,244,820 839,022 211,070 Trust preferred securities 252,780 - - - 252,780 Notes payable 337,700 225,802 44,800 43,471 23,627 Operating leases 135,562 37,929 55,357 30,605 11,671
- 57 - ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Movements in interest rates can pose a major risk to the Company in either a rising or declining interest rate environment. The Company depends on substantial borrowings to conduct its business. These borrowings are all done at variable interest rate terms, which will increase as short-term interest rates rise. Additionally, when interest rates rise, loans held for sale, loans held for investment and any applications in process with locked-in rates decrease in value. To preserve the value of such fixed-rate loans or applications in process with locked-in rates, agreements are executed for mandatory loan sales to be settled at future dates with fixed prices. These sales take the form of forward sales of mortgage-backed securities. When interest rates decline, fallout may occur as a result of customers withdrawing their applications. In those instances, the Company may be required to purchase loans at current market prices to fulfill existing mandatory loan sale agreements, thereby incurring losses upon sale. Additionally, when interest rates decline, the interest income we receive from our mortgage loans held for investment as well as mortgage loans held for sale will decrease. The Company uses an interest rate hedging program to manage these risks. Through this program, mortgage-backed securities are purchased and sold forward and options are acquired on treasury futures contracts. In the event that the Company does not deliver into the forward delivery commitments or exercise its option contracts, the instruments can be settled on a net basis. Net settlement entails paying or receiving cash based upon the change in market value of the existing instrument. All forward delivery commitments and option contracts to buy securities are to be contractually settled within nine months of the balance sheet date. The Company's hedging program contains an element of risk because the counterparties to its mortgage and treasury securities transactions may be unable to meet their obligations. While the Company does not anticipate nonperformance by any counterparty, it is exposed to potential credit losses in the event the counterparty fails to perform. The Company's exposure to credit risk in the event of default by a counterparty is the difference between the contract and the current market price. The Company minimizes its credit risk exposure by limiting the counterparties to well-capitalized banks and securities dealers who meet established credit and capital guidelines. Movements in interest rates also impact the value of MSRs. When interest rates decline, the loans underlying the MSRs are generally expected to prepay faster, which reduces the market value of the MSRs. The Company considers the expected increase in loan origination volumes and the resulting additional origination related income as a natural hedge against the expected change in the value of MSRs. Lower mortgage rates generally reduce the fair value of the MSRs, as increased prepayment speeds are highly correlated with lower levels of mortgage interest rates. The Company enters into interest rate swap agreements ("Swap Agreements") to manage its interest rate exposure when financing its ARM loans and its mortgage-backed securities. The Company generally borrows money based on short-term interest rates by entering into borrowings with maturity terms of less than one year, and frequently nine to twelve months. The Company's ARM loans and mortgage-backed securities financing vehicles generally have an interest rate that reprices based on frequency terms of one to twelve months. The Company's mortgage-backed securities have an initial fixed interest rate period of three to five years. When the Company enters into a swap agreement, it generally agrees to pay a fixed rate of interest and to receive a variable interest rate, generally based on LIBOR. These swap agreements have the effect of converting the Company's variable-rate debt into fixed-rate debt over the life of the swap agreements. These instruments are used as a cost-effective way to lengthen the average repricing period of the Company's variable-rate and short-term borrowings such that the average repricing of the borrowings more closely matches the average repricing of the Company's mortgage-backed securities. The Company's duration gap was approximately one month on June 30, 2006. - 58 - The following tables summarize the Company's interest rate sensitive instruments as of June 30, 2006 and December 31, 2005: June 30, 2006 -------------------------- Carrying Estimated Amount Fair Value ------------ ------------ Assets: Mortgage-backed securities $ 9,299,224 $ 9,299,224 Derivative assets (1) 139,397 192,948 Mortgage loans held for sale, net 1,243,702 1,252,099 Mortgage loans held for investment, net 5,337,138 5,414,804 Mortgage servicing rights 434,173 434,173 Liabilities: Reverse repurchase agreements $ 8,939,786 $ 8,938,826 Collateralized debt obligations 3,724,878 3,725,364 Derivative liabilities 3,280 3,280 December 31, 2005 -------------------------- Carrying Estimated Amount Fair Value ------------ ------------ Assets: Mortgage-backed securities $10,602,104 $10,602,104 Derivative assets (1) 44,594 96,176 Mortgage loans held for sale, net 2,208,749 2,224,234 Mortgage loans held for investment, net 3,479,721 3,529,844 Mortgage servicing rights 319,671 320,827 Liabilities: Reverse repurchase agreements $ 9,806,144 $ 9,805,640 Collateralized debt obligations 1,057,906 1,057,906 Derivative liabilities 16,773 16,773 (1) Derivative assets includes interest rate lock commitments ("IRLCs") to fund mortgage loans. The carrying value excludes the value of the mortgage servicing rights ("MSRs") attached to the IRLCs in accordance with SEC SAB No. 105. The fair value includes the value of MSRs. - 59 - Changes in fair value that are stated in the table below are derived based upon assuming immediate and equal changes to market interest rates of various maturities. The base or current interest rate curve is adjusted by the levels shown below:
June 30, 2006 -------------------------------------------- -100 -50 +50 +100 Basis Basis Basis Basis (In thousands) Points Points Points Points -------- -------- -------- -------- Changes in fair value of mortgage-backed securities, net of the related financing and hedges $(22,864) $ (2,514) $(12,216) $(35,057) Changes in fair value of mortgage loans held for sale and interest rate lock commitments, net of the related financing and hedges (24,108) (9,610) (3,226) (11,377) Changes in fair value of mortgage loans held for investment, net of the related financing and hedges 4,177 2,357 (4,227) (10,656) Changes in fair value of mortgage servicing rights, net of the related financing (36,581) (14,411) 6,217 9,477 -------- -------- -------- -------- Net change $(79,376) $(24,178) $(13,452) $(47,613) ======== ======== ======== ========
ITEM 4. CONTROLS AND PROCEDURES Controls and Procedures The Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the fiscal quarter covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of the end of the fiscal quarter covered by this quarterly report. The Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the Company's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to determine whether any changes occurred during the second quarter of 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during the second quarter of 2006. - 60 - PART II-OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the ordinary course of its business, the Company is from time to time subject to various legal proceedings. The Company does not believe that any of its current legal proceedings, individually or in the aggregate, will have a material adverse effect on its operations or financial condition. Columbia National, Incorporated As previously reported in our periodic reports filed with the SEC, in June 2002, the Company acquired Columbia National, Incorporated, a Maryland corporation ("Columbia"), which is currently a subsidiary of the Company, and which changed its name in July 2004 to "American Home Mortgage Servicing, Inc." Prior to the Company's acquisition of Columbia, Columbia discovered fraudulent loan activity at its Bensalem, Pennsylvania, office and notified the U.S. Department of Housing and Urban Development ("HUD"). HUD then instituted an investigation into the loan originations of the Bensalem office. Shortly thereafter, several years before Columbia was acquired by the Company, Columbia closed the Bensalem office and terminated the employees involved in the alleged fraudulent activity. In 2000, Columbia settled with HUD, paying a fine to HUD in the amount of $24,000 and agreeing to indemnify HUD for certain losses. Columbia, as loan servicer for institutional investors, subsequently made FHA insurance claims with respect to approximately 60 loans that were originated by the Bensalem office between 1997 and 1999. The federal government had sought to recover insurance proceeds paid in connection with certain of those claims, along with applicable fines and penalties. In May 2006, the Company paid $845,000 to settle this claim. In the settlement agreement, the Company specifically denied that it had knowledge of any wrongdoing that was alleged to have occurred at Columbia's Bensalem, Pennsylvania office prior to the Company's acquisition of Columbia. ITEM 1A. RISK FACTORS There have been no material changes during the quarter ended June 30, 2006 to the risk factors previously disclosed in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During the quarter ended June 30, 2006, the Company did not issue any securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act"). ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. - 61 - ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's 2006 Annual Meeting of Stockholders held on June 20, 2006, the following actions were voted upon by the Company's common stockholders of record as of May 16, 2006 (on which date there were 50,059,235 shares of the Company's common stock issued and outstanding), which are described in greater detail in the Company's Definitive Proxy Statement on Schedule 14A filed with the SEC on May 1, 2006: Proposal Votes For Votes Against Votes Abstained -------- --------- ------------- --------- To elect each of C. Cathleen Raffaeli and Kristian R. Salovaara to the Board of Directors of the Company, each, to serve as a Class I director for a term of approximately three years expiring at the 2009 Annual Meeting of Stockholders, and in each case until their respective successors are duly elected and qualify. C. Cathleen Raffaeli 46,922,128 -- 161,733 Kristian R. Salovaara 46,915,799 -- 168,062 To ratify Deloitte & Touche LLP as the Company's independent auditors for the year ending December 31, 2006. 46,803,371 248,196 32,292 Each of the above proposals was approved by the Company's stockholders. ITEM 5. OTHER INFORMATION None. - 62 - ITEM 6. EXHIBITS The following exhibits are filed with this Quarterly Report on Form 10-Q: Exhibit No. Description ----------- ----------- 10.1 -- Whole Loan Purchase and Sale Agreement, dated as of June 26, 2006, by and among American Home Mortgage Corp., American Home Mortgage Investment Corp., American Home Mortgage Servicing, Inc., Aspen Funding Corp., Gemini Securitization Corp., LLC and Newport Funding Corp. 10.1.2 -- Whole Loan Custodial Agreement, dated as of June 26, 2006, by and among American Home Mortgage Corp., American Home Mortgage Investment Corp., American Home Mortgage Servicing, Inc., Aspen Funding Corp., Gemini Securitization Corp., LLC, Newport Funding Corp. and Deutsche Bank National Trust Company. 31.1 -- Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15(d)-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 -- Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15(d)-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 -- Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 -- Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - 63 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN HOME MORTGAGE INVESTMENT CORP. (Registrant) Date: August 9, 2006 By: /s/ Michael Strauss ------------------------------------ Michael Strauss Chairman, Chief Executive Officer and President Date: August 9, 2006 By: /s/ Stephen A. Hozie ----------------------------------- Stephen A. Hozie Executive Vice President and Chief Financial Officer (Principal Financial Officer) - 64 - INDEX TO EXHIBITS Exhibit No. Description ----------- ----------- 10.1 -- Whole Loan Purchase and Sale Agreement, dated as of June 26, 2006, by and among American Home Mortgage Corp., American Home Mortgage Investment Corp., American Home Mortgage Servicing, Inc., Aspen Funding Corp., Gemini Securitization Corp., LLC and Newport Funding Corp. 10.1.2 -- Whole Loan Custodial Agreement, dated as of June 26, 2006, by and among American Home Mortgage Corp., American Home Mortgage Investment Corp., American Home Mortgage Servicing, Inc., Aspen Funding Corp., Gemini Securitization Corp., LLC, Newport Funding Corp. and Deutsche Bank National Trust Company. 31.1 -- Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15(d)-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 -- Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15(d)-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 -- Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 -- Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - 65 - EX-10.1 2 am063006-ex10_1.txt WHOLE LOAN PURCHASE AND SALE AGREEMENT Exhibit 10.1 WHOLE LOAN PURCHASE AND SALE AGREEMENT among AMERICAN HOME MORTGAGE CORP. Seller AMERICAN HOME MORTGAGE INVESTMENT CORP. Seller and AMERICAN HOME MORTGAGE SERVICING, INC. Servicer and ASPEN FUNDING CORP. Purchaser GEMINI SECURITIZATION CORP., LLC Purchaser NEWPORT FUNDING CORP. Purchaser DATED: June 26, 2006 TABLE OF CONTENTS Page Section 1. Definitions................................................1 Section 2. Procedures for Purchases of Mortgage Loans.................9 Section 3. Sale of Mortgage Loans to Takeout Investor................11 Section 4. Holdback..................................................14 Section 5. Servicing of the Mortgage Loans...........................14 Section 6. Trade Assignments.........................................16 Section 7. Transfers of Beneficial Interest in Mortgage Loans by Purchasers................................................16 Section 8. Record Title to Mortgage Loans; Intent of Parties; Security Interest.........................................16 Section 9. Representations and Warranties............................17 Section 10. Covenants of Sellers......................................27 Section 11. Term......................................................31 Section 12. Exclusive Benefit of Parties; Assignment..................31 Section 13. Amendments; Waivers; Cumulative Rights....................31 Section 14. Execution in Counterparts.................................31 Section 15. Effect of Invalidity of Provisions........................31 Section 16. Governing Law.............................................32 Section 17. Notices...................................................32 Section 18. Entire Agreement..........................................32 Section 19. Costs of Enforcement......................................32 Section 20. Consent to Service........................................32 Section 21. Submission to Jurisdiction................................32 Section 22. Jurisdiction Not Exclusive................................32 -i- Section 23. WAIVER OF JURY TRIAL......................................33 Section 24. Construction..............................................33 Section 25. Further Assurances........................................33 Section 26. Joint and Several Liability...............................33 Section 27. Expenses..................................................33 -ii- EXHIBITS Exhibit A-1.Trust Receipt Exhibit B-1.Wet Loan Trust Receipt Exhibit B-1.Warehouse Lender's Release Exhibit B-2.Warehouse Lender's Wire Instructions Exhibit C-1.Seller's Release Exhibit C-2.Seller's Wire Instructions Exhibit D-1.Trade Assignment Exhibit D-2.Trade Assignment (Blanket) Exhibit E...Purchaser's Wire Instructions Exhibit F...Form of Confirmation Exhibit G...Notice of Rejection of Trade Assignment Exhibit H...Settlement Modification Letter Exhibit I...Seller's Officer's Certificate Exhibit J...Seller's Officer's Certificate Exhibit K...List of Conduits Exhibit L...Mortgage Loan Schedule Exhibit M...Form of Transaction Notice Exhibit N...Mortgage Loan Pool -iii- WHOLE LOAN PURCHASE AND SALE AGREEMENT This Whole Loan Purchase and Sale Agreement ("Agreement"), dated as of the date set forth on the cover page hereof, is by and among Aspen Funding Corp., Gemini Securitization Corp., LLC and Newport Funding Corp., each having an address at 60 Wall Street, New York, New York 10005 (each individually, a "Purchaser" and together, the "Purchasers"), American Home Mortgage Corp., having an address at 538 Broadhollow Road, Melville, New York 11747 ("AHMC") and American Home Mortgage Investment Corp., having an address at 538 Broadhollow Road, Melville, New York 11747 ("AHMI" and together with AHMC, each individually, a "Seller" and together, the "Sellers"), and American Home Mortgage Servicing, Inc., having an address at 4600 Regent Blvd., Suite 200, Irving, Texas 75063 (the "Servicer"). PRELIMINARY STATEMENT Sellers may offer to sell to Purchasers from time to time a 100% undivided ownership interest in certain Mortgage Loans, and Purchasers, in their sole discretion, may agree to purchase such Mortgage Loans from Sellers on a servicing-released basis in accordance with the terms and conditions set forth in this Agreement. The related Seller, subject to the terms hereof, will cause each Mortgage Loan purchased by a Purchaser hereunder to be purchased by Takeout Investor. During the period from the purchase of a Mortgage Loan by a Purchaser to the sale of the Mortgage Loan to Takeout Investor, the Servicer shall interim service such Mortgage Loan for the benefit of Purchasers pursuant to the terms of this Agreement. The parties hereto hereby agree as follows: Section 1. Definitions. Capitalized terms used but not defined herein shall have the meanings set forth in the Custodial Agreement. As used in this Agreement, the following terms shall have the following meanings: "Act of Insolvency": With respect to either Seller, (i) the filing of a petition, commencing, or authorizing the commencement of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law relating to the protection of creditors, or suffering any such petition or proceeding to be commenced by another against a Seller, American Home Mortgage Acceptance, Inc. ("AHMA"), American Home Mortgage Holdings, Inc. ("AHMH") and American Home Mortgage Servicing, Inc. ("AHMS" and collectively with AHMA and AHMH, the "American Home Affiliates"); (ii) seeking the appointment of a receiver, trustee, custodian or similar official for either Seller or the American Home Affiliates or any substantial part of the property of either, (iii) the appointment of a receiver, conservator, or manager for either Seller or the American Home Affiliates by any governmental agency or authority having the jurisdiction to do so; (iv) the making or offering by either Seller or the American Home Affiliates of a concession with its creditors or a general assignment for the benefit of creditors, (v) the admission by either Seller or the American Home Affiliates of Seller's or any of the American Home Affiliates' inability to pay its debts or discharge its obligations as they become due or mature; or (vi) any governmental authority or agency or any person, agency or entity acting or purporting to act under governmental authority shall have taken any action to condemn, seize or appropriate, or to assume custody or control of, all or any substantial part of the property of either Seller or the American Home Affiliates, provided, however, that with respect to any involuntary filing, the Seller or the American Home Affiliates, as applicable, shall have sixty (60) days to dismiss such filing. "Affiliate": With respect to any specified Person, any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control" means the power to direct the management and policies of such Person, directly or indirectly, through the ownership of voting equity. "Appraised Value": With respect to any Mortgaged Property, the value thereof set forth in an appraisal made for the originator of the Mortgage Loan at the time of origination of the Mortgage Loan by an appraiser who met the minimum requirements of FNMA and FHLMC. Each appraisal has been made in accordance with and satisfies the provisions of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. "Assignee": As defined in Section 7. "Business Day": Any day other than (a) a Saturday, Sunday or other day on which banks located in The City of New York, New York are authorized or obligated by law or executive order to be closed or (b) any day on which a Seller, Servicer, Purchaser or Custodian is authorized or obligated by law or executive order to be closed. "Collateral": As defined in Section 8(c). "Commitment Amount": The aggregate outstanding principal amount of Mortgage Loans to be purchased pursuant to a Takeout Commitment. If the Commitment Amount is expressed as a fixed amount plus or minus a percentage in the related Takeout Confirmation, then the amount required to be delivered by the related Seller shall be the minimum amount of such range. "Commitment Date": The date set forth in a Takeout Confirmation as the commitment date. "Commitment Guidelines": The guidelines, if any, issued by Takeout Investor regarding the issuance of Takeout Commitments, as amended from time to time by Takeout Investor. "Commitment Number": With respect to a Takeout Commitment, the number identified on the Takeout Confirmation as the commitment number, if applicable. -2- "Conduit": The list of investors attached hereto as Exhibit K, which may be modified from time to time by Sellers with the consent of Purchasers in their reasonable discretion. "Conduit Transactions": A transaction initiated by the related Seller's delivery of a Request for Certification which identifies a Conduit as the Takeout Investor. "Confirmation": A written confirmation of a Purchaser's intent to purchase a Mortgage Loan Pool, which written confirmation shall be substantially in the form attached hereto as Exhibit F. "Credit File": All Mortgage Loan papers and documents required to be maintained pursuant to the Sale Agreement, and all other papers and records of whatever kind or description in Seller's possession whether developed or originated by the related Seller or others, required to document or service the Mortgage Loan; provided, however, that such Mortgage Loan papers, documents and records shall not include any Mortgage Loan papers, documents or records which are contained in the Custodial File. "Custodial Account": As defined in Section 5(b). "Custodial Agreement": The Custodial Agreement, dated as of the date set forth on the cover page thereof, among Sellers, Servicer, Purchasers and Custodian. "Custodial File": With respect to each Mortgage Loan, the documents that are required to be delivered to the Custodian pursuant to the Custodial Agreement. "Custodian": The Custodian whose name is set forth on the cover page of the Custodial Agreement and its permitted successors thereunder. "Cut-off Date": With respect to a Mortgage Loan, the last day of a month on which the Settlement Date can occur if accrued interest for such month is to be collected by Takeout Investor. "Defective Mortgage Loan": With respect to any Mortgage Loan, either (i) the Document File does not contain a document required to be contained therein, (ii) a document within a Document File is, in the judgment of any Purchaser or Takeout Investor, defective or inaccurate in any material respect, as determined upon evaluation of the Document File against the requirements of the Sale Agreement, (iii) a document in the Document File is not legal, valid and binding, or (iv) as to such Mortgage Loan, one of the representations and warranties in Section 9 hereof has been breached and such breach materially and adversely affects the value of such Mortgage Loan or the related Purchaser's interest in such Mortgage Loan and, with respect to any Wet Mortgage Loan, if a Custodial File is not received by Custodian within seven Business Days of the related Purchase Date "Document File": The Credit File and the Custodial File. -3- "Due Date": The day of the month on which the Monthly Payment is due on a Mortgage Loan. "Electronic Agent": Shall have the meaning assigned to such term in Section 2 of the Electronic Tracking Agreement. "Electronic Tracking Agreement": The Electronic Tracking Agreement, dated as of the date hereof, among the Purchasers, the Sellers, the Servicer, the Electronic Agent and MERS, as the same shall be amended, supplemented or otherwise modified from time to time. "Exhibit B-1 Letter": As defined in Section 2(a). "Exhibit C-1 Letter": As defined in Section 2(a). "Expiration Date": With respect to any Takeout Commitment, the expiration date thereof. "FDIC": Federal Deposit Insurance Corporation or any successor thereto. "FHLMC": Freddie Mac or any successor thereto. "FNMA": Fannie Mae or any successor thereto. "GAAP": Generally accepted accounting principles as in effect from time to time in the United States of America. "Holdback": The definition set forth in the Pricing Side Letter. "HUD": United States Department of Housing and Urban Development or any successor thereto. "Indebtedness" shall mean, for any Person: (a) obligations created, issued or incurred by such Person for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such property from such Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business so long as such trade accounts payable are payable within 90 days of the date the respective goods are delivered or the respective services are rendered; (c) Indebtedness of others secured by a Lien on the property of such Person, whether or not the respective Indebtedness so secured has been assumed by such Person; (d) obligations (contingent or otherwise) of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person; (e) all obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP, and, for -4- purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP; (f) obligations of such Person under repurchase agreements or like arrangements; (g) Indebtedness of others guaranteed by such Person; (h) all obligations of such Person incurred in connection with the acquisition or carrying of fixed assets by such Person; (i) Indebtedness of general partnerships of which such Person is a general partner; and (j) any other indebtedness of such Person by a note, bond, debenture or similar instrument excluding any non-recourse debt. "Loan to Value Ratio" or "LTV" means with respect to any Mortgage Loan, the ratio of the original outstanding principal amount of the Mortgage Loan, with respect to a Mortgage Loan plus, with respect to any Second Lien Mortgage Loan, the outstanding principal amount of any related first lien as of the date of origination of such second lien Mortgage Loan, to the lesser of (a) the Appraised Value of the related Mortgaged Property at origination or (b) if the Mortgaged Property was purchased within 12 months of the origination of such Mortgage Loan, the purchase price of the related Mortgaged Property. "Losses": Any and all losses, claims, damages, liabilities or expenses (including reasonable attorney's fees) incurred by any Person specified. "LIBOR": With respect to each day (or if such day is not a Business Day, the next succeeding Business Day), the rate per annum equal to the rate published by Bloomberg or if such rate is not available, the rate appearing at page 3750 of the Telerate Screen, as one-month LIBOR on such date, and if such rate shall not be so quoted, the rate per annum at which the Purchasers are offered Dollar deposits at or about 11:00 A.M., New York City time, on such date by prime banks in the interbank eurodollar market where the eurodollar and foreign currency and exchange operations in respect of its transactions are then being conducted for delivery on such day for a period of one month and in an amount comparable to the amount of the transactions hereunder to be outstanding on such day. "Maximum Aggregate Purchase Price": The aggregate Purchase Price of all Mortgage Loans acquired by Purchasers from Sellers under this Agreement and not yet delivered to and funded by a Takeout Investor, which amount shall be $1,000,000,000. "MERS": Mortgage Electronic Registration Systems, Inc., a Delaware corporation, or any successor in interest thereto. "MERS Mortgage Loan": Any Mortgage Loan as to which the related Mortgage or assignment of Mortgage has been recorded in the name of MERS, as agent for the holder from time to time of the Mortgage Note and which is identified as a MERS Mortgage Loan on the related Mortgage Loan Schedule. "MERS System": The system of recording transfers of Mortgages electronically maintained by MERS. -5- "MIN": The mortgage identification number of Mortgage Loans registered with MERS on the MERS System. "Monthly Payment": The scheduled monthly payment of principal and/or interest on a Mortgage Loan. "Mortgage": The mortgage, deed of trust or other instrument creating a first or second lien on an estate in fee simple in real property securing a Mortgage Note. "Mortgage Interest Rate": The annual rate of interest borne on a Mortgage Note. "Mortgage Loan": Each first or second lien, one- to four-family residential mortgage loan sold, assigned and transferred pursuant to this Agreement and which satisfies the requirements of the related Sale Agreement as the same may be modified from time to time, subject to the consent of the Purchasers and if modified so as to adversely affect the rights or obligations of the Sellers, the consent of the Sellers. "Mortgage Loan Pool": The groups of Mortgage Loans purchased by the Purchaser hereunder as described on Exhibit N. "Mortgage Loan Schedule": The schedule of Mortgage Loans, attached hereto as Exhibit L, delivered to the related Purchaser by the related Seller on each Purchase Date in a form, and containing information, acceptable to such Purchaser and the related Seller. "Mortgage Note": The note or other evidence of the indebtedness of a Mortgagor secured by a Mortgage. "Mortgaged Property": The property subject to the lien of the Mortgage securing a Mortgage Note. "Mortgagor": The obligor on a Mortgage Note. "NCUA": National Credit Union Administration, or any successor thereto. "Net Worth" shall mean, with respect to any Person, the excess of total assets of such Person, over total liabilities of such Person, determined in accordance with GAAP. "Notice of Rejection of Trade Assignment": With respect to any Mortgage Loan that a Purchaser elects not to purchase, a notification by such Purchaser to Takeout Investor and the related Seller in the form of Exhibit G. "Option-ARM Mortgage Loan": An adjustable rate Mortgage Loan which (i) provides the Mortgagor with multiple payment options and (ii) may result in negative amortization. -6- "OTS": Office of Thrift Supervision or any successor thereto. "Parent Company": A corporation or other entity owning at least 50% of the outstanding shares of voting stock of a Seller. "Pass-Through Rate": As defined in the Pricing Side Letter as the Pass-Through Rate. "Person": Any individual, corporation, company, voluntary association, partnership, joint venture, limited liability company, trust, unincorporated association or government (or any agency, instrumentality or political subdivision thereof). "Pricing Side Letter": The pricing side letter, dated as of the date hereof, among Sellers and Purchasers, as the same may be amended, supplemented or modified from time to time. "Purchase Date": With respect to any Mortgage Loan Pool purchased by a Purchaser hereunder, the date of payment thereof by Purchaser to the related Seller of the Purchase Price less the Holdback. "Purchase Price": With respect to each Mortgage Loan Pool purchased by a Purchaser hereunder, the amount specified in the related Pricing Side Letter. "Purchaser": Any of Aspen Funding Corp., Gemini Securitization Corp., LLC and Newport Funding Corp. and its respective successors in interest, including, but not limited to, a party to whom a Trust Receipt is assigned as provided hereunder and in the Custodial Agreement. "Purchaser's Wire Instructions": The wire instructions set forth in a letter in the form of Exhibit E. "Request for Certification": A report detailing loan identification data supplied by the related Seller to the related Purchaser and Custodian in the form of Exhibit C to the Custodial Agreement and transmitted electronically in an appropriate data layout, regarding all Mortgage Loans being offered for sale by such Seller to such Purchaser on the Purchase Date. "Sale Agreement": The agreement providing for the purchase by Takeout Investor of Mortgage Loans from the related Seller. "SEC": The Securities Exchange Commission or any successor thereto. "Seller": Each Seller whose name is set forth on the cover page hereof and its permitted successors hereunder. "Seller's Wire Instructions": The wire instructions set forth in a letter in the form of Exhibit C-2. -7- "Settlement Date": With respect to any Mortgage Loan, the date of payment thereof by Takeout Investor to the related Purchaser of the Takeout Proceeds. "Settlement Modification Letter": A letter in the form of Exhibit H. "Security": A GNMA Security, a FNMA Security or a FHLMC Security. "Servicer": American Home Mortgage Servicing, Inc, its successors and permitted assigns. "Successor Servicer": An entity designated by the Purchasers, with notice provided in conformity with Section 17, to replace the Servicer as servicer of the Mortgage Loans evidenced by a Trust Receipt. "Takeout Commitment": A commitment of the related Seller to sell one or more Mortgage Loans to Takeout Investor and of Takeout Investor to purchase one or more Mortgage Loans from such Seller. Each Takeout Commitment must be acceptable to the related Purchaser in its sole discretion. "Takeout Confirmation": The written notification to the related Seller from Takeout Investor containing all of the relevant details of the Takeout Commitment, which notification may take the form of a trade confirmation. "Takeout Investor": A Conduit. "Takeout Proceeds": With respect to any Mortgage Loan Pool, the related Trade Principal plus accrued interest as calculated in accordance with Section 4, as amended by any related Settlement Modification Letter accepted by the related Purchaser. "Tangible Net Worth" shall mean, with respect to any Person, as of any date of determination, the consolidated Net Worth of such Person and its subsidiaries, less the consolidated net book value of all assets of such Person and its subsidiaries (to the extent reflected as an asset in the balance sheet of such Person or any subsidiary at such date) which will be treated as intangibles under GAAP, including, without limitation, such items as deferred financing expenses, net leasehold improvements, good will, trademarks, trade names, service marks, copyrights, patents, licenses and unamortized debt discount and expense. "Third Party Underwriter": Any third party, including but not limited to a mortgage loan pool insurer, who underwrites the Mortgage Loan(s) prior to the purchase by the related Purchaser of the related Mortgage Loan Pool. "Third Party Underwriter's Certificate": A certificate issued by a Third Party Underwriter with respect to a Mortgage Loan, certifying that such Mortgage Loan complies with the third party underwriting requirements. -8- "Trade Assignment": The assignment by the related Seller to the related Purchaser of such Seller's rights under a specific Takeout Commitment, in the form of Exhibit D-1, or of such Seller's rights under all Takeout Commitments, in the form of Exhibit D-2. "Trade Price": The trade price set forth on a Takeout Commitment as modified pursuant to any Settlement Modification Letter consented to by the related Purchaser. "Trade Principal": With respect to any Mortgage Loan Pool, the aggregate outstanding principal balance of such Mortgage Loan multiplied by a percentage equal to the Trade Price. "Trust Receipt": A trust receipt issued by the Custodian evidencing the Mortgage Loan Pool it holds for a Purchaser, in the form attached hereto as Exhibit A-1 (or A-2 with respect to Wet Mortgage Loans), and delivered to the related Purchaser by the Custodian in accordance with Section 2 hereof. "Warehouse Lender": Any lender providing financing to the related Seller for the purpose of originating or purchasing Mortgage Loans which prior to the Purchase Date has a security interest in such Mortgage Loans as collateral for the obligations of such Seller to such lender. "Warehouse Lender's Wire Instructions": The wire instructions set forth in a letter in the form of Exhibit B-2. "Wet Mortgage Loan": Mortgage Loans for which the Custodian has not yet received a completed Custodial File. Section 2. Procedures for Purchases of Mortgage Loans. (a) Any Purchaser may, in its sole discretion, from time to time, purchase one or more Mortgage Loan Pools from either or both Sellers. Any request by Seller that a Purchaser purchase any Mortgage Loans hereunder shall be provided by delivery of a Transaction Notice in the form attached hereto as Exhibit M, no later than 3:00 p.m. (New York City time) one Business Day prior to the requested Purchase Date with respect to any Mortgage Loans other that Wet Mortgage Loans. With respect to Wet Mortgage Loans, the related Seller shall notify the related Purchaser of an estimate of the Purchase Price of such Wet Mortgage Loans no later than 3:00 p.m. (New York City time) one (1) Business Day prior to the requested Purchase Date. Prior to any Purchaser's actual purchase of any Mortgage Loan Pool, such Purchaser shall have received (a) from Custodian (i) by facsimile, a Notice of Intent to Issue Trust Receipt, and (ii) by facsimile, the Trust Receipt covering all Mortgage Loans (including the Mortgage Loan Pool being purchased) relating to Conduit Transactions fully completed and authenticated by Custodian, with the original Trust Receipt sent by overnight mail to arrive on the Business Day after the day it is sent by facsimile, and (b) from the Seller (i) a copy of the Takeout Confirmation related to the Mortgage Loan(s) in such Mortgage Loan Pool, together with a Trade Assignment in the form of Exhibit D-1 or Exhibit D-2, -9- executed by the related Seller and Takeout Investor or such other notification acceptable to the Purchaser in its sole discretion and (ii) an original letter in the form of Exhibit B-1 (an "Exhibit B-1 Letter") from the applicable Warehouse Lender (if any), or an original letter in the form of Exhibit C-1 (an "Exhibit C-1 Letter") in the event that there is no Warehouse Lender. This Agreement is not a commitment by any Purchaser to enter into transactions with either Seller but rather sets forth the procedures to be used in connection with periodic requests for a Purchaser to enter into transactions with a Seller. Sellers hereby acknowledge that Purchasers are under no obligation to agree to enter into, or to enter into, any transaction pursuant to this Agreement. (b) If any Purchaser elects to purchase any Mortgage Loan Pool, such Purchaser shall pay the amount of the Purchase Price less the Holdback for such Mortgage Loan Pool by wire transfer of immediately available funds in accordance with the Warehouse Lender's Wire Instructions or if there is no Warehouse Lender, the related Seller's Wire Instructions. Upon such payment and not otherwise, Purchaser shall be deemed to have accepted the related Trade Assignment. Sellers shall not offer for sale to any Purchaser any Mortgage Loan as to which the Expiration Date of the related Takeout Commitment is two (2) Business Days or less following the Purchase Date. (c) Simultaneously with the payment by a Purchaser of the Purchase Price less the Holdback, in accordance with the Warehouse Lender's Wire Instructions or the related Seller's Wire Instructions, as applicable, with respect to a Mortgage Loan Pool, such Seller hereby conveys to the related Purchaser all of such Seller's right, title and interest in and to the related Mortgage Loan(s) free and clear of any lien, claim or encumbrance. Notwithstanding the satisfaction by the related Seller of the conditions specified in this Section 2, no Purchaser is obligated to purchase any Mortgage Loans offered to it hereunder. (d) In the event that a Purchaser rejects a Mortgage Loan for purchase for any reason and/or does not transmit the applicable Purchase Price less the Holdback, (i) the Trust Receipt, if any, delivered by Custodian to such Purchaser in anticipation of such purchase shall automatically be null and void and the previously existing Trust Receipt for that type of transaction shall be in full force and effect, (ii) such Purchaser shall not consummate the transactions contemplated in the applicable Takeout Confirmation and shall deliver to Takeout Investor (with a copy to the related Seller and Custodian) a Notice of Rejection of Trade Assignment, provided, however, that failure of such Purchaser to give such notice shall not affect the rejection by such Purchaser of the Trade Assignment, and (iii) if such Purchaser shall nevertheless receive any portion of the related Takeout Proceeds, such Purchaser shall within one Business Day pay such Takeout Proceeds to the related Seller in accordance with such Seller's Wire Instructions. (e) The terms and conditions of the purchase of each Mortgage Loan Pool shall be as set forth in this Agreement. -10- Section 3. Sale of Mortgage Loans to Takeout Investor. (a) With respect to Mortgage Loan(s) that a Purchaser has elected to purchase, such Purchaser may, at its option, either (i) instruct Custodian to deliver to Takeout Investor, in accordance with Takeout Investor's instructions, the Custodial File in respect of such Mortgage Loans, in the manner and at the time set forth in the Custodial Agreement, or (ii) provide for the delivery of the Custodial File through an escrow arrangement satisfactory to such Purchaser and Takeout Investor. The related Seller shall in accordance with the related Sale Agreement but in no event later than two (2) Business Days prior to the related Expiration Date, deliver to Takeout Investor any and all documents required to be delivered pursuant to the Sale Agreement to enable Takeout Investor to purchase such Mortgage Loan(s) on or before the related Expiration Date. (b) (1) The Holdback relating to such Mortgage Pool shall be paid by Purchaser to the Seller upon the completion by Seller of all obligations relating to the Takeout Investor's due diligence of the Mortgage Pool by the Settlement Date and the making of the representations and warranties to the Takeout Investor as required under the Takeout Agreement by the Seller, it being acknowledged and agreed that the Seller is not required to make any representations and warranties there were true as of the Purchase Date but are no longer true as of the Settlement Date in order to receive the Holdback. If such due diligence obligations have not been completed by Seller by the related Settlement Date, the Holdback shall not be paid by the Purchaser to the Seller and shall be retained by the Purchaser. Upon receipt by such Purchaser, prior to the Settlement Date, of a Settlement Modification Letter, duly executed by Takeout Investor and the related Seller, such Purchaser may, at its election, agree to the postponement of the Settlement Date and such other matters as are set forth in the Settlement Modification Letter. If such Purchaser elects to accept a Settlement Modification Letter, such Purchaser shall, not later than two (2) Business Days or earlier if reasonably required by Takeout Investor after receipt of such Settlement Modification Letter execute the Settlement Modification Letter and send, via facsimile, copies of such fully executed Settlement Modification Letter to the related Seller and Takeout Investor. (b) (2) The Seller is required to provide certain representations and warranties to the Takeout Investor pursuant to the Sale Agreement as of the Settlement Date. To the extent that the Seller has knowledge that any such representations and warranties are not true, Seller shall have no obligation to provide any such representation and warranty. (c) (1) If a breach by Sellers of this Agreement results in any Mortgage Loan being a Defective Mortgage Loan at the time of the delivery of the related Trust Receipt to the related Purchaser and in such Purchaser's sole judgment the defects in such Mortgage Loan are not capable of being cured (or in fact are not cured) by the related Seller prior to the Settlement Date, or in the event that the first Monthly Payment due on the Mortgage Loan following the date of origination of such Mortgage Loan is not made within 30 days of its Due Date, such Purchaser, at its election, may require that such Seller, upon receipt of notice from such Purchaser of its exercise of such right, -11- immediately repurchase such Purchaser's ownership interest in such Mortgage Loan by remitting to such Purchaser (in immediately available funds in accordance with Purchaser's Wire Instructions) the amount paid by such Purchaser for such Mortgage Loan plus all accrued and unpaid interest thereon. (c) (2) The Servicer's rights and obligations to interim service each Mortgage Loan as provided in this Agreement, shall terminate on the later of the related Settlement Date or the date which is thirty days following the related Purchase Date; provided that, the related Purchaser may in its sole discretion extend such 30 day interim servicing period by one or more additional 30 day periods by providing written notice to the Servicer prior to the termination of such interim servicing period. If an Act of Insolvency or any other material default hereunder by the Servicer occurs at any time, the Servicer's rights and obligations to service the Mortgage Loan(s), as provided in this Agreement, shall terminate immediately, without any notice or action by Purchaser subject to the rights of any Takeout Investor. Upon any such termination, Purchaser is hereby authorized and empowered to sell and transfer such rights to service the Mortgage Loan(s) for such price and on such terms and conditions as Purchaser shall reasonably determine subject to the rights of any Takeout Investor, and neither the Servicer nor the Sellers shall have any right to attempt to sell or transfer such rights to service. The Servicer shall perform all acts and take all actions so that the Mortgage Loan(s) and all files and documents relating to such Mortgage Loan(s) held by the Servicer, together with all escrow amounts relating to such Mortgage Loan(s), are delivered to Successor Servicer. To the extent that the approval of any Takeout Investor, Third Party Underwriter or any other insurer or guarantor is required for any such sale or transfer, the Sellers and the Servicer shall fully cooperate with Purchaser to obtain such approval. All amounts paid by any purchaser of such rights to service the Mortgage Loan(s) shall be the property of the Purchasers. Upon exercise by Purchasers of the remedies under this Section 3(c)(2), Purchasers' obligation to pay and Sellers' and Servicer's right to receive any portion of the Holdback relating to such Mortgage Loan(s) shall automatically be canceled and become null and void, provided that such cancellation shall in no way relieve such Seller or otherwise affect the obligation of such Seller to indemnify and hold the Purchasers harmless as specified in Section 3(e). (d) Subject to the rights of a Takeout Investor, each Mortgage Loan delivered to any Purchaser hereunder shall be delivered on a servicing released basis free of any servicing rights in favor of the related Seller and free of any title, interest, lien, encumbrance or claim of any kind of such Seller and such Seller hereby waives its right to assert any interest, lien, encumbrance or claim of any kind. Subject to the rights of a Takeout Investor, upon transfer of such servicing rights to any Successor Servicer, the Servicer and the related Seller shall deliver or cause to be delivered all files and documents relating to each Mortgage Loan held by the Servicer or such Seller to Successor Servicer. The related Seller and the Servicer shall promptly take such actions and furnish to the related Purchaser such documents that such Purchaser reasonably deems necessary or appropriate to enable such Purchaser to cure any defect in each such Mortgage Loan or to enforce such Mortgage Loans, as appropriate. -12- (e) Sellers agree to indemnify and hold each Purchaser and its assigns harmless from and against all Losses resulting from any breach or failure to perform by Sellers of any representation, warranty, covenant, term or condition made or to be performed by Sellers under this Agreement. (f) Reserved (g) Reserved (h) No exercise by a Purchaser of its rights under this Section 3 shall relieve Sellers of responsibility or liability for any breach of this Agreement. (i) In addition to any rights and remedies of Purchasers provided by this Agreement and by law, each Purchaser shall have the right, without prior notice to Sellers, any such notice being expressly waived by Sellers to the extent permitted by applicable law, upon any amount becoming due and payable by Sellers hereunder to set-off and appropriate and apply against such amount any and all Mortgaged Property and deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Purchaser to or for the credit or the account of Sellers (including, without limitation, the amount of any accrued and unpaid Holdback). Each Purchaser may also set-off cash and all other sums or obligations owed by such Purchaser to Sellers under this Agreement against all of such Seller's obligations to such Purchaser, whether or not such obligations are then due. The exercise of any such right of set-off shall be without prejudice to any Purchaser's right to recover any deficiency. (j) Sellers agree that, with respect to any Mortgage Loan Pool purchased by a Purchaser, the related Takeout Commitment shall have an Expiration Date which is not later than 60 calendar days after the related Purchase Date. Sellers further agree that any additional Takeout Commitment that they obtain with respect to such Mortgage Loan Pool if the initial Takeout Investor does not perform under such Takeout Commitment shall have an Expiration Date which is not later than 75 calendar days after the related Purchase Date. Sellers have not and will not take any action, or fail to act where action is required, the result of which would be to impair any Trade Assignment. (k) Sellers shall notify and provide the related Purchaser with copies of any changes made to the Sale Agreement or any other correspondent agreements between Sellers and any Takeout Investor within 2 Business Days of such change. (l) In no event shall the Purchasers be liable to the Takeout Investor for any pair-off, breakage or other similar fees in the event that a Takeout Investor asserts any such right under any Takeout Commitment. -13- Section 4. Holdback. (a) With respect to each Mortgage Loan Pool that a Purchaser elects to purchase hereunder, such Purchaser shall pay to the related Seller the Holdback with respect to all Mortgage Loans in such Mortgage Loan Pool subject to the terms of this Agreement. The Holdback shall be payable by such Purchaser as provided in Section 3(b)(i). (b) Reserved. (c) If a Mortgage Loan Pool is purchased by a Purchaser in the month prior to the month in which the related Settlement Date occurs, (A) all interest which accrues on the related Mortgage Loans, on and after the Purchase Date, through the last day of any month prior to the month in which such Settlement Date occurs, and all other collections thereon, shall be paid to such Purchaser by the Servicer, as interim servicer, on a monthly basis on the earlier of (i) the second Business Day of the month following the month such interest accrued or (ii) related Settlement Date and (B) all interest which accrues on the Mortgage Loans in such Mortgage Loan Pool on and after the first day of the month in which such Settlement Date occurs, through the day immediately prior to such Settlement Date, and all other collections thereon, will be paid to such Purchaser by Takeout Investor on such Settlement Date unless such Settlement Date occurs after the Cut-off Date of such month in which event Servicer, as interim servicer, shall pay such amount to such Purchaser on such Settlement Date. If a Mortgage Loan Pool is purchased by such Purchaser in the same month in which the related Settlement Date occurs, (A) all interest, if any, which accrues on such Mortgage Loan(s) from the first day of such month to but not including the related Purchase Date shall be paid by such Purchaser to the related Seller on such Settlement Date, and (B) all interest which accrues on such Mortgage Loan(s), on and after the Purchase Date to but not including the Settlement Date will be paid to such Purchaser by Takeout Investor on the Settlement Date unless such Settlement Date occurs after the Cut-off Date or in a month in which interest has been prepaid by the Mortgagor in either of which events the Servicer, as interim servicer, shall pay such amount to such Purchaser on such Settlement Date. For purposes of this paragraph all interest payments shall be deemed to accrue at the applicable rate set forth in the related Takeout Commitment. (d) Reserved. Section 5. Servicing of the Mortgage Loans. (a) Upon payment of the Purchase Price, the related Purchaser shall own all source files, documents, agreements and papers related to servicing the Mortgage Loans and shall own all derivative information created by the Servicer or the related Seller or other third party used or useful in servicing the Mortgage Loans. The Servicer shall interim service and administer the Mortgage Loan(s) on behalf of the related Purchaser in accordance with customary and reasonable mortgage loan servicing standards and procedures generally accepted by lenders in the mortgage banking industry and in accordance with the requirements of Takeout Investor, provided that the Servicer -14- shall at all times comply with applicable law and the terms of the related Mortgage Loan Documents, and the requirements of any applicable insurer or guarantor including, without limitation, any Third Party Underwriter, so that the insurance in respect of any Mortgage Loan is not voided or reduced. The Servicer shall at all times maintain accurate and complete records of its interim servicing of each Mortgage Loan, and any Purchaser may, at any time during the Servicer's business hours on two (2) Business Days (or immediately in the event of a default hereunder by the Servicer), examine and make copies of such records. At the request and in accordance with the directions of such Purchaser, the Servicer shall deliver to such Purchaser copies of any Credit Files within 3 Business Days of such request by such Purchaser. In addition, upon not less than 2 Business Days notice to the related Seller or the Servicer, any Purchaser shall have the right to perform a due diligence review of such Seller or the Servicer, including the Servicer's servicing capabilities. The Servicer shall at any Purchaser's request deliver to such Purchaser monthly reports regarding the status of such Mortgage Loan, which reports shall include, but shall not be limited to, a description of each Mortgage Loan in default for more than thirty (30) days, and such other circumstances with respect to any Mortgage Loan (whether or not such Mortgage Loan is included in the foregoing list) that could materially adversely affect any such Mortgage Loan, the related Purchaser's ownership of any such Mortgage Loan or the collateral securing any such Mortgage Loan. The Servicer shall deliver such a report to each Purchaser every thirty (30) days until (i) the purchase by Takeout Investor of such Mortgage Loan pursuant to the related Takeout Commitment or (ii) the exercise by Purchasers of any remedial election pursuant to Section 3. (b) The Servicer shall establish and maintain a separate custodial account (the "Custodial Account") entitled "[Name of Servicer], in trust for Aspen Funding Corp., Gemini Securitization Corp., LLC and Newport Funding Corp. and each of their assignees under the Whole Loan Purchase and Sale Agreement dated June 26, 2006" and shall deposit into such account any amounts received within 2 Business Days of receipt. All collections received in respect of each Mortgage Loan that are payable to any Purchaser as the owner of each such Mortgage Loan. (c) Amounts deposited in the Custodial Account with respect to any Mortgage Loan shall be held in trust for the related Purchaser as the owner of such Mortgage Loan and shall be released only as follows: (1) Except as otherwise provided in Section 5(c)(2), following receipt by the related Purchaser or its designee of the Takeout Proceeds for such Mortgage Loan from Takeout Investor, amounts deposited in the Custodial Account related to such Mortgage Loan not otherwise subject to setoff as provided hereunder shall be released to the Servicer. The amounts paid to the Servicer (if any) pursuant to this Section 5(c)(1) shall constitute the Servicer's sole compensation for interim servicing the Mortgage Loans as provided in this Section 5. -15- (2) If Successor Servicer takes delivery of such Mortgage Loan (either under the circumstances set forth in Section 3 or otherwise), all amounts deposited in the Custodial Account shall be paid to the related Purchasers promptly upon such delivery. (3) If a Mortgage Loan is not purchased by Takeout Investor on or before the Settlement Date, during the period thereafter that the related Seller remains as interim servicer, all amounts deposited in the Custodial Account shall be released only in accordance with the related Purchaser's written instructions. (d) Reserved. Section 6. Trade Assignments. Each related Seller hereby assigns to each related Purchaser, free of any security interest, lien, claim or encumbrance of any kind, such Seller's rights, under each Takeout Commitment as to which Takeout Investor has consented to assignment, to deliver the Mortgage Loan(s) specified therein to the related Takeout Investor and to receive the Takeout Proceeds therefor from such Takeout Investor. No Purchaser shall be deemed to have accepted any Trade Assignment unless and until it purchases the related Mortgage Loans, and nothing set forth herein shall be deemed to impair such Purchaser's right to reject any Mortgage Loan for any reason, in its sole discretion. Section 7. Transfers of Beneficial Interest in Mortgage Loans by Purchasers. Each Purchaser may, in its sole discretion, assign all of its right, title and interest in or grant a security interest in any Mortgage Loan sold by Seller hereunder and all rights of such Purchaser under this Agreement and the Custodial Agreement, in respect of such Mortgage Loan solely to one of Purchaser's commercial paper conduits (each, an "Assignee") but in no event to any Seller or any Affiliate of any Seller. It is anticipated that such assignment to an Assignee will be made by Purchasers, and Sellers hereby irrevocably consent to such assignment. No notice of such assignment shall be given by any Purchaser to Sellers or Takeout Investor. Assignment by a Purchaser of the Mortgage Loans as provided in this Section 7 shall not release Purchaser from any obligations otherwise under this Agreement. Without limitation of the foregoing, an assignment of the Mortgage Loans to an Assignee, as described in this Section 7, shall be effective upon delivery to the Assignee of a duly executed and authenticated Trust Receipt. Section 8. Record Title to Mortgage Loans; Intent of Parties; Security Interest. (a) From and after the issuance and delivery of the related Trust Receipt, and subject to the remedies of Purchasers in Section 3, the related Seller may remain the last named payee or endorsee of each Mortgage Note and (except with respect to any MERS Mortgage Loan) the mortgagee or assignee of record of each Mortgage in trust for the benefit of the related Purchaser, for the sole purpose of facilitating the servicing of such Mortgage Loan. Notwithstanding the foregoing, beneficial ownership of -16- each Mortgage and the related Mortgage Note shall be vested solely in the related Purchaser or the appropriate designee of such Purchaser, as the case may be. All rights arising out of the Mortgage Loans including, but not limited to, all funds received by the related Seller after the related Purchase Date on or in connection with a Mortgage Loan shall be vested in the related Purchaser or one or more designees of such Purchaser. (b) Each Seller shall maintain a complete set of books and records for each Mortgage Loan which shall be clearly marked to reflect the ownership interest in each Mortgage Loan of the related Purchaser. Upon the request of the related Purchaser, the related Seller shall prepare and deliver to MERS an assignment of Mortgage from MERS to blank. The related Seller shall cause such assignment of Mortgage to be recorded in the public land records upon request of such Purchaser. At any time during the term of this Agreement, the related Purchaser or the Takeout Investor, as the case may be, may direct the related Seller to cause any MERS Mortgage Loan to be deactivated from the MERS system. In connection with such deactivation, the related Seller shall notify MERS and prepare an assignment of Mortgage from MERS to the related Purchaser or in blank. In the event that the related Purchaser specifies that any such assignment be made to Seller, such assignment shall be for the sole purpose of facilitating the servicing of such Mortgage Loan and such Seller shall also prepare an assignment of Mortgage in recordable form from such Seller to the related Purchaser or its designee and deliver such unrecorded assignment of Mortgage to the Custodian pursuant to the terms and conditions of the Custodial Agreement. (c) Purchasers and Sellers confirm that the transactions contemplated herein are intended to be sales of the Mortgage Loans by Sellers to Purchasers rather than borrowings secured by the Mortgage Loans and will be treated and accounted for as such on their books and records. In the event, for any reason, any transaction is construed by any court or regulatory authority as a borrowing rather than as a sale, Sellers and Purchasers intend that the related Purchaser or its Assignee, as the case may be, shall have a perfected first priority security interest in the Mortgage Loans, the servicing rights appurtenant to the Mortgage Loans, the Custodial Account, and all proceeds thereof, the Takeout Commitments and the proceeds of any and all of the foregoing (collectively, the "Collateral"), free and clear of adverse claims. In such case, the related Seller shall be deemed to have hereby granted to the related Purchaser or Assignee, as the case may be, a first priority security interest in and lien upon the Collateral, free and clear of adverse claims. In such event, this Agreement shall constitute a security agreement, the Custodian shall be deemed to be an independent custodian for purposes of perfection of the security interest granted to the related Purchaser or Assignee, as the case may be, and the related Purchaser or Assignee, as the case may be, shall have all of the rights of a secured party under applicable law. Section 9. Representations and Warranties. (a) Each Seller, jointly and severally, hereby represents and warrants to each Purchaser as of the date hereof and as of the date of each issuance and delivery of a Trust Receipt that: -17- (i) Each Seller is duly organized, validly existing and in good standing under the laws of the state of its organization and has all licenses necessary to carry on its business as now being conducted and is licensed, qualified and in good standing in the state where the Mortgaged Property is located if the laws of such state require licensing or qualification in order to conduct business of the type conducted by each Seller, except where the failure to be so licensed or qualified would not result in a material adverse effect on the Sellers or their ability to perform under this Agreement. Each Seller has all requisite corporate power and authority to execute and deliver this Agreement and to perform in accordance herewith; the execution, delivery and performance of this Agreement (including all instruments of transfer to be delivered pursuant to this Agreement) by each Seller and the consummation of the transactions contemplated hereby have been duly and validly authorized; this Agreement evidences the valid, binding and enforceable obligation of Seller except as the enforceability may be limited by bankruptcy, insolvency, reorganization, or similar laws, and by equitable principles affecting the enforceability of the rights of creditors; and all requisite corporate action has been taken by each Seller to make this Agreement valid and binding upon each Seller in accordance with its terms; (ii) No approval of the transactions contemplated by this Agreement from the OTS, the NCUA, the FDIC or any similar federal or state regulatory authority having jurisdiction over each Seller is required, or if required, such approval has been obtained. There are no actions or proceedings pending or against Sellers which would materially and adversely affect each Seller's ability to perform hereunder. The transfers, assignments and conveyances provided for herein are not subject to the bulk transfer or any similar statutory provisions in effect in any applicable jurisdiction; (iii) The consummation of the transactions contemplated by this Agreement are in the ordinary course of business of each Seller and will not (i) result in the breach of any term or provision of the charter or by-laws of each Seller or (ii) result in the breach of any term or provision of, or conflict with or constitute a default under or result in the acceleration of any obligation under, any material agreement, indenture or loan or credit agreement or other instrument to which each Seller or its property is subject, or (iii) result in the violation of any law, rule, regulation, order, judgment or decree to which each Seller or its property is subject except, in the case of clauses (ii) and (iii), for such conflicts, breaches, defaults or violations of law which would not, individually or in the aggregate, result in a material adverse effect on the Sellers or their ability to perform under this Agreement; (iv) The Custodial Agreement and every document to be executed by Seller each pursuant to this Agreement is and will be valid, -18- binding and subsisting obligations of each Seller, enforceable in accordance with their respective terms, except as the enforceability may be limited by bankruptcy, insolvency, reorganization, or similar laws, and by equitable principles affecting the enforceability of the rights of creditors. No consents or approvals are required to be obtained by Seller or its Parent Company, if any, for the execution, delivery and performance of this Agreement or the Custodial Agreement by each Seller; (v) Upon purchase by the Purchaser, each Seller has not sold, assigned, transferred, pledged or hypothecated any interest in any Mortgage Loan sold hereunder to any person other than the related Purchaser and the Takeout Investor, and upon delivery of a related Trust Receipt to such Purchaser, such Purchaser will be the sole owner thereof, free and clear of any lien, claim or encumbrance subject to the rights of the Takeout Investor; (vi) Neither this Agreement nor any information relating to Sellers that Sellers have delivered to any Purchaser, including, but not limited to, all documents related to this Agreement, the Custodial Agreement or Seller's financial statements, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements made therein or herein in light of the circumstances under which they were made, not misleading. Since the furnishing of such documents or information, there has been no change, nor any development or event involving a prospective change that would render any of such documents or information untrue or misleading in any material respect; (vii) There is no pending or threatened action, suit, proceeding, inquiry or investigation, at law or in equity or before or by any court, administrative body or other tribunal (A) that would prohibit each Seller entering into this Agreement, (B) seeking to prevent the sale of the Mortgage Loans or the consummation of the transactions contemplated by this Agreement or (C) that would prohibit or materially and adversely affect the performance by each Seller of its obligations under, or validity or enforceability of, this Agreement; (viii) AHMI's Aggregate Tangible Net Worth is not less than $700,000,000; and (ix) Sellers and their Affiliates maintains in the aggregate committed warehouse facilities in an amount equal to not less than $4 billion which is in full force and effect, with one or more third party lenders which are not Affiliates of Sellers. -19- (b) The related Seller hereby represents and warrants to the related Purchaser as of the date hereof, as of the date of delivery of each Mortgage Pool and as of each Purchase Date that the Custodian is an eligible custodian as determined by FNMA, FHLMC and GNMA, and is not an Affiliate of Seller. (c) Seller hereby represents and warrants to the related Purchaser with respect to each Mortgage Loan as of each Purchase Date of the related Mortgage Loan that: (i) The Mortgage Loan conforms in all respects to the requirements of this Agreement, the Sale Agreement, the Commitment Guidelines, the Takeout Investor and the requirements of the related Third Party Underwriter's Certificate, if any. The Mortgage Loan was originated not more than 60 days prior to the related Purchase Date. (ii) The related Seller is the sole owner and holder of the Mortgage Loan free and clear of any and all liens, pledges, charges or security interests of any nature other than, prior to the purchase by the Purchaser, the rights of any warehouse lender and has full right and authority, subject to no interest or participation of, or agreement with, any other party, to sell and assign the same pursuant to this Agreement other than the rights of the Takeout Investor; (iii) No servicing agreement has been entered into with respect to the Mortgage Loan, or any such servicing agreement has been terminated and there are no restrictions, contractual or governmental, which would impair the ability of the related Purchaser or such Purchaser's designees from servicing the Mortgage Loan other than the rights of any Takeout Investor; (iv) The Mortgage is a valid and subsisting first or second lien on the property therein described, as specified on the Mortgage Loan Schedule and the Mortgaged Property is free and clear of all encumbrances and liens having priority over the lien of the Mortgage except for liens for real estate taxes and special assessments not yet due and payable and with respect to each Mortgage Loan which is a second lien Mortgage Loan, a first lien on the Mortgaged Property. Any pledge account, security agreement, chattel mortgage or equivalent document related to, and delivered to (or required to be delivered for Wet Mortgage Loans) the Custodian with the Mortgage, establishes in the related Seller a valid and subsisting lien on the property described and the priority provided therein, and such Seller has full right to sell and assign the same to such Purchaser subject to the rights of any Takeout Investor; (v) Neither the related Seller nor any prior holder of the Mortgage has modified the Mortgage in any material respect; satisfied, canceled or subordinated the Mortgage in whole or in part; released the -20- Mortgaged Property in whole or in part from the lien of the Mortgage; or executed any instrument of release, cancellation, modification or satisfaction unless such release, cancellation, modification or satisfaction does not adversely affect the value of the Mortgage Loan and is contained in the related Document File; (vi) The Mortgage Loan is not in default, and all Monthly Payments due prior to the Purchase Date and all taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents due and owing have been paid. Sellers have not advanced funds, or induced or solicited any advance of funds by a party other than the Mortgagor directly or indirectly, for the payment of any amount required by the Mortgage Loan. The collection practices used by each entity which has serviced the Mortgage Loan have been in all respects legal and customary in the mortgage servicing business. With respect to escrow deposits and payments in those instances where such were required, there exist no deficiencies in connection therewith for which customary arrangements for repayment thereof have not been made and no escrow deposits or payments or other charges or payments have been capitalized under any Mortgage or the related Mortgage Note except for deferred interest payments on Option-ARM Mortgage Loan; (vii) There is no default, breach, violation or event of acceleration existing under the Mortgage or the related Mortgage Note and no event which, with the passage of time or with notice and the expiration of any grace of cure period, would constitute a default, breach, violation or event of acceleration; and Sellers have not waived any default, breach, violation or event of acceleration; (viii) The Mortgage Loan is not subject to any valid right of rescission, set-off, counterclaim or defense, including the defense of usury, nor will the operation of any of the terms of the Mortgage Note or the Mortgage, or the exercise of any right thereunder, render either the Mortgage Note or the Mortgage unenforceable, in whole or in part, or subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto; (ix) The Mortgage Note and the related Mortgage are genuine and each is the legal, valid and binding obligation of the maker thereof, enforceable in accordance with its terms. All parties to the Mortgage Note and the Mortgage had legal capacity to execute the Mortgage Note and the Mortgage and each Mortgage Note and Mortgage have been duly and properly executed by the Mortgagor; -21- (x) The Mortgage Loan meets, or is exempt from, applicable state or federal laws, regulations and other requirements pertaining to usury, and the Mortgage Loan is not usurious; (xi) Any and all requirements of any federal, state or local law including, without limitation, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity or disclosure laws applicable to the Mortgage Loan have been complied with, and Sellers shall deliver to the related Purchaser upon demand, evidence of compliance with all such requirements; (xii) Either: (A) the related Seller and every other holder of the Mortgage, if any, were authorized to transact and do business in the jurisdiction in which the Mortgaged Property is located at all times when such party held the Mortgage; or (B) the loan of mortgage funds, the acquisition of the Mortgage (if to the extent required by applicable law such Seller was not the original lender), the holding of the Mortgage and the transfer of the Mortgage did not constitute the transaction of business or the doing of business in such jurisdiction; (xiii) The proceeds of the Mortgage Loan have been fully disbursed, there is no requirement for future advances thereunder and any and all requirements as to completion of any on site or off-site improvements and as to disbursements of any escrow funds, therefore, have been complied with. All costs, fees and expenses incurred in making, closing or recording the Mortgage Loans were paid; (xiv) The related Mortgage contains customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security, including, (i) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (ii) otherwise by judicial foreclosure. There is no homestead or other exemption available to the Mortgagor which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage; (xv) The Mortgage Loan was originated free of any "original issue discount" with respect to which the owner of the Mortgage Loan could be deemed to have income pursuant to Sections 1271 et seq. of the Internal Revenue Code; (xvi) Each Mortgage Loan was originated by an institution described in Section 3(a)(41)(A)(ii) of the Securities Exchange Act of 1934, as amended; -22- (xvii) At origination, the Mortgaged Property was free and clear of all mechanics' and materialmen's liens or liens in the nature thereof which are or could be prior to the Mortgage lien; (xviii) All of the improvements which are included for the purpose of determining the Appraised Value of the Mortgaged Property lie wholly within the boundaries and building restriction lines of such property, and no improvements on adjoining properties encroach upon the Mortgaged Property; (xix) No improvement located on or being part of the Mortgaged Property is in violation of any applicable zoning law or regulation and all inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Mortgaged Property, and with respect to the use and occupancy of the same, including but not limited to certificates of occupancy and fire underwriting certificates, had been made or obtained from the appropriate authorities and the Mortgaged Property was lawfully occupied under applicable law; (xx) There is no proceeding pending for the total or partial condemnation of the Mortgaged Property and said property is undamaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other casualty; (xxi) The Custodial File contains, and the Credit File contains or shall contain prior to the Expiration Date, each of the documents and instruments specified to be included therein duly executed and in due and proper form and each such document or instrument is either in form acceptable to the Applicable Agency or is a uniform instrument. Each Mortgage Note and Mortgage are on forms approved by the Applicable Agency with such riders as have been approved by the Applicable Agency; the Custodian is currently in possession of the Custodial File for each Mortgage Loan (except for Wet Mortgage Loans) and the related Seller is in possession or shall be prior to the Expiration Date of the Credit File for each Mortgage Loan and there are no custodial agreements in effect adversely affecting the rights of such Seller to make the deliveries required within the required time. The related Seller shall not deliver a Credit File to Takeout Investor prior to the related Commitment Date; (xxii) The lien of each Mortgage Loan securing the consolidated principal amount thereof is expressly insured as having first or second (as indicated on the Mortgage Loan Schedule) lien priority or is covered by an attorney's opinion of title acceptable to GNMA, FNMA or FHLMC, as applicable, if customarily provided in the jurisdiction in which the related Mortgaged Property is located, or a mortgage title insurance policy acceptable to FNMA, issued by, and the valid and binding obligation of, a -23- title insurer acceptable to FNMA and qualified to do business in the jurisdiction where the Mortgaged Property is located, insuring the related Seller, its successors and assigns, as to the validity and appropriate priority of the lien created by the Mortgage subject to customary permitted exceptions in the original principal amount of the Mortgage Loan. The related Seller is the named insured and the sole insured of such mortgage title insurance policy, and the assignment to the related Purchaser of such Seller's interest in such mortgage title insurance policy does not require the consent of or notification to the insurer, such mortgage title insurance policy is in full force and effect and will be in full force and effect and inure to the benefit of the related Purchaser upon the consummation of the transactions contemplated by this Agreement and no claims have been made under such mortgage title insurance policy and no prior holder of the related Mortgage, including such Seller, has done, by act or omission, anything which would impair the coverage of such mortgage title insurance policy; (xxiii) All buildings upon the Mortgaged Property are insured against loss by fire, hazards of extended coverage and such other hazards as are customary in the area where the Mortgaged Property is located, pursuant to fire and hazard insurance policies with extended coverage or other insurance required by the Sale Agreement by insurance companies reasonably acceptable to the related Purchaser, in an amount at least equal to the lesser of (i) the outstanding principal balance of the Mortgage Loan or (ii) the maximum insurable value (replacement cost without deduction for depreciation) of the improvements constituting the Mortgaged Property. If applicable laws limit the amount of such insurance to the replacement cost of the improvements constituting the Mortgaged Property or to some other amount, then such insurance is in an amount equal to the maximum allowed by such laws. Such insurance amount is sufficient to prevent the Mortgagor or the loss payee under the policy from becoming a co-insurer. The insurer issuing such insurance is acceptable pursuant to the Sale Agreement. All individual insurance policies contain a standard mortgagee clause naming the related Seller, its successors and assigns, as mortgagee and all premiums thereon have been paid and providing that such policy may not be canceled without prior notice to such Seller. Each Mortgage obligates the Mortgagor thereunder to maintain all such insurance at Mortgagor's cost and expense, and upon the Mortgagor's failure to do so, authorizes the holder of the Mortgage to obtain and maintain such insurance at Mortgagor's cost and expense and to seek reimbursement therefor from the Mortgagor. Any flood insurance required by applicable law has been obtained; (xxiv) The combined LTV of each Mortgage Loan was not more than 100% as of the date of origination of the Mortgage Loan and as of the Purchase Date. Each prime credit First Lien Mortgage Loan which is not insured by the FHA or guaranteed by the VA and which has an LTV -24- over 80% is and will be insured as to payment defaults by a policy of primary mortgage guaranty insurance in accordance with the Sale Agreement and all provisions of such primary mortgage guaranty insurance policy have been and are being complied with, such policy is in full force and effect, and all premiums due thereunder have been paid. Any Mortgage Loan subject to any such policy of primary mortgage guaranty insurance obligates the Mortgagor thereunder to maintain such insurance and pay all premiums and charges in connection therewith. No action, event or state of facts exists or has existed which, because of its involving or arising from any dishonest, fraudulent, criminal, negligent or knowingly wrongful act, error or omission by the Mortgagor or the originator or servicer of the Mortgage Loan, would result in the exclusion from, denial of, or defense to coverage which otherwise would be provided by such insurance; (xxv) [Reserved]; (xxvi) [Reserved] (xxvii) The Mortgaged Property consists of a single parcel of real property; (xxviii) There are no circumstances or conditions with respect to the Mortgage, the Mortgaged Property, the Mortgagor or the Mortgagor's credit standing that can be reasonably expected to cause private institutional investors to regard the Mortgage Loan as an unacceptable investment, cause the Mortgage Loan to become delinquent or adversely affect the value or marketability of the Mortgage Loan; (xxix) Such Mortgage Loan was, immediately prior to the sale to the related Purchaser of the related Mortgage Loan Pool, owned solely by the related Seller subject to the rights of any warehouse lender (which will be released simultaneous with the purchase) and any Takeout Investor, is not subject to any lien, claim or encumbrance, including, without limitation, any such interest pursuant to a loan or credit agreement for warehousing mortgage loans, and was originated and serviced in accordance with all applicable law and regulations, including without limitation the Federal Truth-in-Lending Act, the Real Estate Settlement Procedures Act, regulations issued pursuant to any of the aforesaid, and any and all rules, requirements, guidelines and announcements of the Applicable Agency, and, as applicable, the FHA and VA, as the same may be amended from time to time; (xxx) To the extent applicable, such Mortgage Loan is either insured by the FHA under the National Housing Act, guaranteed by the VA under the Servicemen's Readjustment Act of 1944 or is otherwise insured or guaranteed in accordance with the requirements of the GNMA, -25- FNMA or FHLMC Program, as applicable, and is not subject to any defect that would prevent recovery in full or in part against the FHA, VA or other insurer or guarantor, as the case may be; (xxxi) Such Mortgage Loan is in material compliance with the requirements and specifications (including, without limitation, all representations and warranties required in respect thereof) set forth in the GNMA Guide, FNMA Guide or FHLMC Guide, or the guide or agreements entered into with any Conduit, as applicable; (xxxii) The Servicer and any sub-servicer have all Approvals necessary to make such Mortgage Loan eligible to back a GNMA, FNMA or FHLMC Security, if applicable; (xxxiii) The Mortgage Note, the Mortgage, an assignment of Mortgage from the related Seller in blank (except with respect to MERS Mortgage Loans), and any other documents required to be delivered with respect to each Mortgage Loan pursuant to the Custodial Agreement, have been delivered to the Custodian all in compliance with the specific requirements of the Custodial Agreement; (xxxiv) With respect to each MERS Mortgage Loan, a Mortgage Identification Number has been assigned by MERS and such Mortgage Identification Number is accurately provided on the Mortgage Loan Schedule. The related Assignment of Mortgage to MERS has been duly and properly recorded or sent for recording; (xxxv) With respect to each MERS Mortgage Loan, Sellers have not received any notice of liens or legal actions with respect to such Mortgage Loan and no such notices have been electronically posted by MERS; (xxxvi) With respect to any MERS Mortgage Loan, the related Takeout Investor has been notified that the mortgagee of record is MERS and has consented to such assignment of such MERS Mortgage Loan; (xxxvii) No Mortgage Loan is (a)(1) subject to the provisions of the Homeownership and Equity Protection Act of 1994 as amended ("HOEPA") or (2) has an "annual percentage rate" or "total points and fees" (as each such term is defined under HOEPA) payable by the Mortgagor that equal or exceed the applicable thresholds defined under HOEPA (as defined in 12 CFR 226.32 (a)(1)(i) and (ii)), (b) a "high cost" mortgage loan, "covered" mortgage loan, "high risk home" mortgage loan, or "predatory" mortgage loan or any other comparable term, no matter how defined under any federal, state or local law, (c) subject to any comparable federal, state or local statutes or regulations, or any other statute or regulation providing for heightened regulatory scrutiny or -26- assignee liability to holders of such mortgage loans, or (d) a High Cost Loan or Covered Loan, as applicable (as such terms are defined in the current Standard & Poor's LEVELS(R) Glossary Revised, Appendix E); (xxxviii) No predatory or deceptive lending practices, including but not limited to, the extension of credit to a mortgagor without regard for the mortgagor's ability to repay the Mortgage Loan and the extension of credit to a mortgagor which has no apparent benefit to the mortgagor, were employed in connection with the origination of the Mortgage Loan. Each Mortgage Loan is in compliance with the anti-predatory lending eligibility for purchase requirements of GNMA, Fannie Mae and Freddie Mac; (xxxix) Each Mortgage Loan is eligible for sale in the secondary market without being priced at an unreasonable discount and for inclusion in a publicly issued or privately placed mortgage-backed securities transaction that can be rated by each nationally recognized rating agency without unreasonable credit enhancement; (xl) Each Mortgage Loan is subject to a mandatory Takeout Commitment at the locked-in Trade Price, and of a Takeout Investor to purchase such Mortgage Loans at such Trade Price on the related Settlement Date. The existence of such Takeout Commitment is confirmed in writing in the form of a Takeout Confirmation by Takeout Investor to Seller and contains all of the relevant details of the Takeout Commitment. Such Takeout Commitment and Takeout Confirmation have been assigned by the related Seller to the related Purchaser in writing and acknowledged and agreed to by the Takeout Investor in the form of a Trade Assignment or such other notification acceptable to the Purchaser in its sole discretion. The Settlement Date of the Takeout Commitment must be no more than 60 days after the Purchase Date; and (xli) With respect to each Wet Mortgage Loan, the Custodial File shall be delivered within seven Business Days of the related Purchase Date. The representations and warranties of Sellers in this Section 9 are unaffected by and supersede any provision in any endorsement of any Mortgage Loan or in any assignment with respect to such Mortgage Loan to the effect that such endorsement or assignment is without recourse or without representation or warranty. Section 10. Covenants of Sellers. Sellers hereby covenant and agree with Purchasers as follows: (a) Sellers shall deliver to Purchasers: (i) Within ninety (90) days after the end of each fiscal year of AHMI, the consolidated -27- balance sheets of each Seller and its consolidated subsidiaries, which will be in conformity with GAAP, and the related consolidated statements of income showing the financial condition of each Seller and its consolidated subsidiaries as of the close of such fiscal year, and the results of operations during such year, and a consolidated statement of cash flows, as of the close of such fiscal year, setting forth, in each case, in comparative form the corresponding figures for the preceding year. The foregoing consolidated financial statements are to be reported on by, and to carry the report (acceptable in form and content to Purchasers) of an independent public accountant of national standing acceptable to Purchasers and are to be accompanied by a letter of management in form and substance acceptable to Purchasers; (ii) Within forty-five (45) days after the end of each of the first three fiscal quarters of each fiscal year of each Seller, unaudited consolidated balance sheets and consolidated statements of income, all to be in a form acceptable to Purchasers, showing the financial condition and results of operations of each Seller and its consolidated subsidiaries on a consolidated basis as of the end of each such quarter and for the then elapsed portion of the fiscal year, setting forth, in each case, in comparative form the corresponding figures for the corresponding periods of the preceding fiscal year, certified by a financial officer of each Seller (acceptable to Purchasers) as presenting fairly the financial position and results of operations of each Seller and its consolidated subsidiaries and as having been prepared in accordance with GAAP consistently applied, in each case, subject to normal year-end audit adjustments; (iii) Reserved; (iv) Promptly upon becoming aware thereof, notice of (1) the commencement of, or any determination in, any legal, judicial or regulatory proceedings that if adversely determined would have a material adverse effect on the related Seller, (2) any material dispute between each Seller or its Parent Company and any governmental or regulatory body, (3) any event or condition, which, in any case of (1) or (2) is likely to be adversely determined, and would have a material adverse effect on (A) the validity or enforceability of this Agreement, (B) the financial condition or business operations of each Seller, or (C) the ability of Seller to fulfill its obligations under this Agreement or (4) any material adverse change in the business, operations, prospects or financial condition of Seller, including, without limitation, the insolvency of each Seller or its Parent Company; (v) [Reserved] (vi) [Reserved] -28- (vii) Prior to the first Purchase Date hereunder and at the request of any Purchaser at any time thereafter, a copy of an Officer's Certificate in the form attached hereto as Exhibit I together with (1) the articles of incorporation of the related Seller and any amendments thereto, certified by the Secretary of State of such Seller's state of incorporation, (2) a copy of such Seller's by-laws, together with any amendments thereto, and (3) a copy of the resolutions adopted by such Seller's Board of Directors authorizing such Seller to enter into this Agreement and the Custodial Agreement and authorizing one or more of such Seller's officers to execute the documents related to this Agreement and the Custodial Agreement; (viii) Evidence that all other actions necessary or, in the opinion of the related Purchaser, desirable to perfect and protect Purchaser's interest in the Mortgage Loans and other Collateral have been taken, including, without limitation, duly filed Uniform Commercial Code financing statements on Form UCC-1; (ix) Reserved; and (x) Such supplements to the aforementioned documents and such other information regarding the operations, business, affairs and financial condition of its Parent Company, each Seller or any of each Seller's consolidated subsidiaries as Purchasers may reasonably request in the possession of a Seller. (b) After the related Purchase Date, neither each Seller nor any affiliate thereof will acquire at any time any economic interest in or obligation with respect to any Mortgage Loan, except (i) in the case of Defective Mortgage Loans and (ii) to the extent that the Seller retains the servicing rights with respect to any Mortgage Loans purchased by the Purchaser hereunder; (c) Under GAAP and for federal income tax purposes, each Seller will report each sale of a Mortgage Loan to the related Purchaser hereunder as a sale of the ownership interest in the Mortgage Loan. Each Seller has been advised by or has confirmed with its independent public accountants that the foregoing transactions will be so classified under GAAP; (d) The consideration received by the related Seller upon the sale of each Mortgage Loan Pool will constitute reasonably equivalent value and fair consideration for the ownership interest in the Mortgage Loans included therein; (e) Each Seller will be solvent at all relevant times prior to, and will not be rendered insolvent by, any sale of a Mortgage Loan to any Purchaser; (f) Each Seller will not sell any Mortgage Loan to any Purchaser with any intent to hinder, delay or defraud any of each Seller's creditors; -29- (g) Each Seller shall comply, in all material respects, with all laws, rules and regulations to which it is subject; (h) Each Seller shall, upon request of any Purchaser, promptly execute and deliver to such Purchaser all such other and further documents and instruments of transfer, conveyance and assignment, and shall take such other action as such Purchaser may reasonably require more effectively to transfer, convey, assign to and vest in such Purchaser and to put such Purchaser in possession of the property to be transferred, conveyed, assigned and delivered hereunder and otherwise to carry out more effectively the intent of the provisions under this Agreement; (i) Each Seller is a member of MERS in good standing and current in the payment of all fees and assessments imposed by MERS, and has complied with all rules and procedures of MERS. Each Seller has entered into the Electronic Tracking Agreement. In accordance with the provisions of the Electronic Tracking Agreement, each Seller shall (1) cause each Mortgage Loan that is to be sold to the related Purchaser on a Purchase Date the Mortgage for which is recorded in the name of MERS to be designated a MERS Mortgage Loan and (2) cause the related Purchaser to be designated an Associated Member (as defined in the Electronic Tracking Agreement) with respect to each such MERS Mortgage Loan. In connection with the assignment of any Mortgage Loan registered on the MERS System, each Seller agrees that at the request of the related Purchaser it will, at each Seller's own cost and expense, cause the MERS System to indicate that such Mortgage Loan has been transferred to the related Purchaser in accordance with the terms of this Agreement by including in MERS' computer files (a) the code in the field which identifies the specific owner of the Mortgage Loans and (b) the code in the field "Pool Field" which identifies the series in which such Mortgage Loans were sold. Each Seller further agrees that it will not alter codes referenced in this paragraph with respect to any Mortgage Loan at any time that such Mortgage Loan is subject to this Agreement, and each Seller shall retain its membership in MERS at all times during the term of this Agreement; (j) The Seller shall not offer for sale to any Purchaser any second lien Mortgage Loans if the sale of such Mortgage Loans would cause the aggregate Purchase Price of all second lien Mortgage Loans which are then owned by the Purchasers pursuant to this Agreement to exceed of 15% of the Maximum Aggregate Purchase Price; (k) [Reserved] (l) The Seller shall not offer for sale to any Purchaser any Option-ARM Mortgage Loans if the sale of such Mortgage Loans would cause the aggregate Purchase Price of all Option-ARM Mortgage Loans which are then owned by the Purchasers pursuant to this Agreement to exceed $250,000,000; and (m) The Seller shall not offer for sale to any Purchaser any Wet Mortgage Loans either (a) during any day during any calendar month other than the last five (5) Business Days of the month or (b) if the sale of such Mortgage Loans would cause the aggregate Purchase Price of all Wet Mortgage Loans which are then owned by -30- the Purchasers pursuant to this Agreement to exceed 25% of the Maximum Aggregate Purchase Price. (n) Proceeds of any insurance on a Mortgaged Property that is paid to the related Seller shall be held in trust for the benefit of the related Purchaser. Section 11. Term. This Agreement shall continue in effect until terminated as to future transactions by written instruction signed by the Sellers or Purchasers and delivered to the other, provided that no termination will affect the obligations hereunder as to any of the Mortgage Loans purchased hereunder. Section 12. Exclusive Benefit of Parties; Assignment. This Agreement is for the exclusive benefit of the parties hereto and their respective successors and assigns and shall not be deemed to give any legal or equitable right to any other person, including the Custodian. Except as provided in Section 7, no rights or obligations created by this Agreement may be assigned by any party hereto without the prior written consent of the other parties. Any Person into which either Seller may be merged or consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Seller shall be a party, or any Person succeeding to the business of such Seller, shall be the successor of such Seller hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. Section 13. Amendments; Waivers; Cumulative Rights. This Agreement may be amended from time to time only by written agreement of Sellers and Purchasers. Any forbearance, failure or delay by either party in exercising any right, power or remedy hereunder shall not be deemed to be a waiver thereof, and any single or partial exercise by a Purchaser of any right, power or remedy hereunder shall not preclude the further exercise thereof. Every right, power and remedy of Purchasers shall continue in full force and effect until specifically waived by Purchasers in writing. No right, power or remedy shall be exclusive, and each such right, power or remedy shall be cumulative and in addition to any other right, power or remedy, whether conferred hereby or hereafter available at law or in equity or by statute or otherwise. Section 14. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. Section 15. Effect of Invalidity of Provisions. In case any one or more of the provisions contained in this Agreement should be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall in no way be affected, prejudiced or disturbed thereby. -31- Section 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflict of laws rules. Section 17. Notices. Any notices, consents, elections, directions and other communications given under this Agreement shall be in writing and shall be deemed to have been duly given when telecopied or delivered by overnight courier, personally delivered, or on the third day following the placing thereof in the mail, first class postage prepaid, to the respective addresses set forth in the first paragraph hereof for Sellers, Servicer and Purchasers, or to such other address as either party shall give notice to the other party pursuant to this Section 17. Copies of all notices to Sellers shall be delivered to the attention of Craig Pino and copies of all notices to Servicer shall be delivered to the attention of David M. Friedman, in each case with a copy of all legal notices delivered to the attention of Alan B. Horn, General Counsel. Copies of all notices to Purchasers shall be delivered to the attention of Glenn Minkoff. Section 18. Entire Agreement. This Agreement and the Custodial Agreement contain the entire agreement between the parties hereto with respect to the subject matter hereof, and supersede all prior and contemporaneous agreements between them, oral or written, of any nature whatsoever with respect to the subject matter hereof. Section 19. Costs of Enforcement. In addition to any other indemnity specified in this Agreement, Sellers agree to reimburse Purchasers as and when billed by Purchasers for all Purchasers' reasonable out-of-pocket costs and expenses, including reasonable attorneys' fees and expenses of Purchasers and/or Assignees, incurred in connection with the enforcement or the preservation of Purchasers' rights under this Agreement, including any costs incurred in the event of a breach by Seller of this Agreement, the Custodial Agreement or a Takeout Commitment. Section 20. Consent to Service . Each party irrevocably consents to the service of process by registered or certified mail, postage prepaid, to it at its address given in or pursuant to Section 17. Section 21. Submission to Jurisdiction. With respect to any claim arising out of this Agreement each party (a) irrevocably submits to the nonexclusive jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City, and (b) irrevocably waives (i) any objection which it may have at any time to the laying of venue of any suit, action or proceeding arising out of or relating hereto brought in any such court, (ii) any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum and (iii) the right to object, with respect to such claim, suit, action or proceeding brought in any such court, that such court does not have jurisdiction over such party. Section 22. Jurisdiction Not Exclusive. Nothing herein will be deemed to preclude either party hereto from bringing an action or proceeding in respect of this Agreement in any jurisdiction other than as set forth in Section 21. -32- Section 23. WAIVER OF JURY TRIAL. EACH PARTY HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 24. Construction. The headings in this Agreement are for convenience only and are not intended to influence its construction. References to Sections, Exhibits and Annexes in this Agreement are to the Sections of and Exhibits to this Agreement. The Exhibits are part of this Agreement, and are incorporated herein by reference. The singular includes the plural, the plural the singular, and the words "and" and "or" are used in the conjunctive or disjunctive as the sense and circumstances may require. Section 25. Further Assurances. Sellers and Purchasers each agree to execute and deliver to the other such reasonable and appropriate additional documents, instruments or agreements as may be necessary or appropriate to effectuate the purposes of this Agreement. Section 26. Joint and Several Liability. The liability of the Sellers hereunder is joint and several. The Sellers hereby: (a) acknowledge and agree that the Purchasers shall have no obligation to proceed against one Seller before proceeding against the other Seller, (b) waive any defense to their obligations under this Agreement, based upon or arising our of the disability or other defense or cessation of liability of one Seller versus the other or of any other Seller, and (c) waive any right or subrogation or ability to proceed against any Person until all amounts owed to Purchasers by Sellers pursuant to this Agreement are paid in full. Section 27. Expenses. Seller shall pay to Purchasers and their affiliates: (i) all of its reasonable fees and out-of-pocket expenses incurred in connection with the preparation, negotiation and execution of this Agreement and related documentation (including all reasonable fees and out-of-pocket expenses of its legal counsel incurred in connection with any amendments to this Agreement or any take-out); (ii) its due diligence expenses (including the diligence undertaken in connection with the execution of this Agreement and any on-going due diligence undertaken in connection with this Agreement or any take-out); provided that, the Sellers shall not be required to reimburse the Purchasers for due diligence costs in excess of $50,000 in any twelve month period unless the Purchasers require additional due diligence due to non-compliance, in which case the Sellers will reimburse the Purchasers directly for all reasonable out of pocket costs incurred in connection with such due diligence; and (iii) up front and ongoing custodial fees and expenses. Sellers shall reimburse Purchasers for any other fees and out-of-pocket expenses reasonably incurred in connection with this Agreement. All of the foregoing amounts shall be due and payable from time to time promptly after demand of Purchasers irrespective of the execution of this Agreement. [signature page follows] -33- IN WITNESS WHEREOF, Purchasers, Sellers and Servicer have duly executed this Agreement as of the date and year set forth on the cover page hereof. ASPEN FUNDING CORP. By: /s/ Doris J. Hearn ----------------------------------------- Name: Doris J. Hearn Title: Vice President GEMINI SECURITIZATION CORP., LLC By: /s/ R. Douglas Donaldson ----------------------------------------- Name: R. Douglas Donaldson Title: Treasurer NEWPORT FUNDING CORP. By: /s/ Doris J. Hearn ----------------------------------------- Name: Doris J. Hearn Title: Vice President AMERICAN HOME MORTGAGE CORP. By: /s/ Alan B. Horn ----------------------------------------- Name: Alan B. Horn Title: Executive Vice President, General Counsel and Secretary AMERICAN HOME MORTGAGE INVESTMENT CORP. By: /s/ Alan B. Horn ----------------------------------------- Name: Alan B. Horn Title: Executive Vice President, General Counsel and Secretary AMERICAN HOME MORTGAGE SERVICING, INC. By: /s/ Alan B. Horn ----------------------------------------- Name: Alan B. Horn Title: Executive Vice President, General Counsel and Secretary EXHIBIT A-1 TRUST RECEIPT RESIDENTIAL MORTGAGE LOANS No.________ Date:________ [Deutsche Bank National Trust Company], as custodian (the "Custodian"), certifies that [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.] ("Purchaser") is the registered owner of this Trust Receipt evidencing ownership of certain mortgage loans (the "Mortgage Loans") listed by identifying number on the schedule attached to this Trust Receipt and further identified in the books and records of the Custodian, owned of record by American Home Mortgage Corp. and American Home Mortgage Investment Corp., as applicable (the "Sellers") and interim serviced by American Home Mortgage Servicing, Inc. The Mortgage Note and Mortgage for each Mortgage Loan are held by Custodian, pursuant to the terms and conditions of that certain Custodial Agreement dated as of June 26, 2006 (the "Agreement") among Sellers, Purchaser, and Custodian. To the extent not defined herein, the capitalized terms used herein have the meanings assigned in the Agreement. This Trust Receipt is issued under and is subject to the terms, provisions and conditions of the Agreement, to which Agreement the holder of this Trust Receipt by virtue of the acceptance hereof assents and by which such holder is bound. This Trust Receipt supersedes any Trust Receipt bearing an earlier date. This Trust Receipt shall not be valid or become obligatory for any purpose unless and until the Certificate of Authentication appearing below has been duly executed by the Custodian. IN WITNESS WHEREOF, the Custodian has caused this Trust Receipt to be duly executed under its official seal. DEUTSCHE BANK NATIONAL TRUST COMPANY, as Custodian By: ----------------------------------------- Authorized Officer (Seal) Attest: By: Authorized Officer CERTIFICATE OF AUTHENTICATION This Trust Receipt is the Trust Receipt issued under the above-described Agreement. Dated:__________ By:________________________ Authorized Officer TRUST RECEIPT NO. ________ RESIDENTIAL MORTGAGE LOANS Following are the identifying numbers of the Mortgage Loans subject to this Trust Receipt: EXHIBIT A-2 WET LOAN TRUST RECEIPT Overnight Courier Tracking No.______ # of Loans:_______ Original Quantity $____ Product Type ______ [Aspen Funding Corp. Gemini Securitization Corp., LLC Newport Funding Corp.] 60 Wall Street New York, New York 10005 Attn: _________________ Re: Custodial Agreement, dated as of June 26, 2006 (the "Custodial Agreement"), among American Home Mortgage Corp. and American Home Mortgage Investment Corp., as Sellers, Deutsche Bank National Trust Company as Custodian, and Aspen Funding Corp., Gemini Securitization Corp., LLC and Newport Funding Corp. as Purchasers Ladies and Gentlemen: In accordance with the provisions of Section [__]of the above-referenced Custodial Agreement (capitalized terms not otherwise defined herein having the meanings ascribed to them in the Custodial Agreement, or if not defined in the Custodial Agreement, then in that certain Whole Loan Purchase and Sale Agreement, dated as of June 26, 2006 between the Sellers and Purchaser (the "Purchase Agreement")), the undersigned, as the Custodian, hereby certifies as to each Mortgage Loan described in the attached Custodian Loan Transmission all matters (subject to the Exceptions listed therein) set forth in Section 3 of the Custodial Agreement, subject to the limitation set forth in Section 3(b) of the Custodial Agreement. The delivery of this Trust Receipt evidences that (i) the Custodian has reviewed all documents required to be delivered in respect of each Mortgage Loan listed herein pursuant to Section 2(a)(i), (ii), and (iii) of this Custodial Agreement and the documents listed in Sections (i), (ii), (iii), (iv) and (v) of Annex 16 (and if actually delivered to the Custodian the documents listed in Sections (vi) - (ix) of Annex 16) and such documents other than the Exceptions listed herein are in the possession of the Custodian as part of the Mortgage File for such Mortgage Loan, (ii) the Custodian is holding each Mortgage Loan identified on the Custodian Loan Transmission, pursuant to the Custodial Agreement, as the bailee of and custodian for the Purchaser and (iii) such documents have been reviewed by the Custodian and appear on their face to be regular and to relate to such Mortgage Loan and satisfy the requirements set forth in Section 3(a) of the Custodial Agreement and the Review Procedures. On each date the Custodian delivers to the Purchaser a Trust Receipt, it shall supersede the Trust Receipt, previously delivered by the Custodian to the Purchaser hereunder. The most recently delivered Trust Receipt, shall control and be binding upon the parties hereto. DEUTSCHE BANK NATIONAL TRUST COMPANY, as Custodian By: Name: Title: EXHIBIT B-1 [WAREHOUSE LENDER'S RELEASE] Aspen Funding Corp. Gemini Securitization Corp., LLC Newport Funding Corp. 60 Wall Street New York, New York 10005 Ladies and Gentlemen: We hereby release all right, interest or claim of any kind, including any security interest or lien, with respect to the mortgage loan(s) referenced below, such release to be effective automatically without any further action by any party, upon payment, in one or more installments, by either Aspen Funding Corp., Gemini Securitization Corp., LLC or Newport Funding Corp., in accordance with the wire instructions which we delivered to you in a letter dated _________, ____, in immediately available funds, of an aggregate amount equal to __________. - ----------------------------------------------------------------- Street Loan # Mortgagor Address City State Zip - ----------------------------------------------------------------- Very truly yours, [WAREHOUSE LENDER] By: _____________________ Name: _____________________ Title: _____________________ EXHIBIT B-2 [WAREHOUSE LENDER'S WIRE INSTRUCTIONS] [Aspen Funding Corp. Gemini Securitization Corp., LLC Newport Funding Corp.] 60 Wall Street New York, New York 10005 Re: Aspen Funding Corp., Gemini Securitization Corp., LLC and Newport Funding Corp. Mortgage Loan Purchase Program with American Home Mortgage Corp. and American Home Mortgage Investment Corp. and American Home Mortgage Servicing, Inc. Ladies and Gentlemen: Set forth below are [Warehouse Lender's] wire instructions applicable to the above-referenced Purchase Program. Wire Instructions: Bank Name: --------------------------------- City, State: --------------------------------- ABA #: --------------------------------- Account #: --------------------------------- Account Name: --------------------------------- Please acknowledge receipt of this letter in the space provided below. This letter supersedes and replaces any prior notice specifying the name of [Warehouse Lender] and setting forth wire instructions and shall remain in effect until superseded and replaced by a letter, in the form of this letter, executed by each of us and acknowledged by you. Very truly yours, [AMERICAN HOME MORTGAGE CORP.] [AMERICAN HOME MORTGAGE INVESTMENT CORP.] By: ___________________________ Name: ___________________________ Title: ___________________________ [WAREHOUSE LENDER(S)]* By: : ___________________________ Name: ___________________________ Title: ___________________________ [ASPEN FUNDING CORP. GEMINI SECURITIZATION CORP., LLC NEWPORT FUNDING CORP.] By: ________________________ Name: ________________________ Title: ________________________ - ------------------------ * The authorized officer of each warehouse lender executing this letter must be the same authorized officer as signs the Exhibit B-1 Letter. Not applicable if there is no warehouse lender. EXHIBIT C-1 [SELLER'S RELEASE] [Aspen Funding Corp. Gemini Securitization Corp., LLC Newport Funding Corp.] 60 Wall Street New York, New York 10005 Ladies and Gentlemen: With respect to the mortgage loan(s) referenced below (a) we hereby certify to you that the mortgage loan(s) is not subject to a lien of any warehouse lender and (b) we hereby release all right, interest or claim of any kind with respect to such mortgage loan, such release to be effective automatically without any further action by any party upon payment from Purchaser to Seller of an aggregate amount equal to ______________. - ----------------------------------------------------------------- Street Loan # Mortgagor Address City State Zip - ----------------------------------------------------------------- Very truly yours, [AMERICAN HOME MORTGAGE CORP.][AMERICAN HOME MORTGAGE INVESTMENT CORP.] By: ________________________ Name: ________________________ Title: ________________________ EXHIBIT C-2 [SELLER'S WIRE INSTRUCTIONS] Aspen Funding Corp. Gemini Securitization Corp., LLC Newport Funding Corp. 60 Wall Street New York, New York 10005 Re: Custodial Agreement dated as of June 26, 2006, among Aspen Funding Corp., Gemini Securitization Corp., LLC, Newport Funding Corp., American Home Mortgage Corp., American Home Mortgage Investment Corp. and [Deutsche Bank National Trust Company] Ladies and Gentlemen: Capitalized terms used herein and not defined herein shall have the meanings ascribed to such terms in the above-referenced Custodial Agreement. Set forth below are Seller's Wire Instructions applicable to the above-referenced Custodial Agreement. Wire Instructions: Bank Name: --------------------------------- City, State: --------------------------------- ABA #: --------------------------------- Account #: --------------------------------- Account Name: --------------------------------- Please acknowledge receipt of this letter in the space provided below. This letter supersedes and replaces any prior notice specifying the name of Seller and Seller's Wire Instructions and shall remain in effect until superseded and replaced by a letter, in the form of this letter, executed by each of us and acknowledged by you. Very truly yours, [AMERICAN HOME MORTGAGE CORP.][AMERICAN HOME MORTGAGE INVESTMENT CORP.] By _________________________________ Name: _________________________________ Title: _________________________________ Receipt acknowledged by: [ASPEN FUNDING CORP. GEMINI SECURITIZATION CORP., LLC NEWPORT FUNDING CORP.] By: ________________________ Name: ________________________ Title: ________________________ EXHIBIT D-1 [TRADE ASSIGNMENT] _______________ ("Takeout Investor") [Address] Attention: ____________________ Ladies and Gentlemen: Attached hereto is a correct and complete copy of your confirmation of commitment [or a portion thereof] (the "Commitment"), trade-dated _______________ _, ____, to purchase $_______________ of mortgage loans of which $__________ of mortgage loans (the "Mortgage Loans") is assigned to [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.} at a purchase price of _______________. This is to confirm that (i) the Commitment is in full force and effect, (ii) the Commitment is hereby assigned to [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.] (the "Assignee"), (iii) you will accept delivery of such Mortgage Loans directly from THE ASSIGNEE, (iv) you will pay the Assignee for such Mortgage Loans, (v) upon the Assignee's acceptance of this assignment, the Assignee is obligated to make delivery of such Mortgage Loans to you in accordance with the attached Commitment and (vi) upon the Assignee's acceptance of this assignment, you will release Seller from its obligation to deliver the Mortgage Loans to you under the Commitment. Upon the Assignee's determination not to accept an assignment, the Assignee will notify you that this assignment is rejected. Not later than 2:00 P.M. Eastern Standard Time one business day prior to your satisfaction of the Commitment, you shall fax a purchase confirmation to the Assignee at ____________, Attention: _______________. Payment will be made to the Assignee in immediately available funds. Very truly yours, [AMERICAN HOME MORTGAGE CORP.][AMERICAN HOME MORTGAGE INVESTMENT CORP.] By: ____________________________________ Name: ____________________________________ Title: ____________________________________ Agreed to, confirmed and accepted: [TAKEOUT INVESTOR] By: ____________________________________ Name: ____________________________________ Title: ____________________________________ EXHIBIT D-2 [TRADE ASSIGNMENT] (Blanket) ____________("Takeout Investor") [Address] Attention: ______________ Ladies and Gentlemen: This is to confirm that (i) your commitments ("Commitment"), made from time to time, to purchase mortgage loans (the "Mortgage Loans") from Seller may be assigned to [Aspen Funding Corp./Gemini Securitization Corp. LLC/Newport Funding Corp.] (the "Assignee"), (ii) you will accept delivery of such Mortgage Loans directly from the Assignee, (iii) you will pay the Assignee for such Mortgage Loans, (iv) upon the Assignee's acceptance of this assignment with respect to any Commitment, the Assignee will be obligated to make delivery of such Mortgage Loans to you in accordance with such Commitment and (v) upon the Assignee's acceptance of such assignment with respect to any Commitment, you will release Seller from its obligation to deliver the related Mortgage Loans to you under such Commitment but Seller will not be released from any of its other obligations under the Whole Loan Purchase and Sale Agreement. Your agreement to the foregoing shall remain in effect until terminated by your giving notice of such termination to Seller in the form attached hereto as Exhibit 1. Upon the Assignee's determination not to accept an assignment, the Assignee will notify you that this assignment is rejected with respect to the related Commitment. Not later than 9:00 A.M. Eastern Standard Time on the business day that you purchase the Mortgage Loans, you shall fax a purchase list containing the information required by the Mortgage Loan Settlement Summary to the Assignee at ____________, Attention: _______________. You may also transmit such information electronically by 10:00 A.M. on such business day. Payment will be made to the Assignee in immediately available funds. Very truly yours, [AMERICAN HOME MORTGAGE CORP.][AMERICAN HOME MORTGAGE INVESTMENT CORP.] By: ____________________________________ Name: ____________________________________ Title: ____________________________________ Agreed to, confirmed and accepted: [TAKEOUT INVESTOR] By: ____________________________ Name: ____________________________ Title: ____________________________ EXHIBIT 1 to EXHIBIT D-2 [WITHDRAWAL OF CONSENT TO BLANKET TRADE ASSIGNMENT] American Home Mortgage Corp. 538 Broadhollow Road Melville, New York 11747 American Home Mortgage Investment Corp. 538 Broadhollow Road Melville, New York 11747 Ladies and Gentlemen: The undersigned hereby terminates its agreement to [American Home Mortgage Corp.][American Home Mortgage Investment Corp.]'s assignment of Commitments to the Assignee, which approval was given pursuant to the Trade Assignment dated ____________. This termination shall be effective as of ___________ but shall not affect the assignment of any Commitment which assignment was made prior to the date hereof. Capitalized terms not defined herein shall have the meanings set forth in the Trade Assignment. Very truly yours, [TAKEOUT INVESTOR] By: ____________________________________ Name: ____________________________________ Title: ____________________________________ Copy to: [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.] EXHIBIT E [PURCHASER'S WIRE INSTRUCTIONS] [Takeout Investor] [Address] Re:Custodial Agreement dated as of June 26, 2006, among Aspen Funding Corp., Gemini Securitization Corp., LLC, Newport Funding Corp., American Home Mortgage Corp., American Home Mortgage Investment Corp. and Deutsche Bank National Trust Company Ladies and Gentlemen: Capitalized terms used herein and not defined herein shall have the meanings ascribed to such terms in the above-referenced Custodial Agreement. Set forth below are the Purchaser's Wire Instructions applicable to the above-referenced Custodial Agreement. Wire Instructions: ---------------------------------------- Bank Name: ---------------------------------------- City, State: ---------------------------------------- ABA #: ---------------------------------------- Account #: ---------------------------------------- Account Name: ---------------------------------------- Please acknowledge receipt of this letter in the space provided below. This letter supersedes and replaces any prior notice specifying the name of Purchaser and the Purchaser's Wire Instructions and shall remain in effect until superseded and replaced by a letter, in the form of this letter, executed by each of us and acknowledged by you. Very truly yours, [ASPEN FUNDING CORP. GEMINI SECURITIZATION CORP., LLC NEWPORT FUNDING CORP.] By: ___________________________________ Name: ___________________________________ Title: ___________________________________ Receipt acknowledged by: [TAKEOUT INVESTOR] By: _________________________ Name: _________________________ Title: _________________________ cc: [American Home Mortgage Corp.] [American Home Mortgage Investment Corp.] [Deutsche Bank National Trust Company] EXHIBIT F [FORM OF CONFIRMATION] TO: American Home Mortgage Corp. 538 Broadhollow Road Melville, New York 11747 American Home Mortgage Investment Corp. 538 Broadhollow Road Melville, New York 11747 DATE: RE: Confirmation of Purchase of Mortgage Loans [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.] ("Purchaser") is pleased to confirm its agreement to purchase and your agreement to sell the Mortgage Loans relating to the pool number referred to herein, pursuant to the Whole Loan Purchase and Sale Agreement, dated as of June 26, 2006 (the "Whole Loan Purchase and Sale Agreement"), among Aspen Funding Corp., Gemini Securitization Corp., LLC, Newport Funding Corp., American Home Mortgage Corp., American Home Mortgage Investment Corp. and American Home Mortgage Servicing, Inc. under the following terms and conditions: Pool No. ________________ Check as appropriate: Cash Window Transaction__Conduit Transaction (Conduit): Purchase Date ___________ Settlement Date _________ Discount ________________ Purchase Price __________ Pass-Through Rate _______ Total Principal Amount of the Pool ________________ Capitalized terms used and not otherwise defined herein shall have the meanings ascribed in the Whole Loan Purchase and Sale Agreement. Very truly yours, [ASPEN FUNDING CORP. GEMINI SECURITIZATION CORP., LLC NEWPORT FUNDING CORP.] By: ___________________________________ Name: ___________________________________ Title: ___________________________________ EXHIBIT G [NOTICE OF REJECTION OF TRADE ASSIGNMENT] ("Takeout Investor") [Address] Attention: ____________ Ladies and Gentlemen: [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.] (the "Assignee") hereby notifies you that it does not intend to purchase a 100% ownership interest in $_____________ in mortgage loans (the "Mortgage Loans") that you committed to purchase from [American Home Mortgage Corp.][American Home Mortgage Investment Corp.] pursuant to your confirmation of commitment (the "Commitment") trade-dated _______, ____ a copy of which is attached hereto. Accordingly, the assignment of the Commitment by Seller to the Assignee is hereby rejected, and the Assignee shall have no obligations thereunder. Very truly yours, [ASPEN FUNDING CORP. GEMINI SECURITIZATION CORP., LLC NEWPORT FUNDING CORP.] By: ___________________________________ Name: ___________________________________ Title: ___________________________________ cc: [American Home Mortgage Corp.] [American Home Mortgage Investment Corp.] [Deutsche Bank National Trust Company] EXHIBIT H [SETTLEMENT MODIFICATION LETTER] [DATE] [Aspen Funding Corp. Gemini Securitization Corp., LLC Newport Funding Corp.] 60 Wall Street New York, New York 10005 Attention: ________________ [American Home Mortgage Corp. 538 Broadhollow Road Melville, New York 11747] [American Home Mortgage Investment Corp. 538 Broadhollow Road Melville, New York 11747] Re: The Attached Confirmation of Commitment Ladies and Gentlemen: Attached hereto is a correct and complete copy of our confirmation of commitment ("Commitment"). We hereby confirm that we have irrevocably approved the Mortgage Loans subject to the Commitment for purchase by us and we hereby agree to purchase such Mortgage Loan(s) from [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.] (the "Assignee") in accordance with the terms of the Commitment or, if this letter is executed by the Assignee and [American Home Mortgage Corp.][American Home Mortgage Investment Corp.], in accordance with the terms of the Commitment as amended hereby. We hereby request that the Commitment be amended as follows: (i) the Settlement Date set forth in the Commitment shall be; (ii) the aggregate outstanding principal balance of the Mortgage Loans shall be $_______________ ; (iii) the aggregate amount of accrued interest on the Mortgage Loans shall be $ ; (iv) the trade price shall be %; and (v) the total amount payable to the Assignee shall be $ If we fail to pay you the amount set forth in clause (v) above on the amended Settlement Date, interest shall accrue on such amount at a rate equal to the weighted average of the Pass-Through Rates related to such Mortgage Loans. If the amendments to the Commitment set forth above are acceptable to you, please so indicate by executing this letter in the appropriate space provided below and return it to us via facsimile at [TAKEOUT INVESTOR] By:______________________ Title: Agreed to: [AMERICAN HOME MORTGAGE CORP.] [AMERICAN HOME MORTGAGE INVESTMENT CORP.] By: Title: Facsimile #:._____________ Agreed to: ASPEN FUNDING CORP. GEMINI SECURITIZATION CORP., LLC NEWPORT FUNDING CORP. By:________________________ EXHIBIT I SELLER'S OFFICER'S CERTIFICATE I, ________________, hereby certify that I am the duly elected ________________ of [American Home Mortgage Corp.][American Home Mortgage Investment Corp.], a [New York][Maryland] corporation (the "Seller"), and further certify, on behalf of the Seller as follows: 1. Attached hereto as Attachment I is a true and correct copy of the articles of incorporation and by-laws of the Seller as are in full force and effect on the date hereof. 2. Attached hereto as Attachment II is a Certificate of Good Standing of the Seller, issued by the Secretary of the State of ________ dated _____, ____. No event has occurred since _______, ____ which has affected the good standing of the Seller under the laws of the State of [New York][Maryland]. 3. Each person who, as an officer or attorney-in-fact of the Seller, signed (a) the Whole Loan Purchase and Sale Agreement (the "Purchase Agreement"), dated as of _________ __, ____, among the Seller, [American Home Mortgage Corp.][American Home Mortgage Investment Corp.], American Home Mortgage Servicing, Inc. and Aspen Funding Corp., Gemini Securitization Corp., LLC and Newport Funding Corp. (the "Purchasers"); (b) the Custodial Agreement (the "Custodial Agreement"), dated as of ___________ __, ____, by and among the Seller, the Purchaser and _______________; and (c) any other document delivered prior hereto or on the date hereof in connection with transactions contemplated in the Purchase Agreement was, at the respective times of such signing and delivery, and is as of the date hereof, duly elected or appointed, qualified and acting as such officer or attorney-in-fact, and the signatures of such persons appearing on such documents are their genuine signatures. 4. Attached hereto as Attachment III is a true and correct copy of the resolutions duly adopted by the board of directors of the Seller on __________, ____ (the "Resolutions") with respect to the authorization and approval of the transactions contemplated in the Purchase Agreement; said Resolutions have not been amended, modified, annulled or revoked and are in full force and effect on the date hereof. 5. All of the representations and warranties of the Seller contained in the Purchase Agreement were true and correct in all material respects as of the date of the Purchase Agreement and are true and correct in all material respects as of the date hereof and the Seller has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to the date hereof.. 6. The Seller has performed all of its duties and has satisfied all the material conditions on its part to be performed or satisfied pursuant to the Purchase Agreement on or prior to the date hereof. 7. There are no actions, suits or proceedings pending or, to my knowledge, threatened, against or affecting the Seller which, if adversely determined either individually or in the aggregate, would adversely affect the Seller's obligations under the Purchase Agreement or the Custodial Agreement. 8. No proceedings that could result in the liquidation or dissolution of the Seller are pending or contemplated. 9. Incumbency of Officers. The below named persons have been duly elected or appointed, and have been duly qualified as officers of the Seller holding the respective office below set opposite his or her name, and the signature below set opposite his or her name is his or her genuine signature. - --------------------------------------------------------------------------- Name Office Signature - -------------------- --------------------- ------------------------ - -------------------- --------------------- ------------------------ - -------------------- --------------------- ------------------------ All capitalized terms used herein and not otherwise defined shall have the meaning assigned to them in the Purchase Agreement. IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of the Seller. Dated: _________ __, ____ [Seal] --------------------- By: ______________________________ Name Title: I, ___________________, _________ of ______________, hereby certify that ________________ is the duly elected, qualified and acting _______________ of __________ and that the signature appearing above is the genuine signature of such person. IN WITNESS WHEREOF, I have hereunto signed my name. Dated: ____________ __, ____ [Seal] ---------------------- By: ________________________________ Name: Title: EXHIBIT J SELLER'S OFFICER'S CERTIFICATE I, ________________, hereby certify that I am the duly elected ________________ of [American Home Mortgage Corp.][American Home Mortgage Investment Corp.], a [New York][Maryland] corporation (the "Seller"), and further certify, on behalf of the Seller as follows: 1. There has been no change in the articles of incorporation and by-laws of the Seller since the date such documents were provided to the Purchaser and such documents are in full force and effect on the date hereof. 2. No event has occurred since the date of the last good standing certificate of the Seller provided to the Purchaser which has affected the good standing of the Seller under the laws of the State of [New York][Maryland]. 3. All of the representations and warranties of the Seller contained in the Purchase Agreement, including but not limited to the representations and warranties as to the Mortgage Loans being sold to the Purchaser on the date hereof, are true and correct in all material respects as of the date hereof and the Seller has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to the date hereof.. 4. The Seller has performed all of its duties and has satisfied all the material conditions on its part to be performed or satisfied pursuant to the Purchase Agreement on or prior to the date hereof. 5. There are no actions, suits or proceedings pending or, to my knowledge, threatened, against or affecting the Seller which, if adversely determined either individually or in the aggregate, would adversely affect the Seller's obligations under the Purchase Agreement or the Custodial Agreement. 6. No proceedings that could result in the liquidation or dissolution of the Seller are pending or contemplated. 7. To the best of my knowledge after due inquiry and investigation, no Event of Default has occurred prior to the date hereof or is occurring on the date hereof. 8. Under generally accepted and regulatory accounting principles ("GAAP") and for federal income tax purposes, the Seller will report the transfer of the Mortgage Loans by the Seller to the Purchaser as a sale of the Mortgage Loans. The Seller has been advised by, or has confirmed with, its independent public accountants that the foregoing transactions will be so classified. 9. Each Mortgage Loan to be sold to the Purchaser on the date hereof was originated by the Seller or purchased from an approved originator previously approved by the Purchaser not later than 60 days prior to the date hereof. No Mortgage Loan was rejected for purchase or financing by any third party. All capitalized terms used herein and not otherwise defined shall have the meaning assigned to them in the Purchase Agreement. IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of the Seller. Dated: _________ __, ____ [Seal] --------------------- By: _____________________________ Name Title: I, ___________________, _________ of ______________, hereby certify that ________________ is the duly elected, qualified and acting _______________ of __________ and that the signature appearing above is the genuine signature of such person. IN WITNESS WHEREOF, I have hereunto signed my name. Dated: ____________ __, _____ [Seal] ---------------------- By:________________________________ Name: Title: EXHIBIT K LIST OF CONDUITS EXHIBIT L MORTGAGE LOAN SCHEDULE EXHIBIT M FORM OF TRANSACTION NOTICE ____________, 200_ Aspen Funding Corp. Newport Funding Corp. Gemini Securitization Corp., LLC. 60 Wall Street New York, NY 10005 Attention: Frank Grausso Deutsche Bank National Trust Company 1761 East St. Andrew Place Santa Ana, California 92705 Attention: Norma Catone Transaction No._____________ Ladies and Gentlemen: The undersigned executes and delivers this notice (the "Notice") pursuant to the requirements of the Whole Loan Purchase and Sale Agreement, dated as of [______], 2006 (the "Agreement"), among Aspen Funding Corp. ("Aspen"), Newport Funding Corp. ("Newport"), Gemini Securitization Corp., LLC ("Gemini" and collectively with Aspen and Newport, the "Purchasers" and individually a "Purchaser"), and American Home Mortgage Corp. ("AHMC") and American Home Investment Corp. ("AHMI" and together with AHMC, each individually, a "Seller" and together, the "Sellers") in connection with the submission for sale thereunder on _________ __, 200__ (the "Purchase Date") of the Purchased Loans identified on the Schedule attached hereto. All capitalized terms used in this Notice without definition shall have the same meanings herein as they have in the Whole Loan Purchase and Sale Agreement. [AHMC/AHMI] hereby represents and certifies to [Aspen] [Newport] [Gemini] (the "Purchaser") as follows: 1. As of this date, the Seller is in compliance with all of the terms and conditions of the Agreement and all other related agreements (the "Program Documents"). 2. The Seller's representations and warranties set forth in the Program Documents are true and accurate as of the date of this Notice. 3. All of the conditions to the proposed purchase to which this Notice relates have been satisfied. 4. Upon payment of the Purchase, all of the right (including the power to convey title thereto), title and interest in and to each Mortgage Loan shall be transferred, assigned, set over and otherwise conveyed to the Purchaser. 5. The general terms of the sale are: A. Aggregate original principal balance of the Mortgage Loans as of the Purchase Date: _________ B. Aggregate outstanding principal balance of the Mortgage Loans as of the Purchase Date: _________ C. Number of loans: _________ D. Purchase Price: _________ E. Purchase Date: ___________ Wire Instructions For Seller: [Bank Name: City, State: ABA #: Account #: Account Name: Attention: ] IN WITNESS WHEREOF, the parties hereto have executed and delivered this Notice as of the date first above written. AMERICAN HOME MORTGAGE CORP./AMERICAN HOME MORTGAGE INVESTMENT CORP as Seller By: _______________________________ Name: _______________________________ Title: _______________________________ EXHIBIT N Mortgage Loan Pool EX-10.1.2 3 am063006-ex10_1point2.txt WHOLE LOAN CUSTODIAL AGREEMENT Exhibit 10.1.2 WHOLE LOAN CUSTODIAL AGREEMENT ASPEN FUNDING CORP. Purchaser, 60 Wall Street New York, New York 10005 GEMINI SECURITIZATION CORP., LLC. Purchaser, 60 Wall Street New York, New York 10005 NEWPORT FUNDING CORP. Purchaser, 60 Wall Street New York, New York 10005 and AMERICAN HOME MORTGAGE CORP. Seller, 538 Broadhollow Road Melville, New York 11747 AMERICAN HOME MORTGAGE INVESTMENT CORP. Seller, 538 Broadhollow Road Melville, New York 11747 AMERICAN HOME MORTGAGE SERVICING, INC., Servicer, 4600 Regent Blvd., Suite 200 Irving, Texas 75063 and DEUTSCHE BANK NATIONAL TRUST COMPANY Custodian 1761 East St. Andrew Place Santa Ana, California 92705 Attn: Mortgage Custody - AH064C Dated as of June [__], 2006 TABLE OF CONTENTS Page Section 1. Definitions.....................................................1 Section 2. Delivery of Documents by Sellers................................6 Section 3. Custodian as Custodian for, and Bailee of, Purchasers, Assignee and Warehouse Lender...........................................6 Section 4. Certification by Custodian; Delivery of Documents; Disbursement Account........................................................7 Section 5. [Reserved].....................................................11 Section 6. Default........................................................12 Section 7. Access to Documents............................................12 Section 8. Custodian's Fees and Expenses; Successor Custodian; Standard of Care..........................................................12 Section 9. Assignment by Purchaser........................................15 Section 10. Insurance......................................................16 Section 11. Representations, Warranties and Covenants......................16 Section 12. No Adverse Interests...........................................18 Section 13. Amendments.....................................................18 Section 14. Execution in Counterparts......................................18 Section 15. Agreement for Exclusive Benefit of Parties; Assignment.........18 Section 16. Effect of Invalidity of Provisions.............................18 Section 17. Governing Law..................................................19 Section 18. Consent to Service.............................................19 Section 19. Notices........................................................19 Section 20. Construction...................................................19 Section 21. Submission to Jurisdiction.....................................19 Section 22. WAIVER OF JURY TRIAL...........................................19 EXHIBITS Exhibit A-1 [Reserved] Exhibit A-2 [Reserved] Exhibit B-1 Conduit Submission Package Exhibit B-2 Conduit Master Bailee Letter Exhibit C Request for Certification Exhibit D-1 Trust Receipt Exhibit D-2 Wet Mortgage Loan Trust Receipt Exhibit E- 1 Warehouse Lender's Release Exhibit E-2 Warehouse Lender's Wire Instructions Exhibit F-l Seller's Release Exhibit F-2 Seller's Wire Instructions Exhibit G-l Purchaser's Wire Instructions to Seller Exhibit G-2 Purchaser's Wire Instructions to Custodian Exhibit G-3 Purchaser's Delivery Instructions to Custodian Exhibit H Notice by Assignee to Custodian of Purchaser's Default Exhibit I Notice of Assignment Exhibit J Form of Delivery Instructions Exhibit K-1 Trade Assignment Exhibit K-2 Trade Assignment (Blanket) Exhibit L Officer's Certificate of Seller Exhibit M Request for Release Schedule A List of Conduits Schedule B Loan Identification Data CUSTODIAL AGREEMENT THIS CUSTODIAL AGREEMENT ("Agreement"), dated as of the date set forth on the cover page hereof (the "Effective Date"), is entered into by and among ASPEN FUNDING CORP., GEMINI SECURITIZATION CORP., LLC and NEWPORT FUNDING CORP. (each individually, a "Purchaser" and together, the "Purchasers"), DEUTSCHE BANK NATIONAL TRUST COMPANY, as custodian ("Custodian") and AMERICAN HOME MORTGAGE CORP., AMERICAN HOME MORTGAGE INVESTMENT CORP., (each individually, a "Seller" and together, the "Sellers") and AMERICAN HOME MORTGAGE SERVICING, INC., (the "Servicer"). PRELIMINARY STATEMENT Purchasers have agreed to purchase from Sellers, from time to time, at their sole election, certain mortgage loans pursuant to the terms and conditions of the Whole Loan Purchase and Sale Agreement ("Purchase Agreement") among Purchasers, Servicer, and Sellers. Servicer is obligated to interim service the Mortgage Loans pursuant to the terms and conditions of the Purchase Agreement. Purchasers desire to have Custodian take possession of the Mortgage Notes evidencing the Mortgage Loans, along with certain other documents specified herein, as the custodian for and bailee of the related Purchaser or Assignee in accordance with the terms and conditions hereof. The parties hereto agree as follows: Section 1. Definitions. Capitalized terms used, but not defined, herein shall have the meanings set forth in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: "Applicable Guide": With respect to each Takeout Investor the applicable guide published by such Takeout Investor setting forth the requirements Mortgage Loans must satisfy in order to be eligible for purchase by such Takeout Investor as amended or supplemented from time to time. "Assignee": The party identified in writing to Sellers and Custodian by Purchasers from time to time who acts as agent for certain beneficiaries pursuant to certain custody agreements with Purchasers. "Assignment of Mortgage": An assignment of the Mortgage, notice of transfer or equivalent instrument sufficient under the laws of the jurisdiction wherein the related Mortgaged Property is located to reflect of record the sale of a Mortgage Loan. "Bailee Letter": A Conduit Bailee Letter. "Business Day": Any day other than (a) a Saturday, Sunday or other day on which banks located in The City of New York, New York or California are authorized or obligated by law or executive order to be closed or (b) any day on which the Servicer, Purchasers or Custodian is authorized or obligated by law or executive order to be closed. "Commitment": A commitment executed by Takeout Investor and the related Seller evidencing Takeout Investor's agreement to purchase one or more Mortgage Loans from such Seller and such Seller's agreement to sell one or more Mortgage Loans to an investor in a forward trade by the applicable Expiration Date. "Conduit": Any of the entities listed on Schedule A, as amended or supplemented from time to time. "Conduit Bailee Letter": The master bailee letter, in the form of Exhibit B-2, for use by Custodian in connection with the delivery of a Conduit Submission Package, for the purpose of delivering the related Conduit Submission Package, excluding (i) a copy of the Confirmation, (ii) the Warehouse Lender's Release or the related Seller's Release, as applicable, and (iii) the original Assignment of Mortgage, in blank, to a Conduit. "Conduit Submission Package": The documents listed on Exhibit B-1, which shall be delivered by the related Seller to Custodian in connection with each Conduit Transaction. "Conduit Transaction": A transaction initiated by the related Seller's delivery of a Request for Certification which identifies a Conduit as the Takeout Investor. "Confirmation": A written confirmation as required by the Purchase Agreement of Purchaser's intent to purchase a pool of Mortgage Loans. "Custodian": The party identified on the cover page hereto and its permitted successors hereunder. "Delivery Instructions": With respect to a Mortgage Loan, instructions prepared by Sellers and transmitted electronically in an appropriate data layout no later than 11:00 a.m. New York City time, in the form of Exhibit J indicating the address for the delivery by Custodian of the applicable portion of the related Submission Package. "Disbursement Account": shall have the meaning set forth in Section 4(a)(2) hereof. "Discount": With respect to a Mortgage Loan sold by the related Seller to the Purchaser, the amount set forth on the related Confirmation as the Discount. "Electronic Agent": Shall have the meaning assigned to such term in Section 2 of the Electronic Tracking Agreement. "Electronic Tracking Agreement" The Electronic Tracking Agreement, dated as of the date hereof, among the Purchasers, the Sellers, the Servicer, the Electronic Agent and MERS, as the same shall be amended, supplemented or otherwise modified from time to time. -2- "Expiration Date": With respect to any Commitment, the expiration date thereof. "Funding Confirmation": With respect to all Mortgage Loans purchased by the related Purchaser from Sellers via a single wire funds transaction on a particular Business Day, the trade confirmation from such Purchaser to Sellers confirming the terms of such Purchaser's purchase of such Mortgage Loans. "GNMA": The Government National Mortgage Association and any successor thereto. "HUD": United States Department of Housing and Urban Development and any successor thereto. "Loan Identification Data": The applicable information regarding a Mortgage Loan, set forth on a Request for Certification, which shall include the fields set forth on Schedule B, such schedule may be modified from time to time by the Purchaser. "Losses": Any and all losses, claims, damages, liabilities or expenses (including lost interest and reasonable attorney's fees) incurred by any Person specified; provided, however that "Losses" shall not include losses, claims, damages, liabilities or expenses which would have been avoided had such Person taken reasonable actions to mitigate such losses, claims, damages, liabilities or expenses. "MERS": Mortgage Electronic Registration Systems, Inc., a corporation organized and existing under the laws of the State of Delaware, or any successor thereto. "MERS Mortgage Loan": Any Mortgage Loan as to which the related Mortgage or assignment of Mortgage has been recorded in the name of MERS, as agent for the holder from time to time of the Mortgage Note and which is identified as a MERS Mortgage Loan on the related Loan Identification Data." "MERS Report": The schedule listing MERS Mortgage Loans and other information prepared by the Electronic Agent with respect to such Mortgage Loan. "MERS System": The system of recording transfers of Mortgages electronically maintained by MERS. "MIN": The mortgage identification number of Mortgage Loans registered with MERS on the MERS System. "Mortgage": A mortgage, deed of trust or other security instrument creating a lien on an estate in fee simple in real property securing a Mortgage Note. "Mortgage Loan": A mortgage loan that is subject to this Agreement. "Mortgage Note": The note or other evidence of the indebtedness of a Mortgagor secured by a Mortgage. -3- "Mortgaged Property": The property subject to the lien of the Mortgage securing a Mortgage Note. "Mortgagor": The obligor on a Mortgage Note. "Notice of Bailment": A notice, in the form of Schedule A to Exhibit A-2 or Schedule A to Exhibit B-2, as applicable, delivered by Custodian to Takeout Investor in connection with each delivery to Takeout Investor of the applicable portion of each Submission Package. "Person": Any individual, corporation, partnership, joint venture, association, joint stock company, trust (including any beneficiary thereof), unincorporated organization or government or any agency or political subdivision thereof. "Pricing Side Letter": The pricing side letter, dated as of the date hereof, among Sellers and Purchasers, as the same may be amended, supplemented or modified from time to time. "Primary Mortgage Insurer": Any one of GE Capital Mortgage Insurance Co., Republic Mortgage Insurance Co., Mortgage Guaranty Insurance Corp., United Guaranty Corporation or PMI Mortgage Insurance Company or any other entity approved as a primary mortgage insurer by Fannie Mae. "Purchase Agreement": The Whole Loan Purchase and Sale Agreement, dated as of the date set forth on the cover page thereof, among Sellers, Servicer and Purchaser, as each is amended from time to time providing the terms of Conduit Transactions. "Purchase Date": With respect to a Mortgage Loan, the date on which the Purchasers purchases such Mortgage Loan from Sellers. "Purchasers": Aspen Funding Corp., Gemini Securitization Corp., LLC and Newport Funding Corp., each a Purchaser and together "Purchasers". With respect to any Mortgage Loan, the related Purchaser whose name is set forth on the cover page hereof to whom the Seller sold such Mortgage Loan pursuant to the terms of the Purchase Agreement, and its permitted successors hereunder. "Purchaser's Payment": The amount set forth on the Request for Certification in the "RELEASE PAYMENT" column. "Purchase Price": With respect to each Mortgage Loan Pool purchased by a Purchaser hereunder, the amount specified in the Pricing Side Letter. "Purchaser's Wire Instructions to Custodian": Wire Instructions delivered by the related Purchaser to Custodian, in the form of Exhibit G-2, executed by such Purchaser, receipt of which has been acknowledged by Custodian specifying the wire address where all funds received in accordance with such Purchaser's Wire Instructions to the related Seller shall be transferred by Custodian. -4- "Purchaser's Wire Instructions to Seller": The wire instructions, set forth on Exhibit G-1, specifying the account which shall be used for the payment of all amounts due and payable by Sellers to the related Purchaser hereunder. "Release Payment": The funds referred to in a Warehouse Lender's Release or the related Seller's Release, as applicable. "Request for Certification": A report detailing Loan Identification Data supplied by the related Seller to the related Purchaser and Custodian in the form of Exhibit C and transmitted electronically in an appropriate data layout, regarding all Mortgage Loans being offered for sale by such Seller to such Purchaser on the Purchase Date. "Sellers": American Home Mortgage Corp. and American Home Mortgage Investment Corp., each a Seller and together "Sellers". With respect to any Mortgage Loan, the related Seller whose name is set forth on the cover page hereof from whom the Purchaser purchased such Mortgage Loan pursuant to the terms of the Purchase Agreement, and its permitted successors hereunder. "Seller's Release": A letter, in the form of Exhibit F-1, delivered by the related Seller when no Warehouse Lender has an interest in a Mortgage Loan, conditionally releasing all of such Seller's right, title and interest in a Mortgage Loan upon receipt of payment by such Seller. "Seller's Wire Instructions": The wire instructions, set forth in a letter in the form of Exhibit F-2, to be used for the payment of funds to the related Seller when no Warehouse Lender has an interest in the Mortgage Loans to which such payment relates. "Submission Package": With respect to each Mortgage Loan, a Conduit Submission Package. "Successor Servicer": An entity designated by Purchasers, in conformity with the Purchase Agreement, to replace Servicer as servicer for Purchaser. "Takeout Investor": A Conduit. "Trade Assignment": The assignment by the related Seller to the related Purchaser of such Seller's rights under a specific Commitment, in the form of Exhibit K-1, or of such Seller's rights under all Commitments, in the form of Exhibit K-2. "Trade Price": The trade price set forth on a Commitment. "Trade Principal": With respect to any Mortgage Loan, the outstanding principal balance of the Mortgage Loan multiplied by a percentage equal to the Trade Price. "Trust Receipt": A receipt of Custodian, substantially in the form of Exhibit D-1, or with respect to Wet Mortgage Loans as defined in the Purchase Agreement in the form of Exhibit D-2, indicating that with respect to the Mortgage Loans listed on the attached schedule, the Custodian has performed the procedures set forth in Sections 4(a) and 4(b) -5- hereof, that it has received the entire Conduit Submission Package, as applicable, and that it is holding such documents as bailee and custodian of the related Purchaser. "Warehouse Lender": Any lender providing financing to the related Seller for the purpose of originating Mortgage Loans, which lender has a security interest in such Mortgage Loans as collateral for the obligations of such Seller to such lender. "Warehouse Lender's Release": A letter, in the form of Exhibit E-1, from a Warehouse Lender to the related Purchaser, conditionally releasing all of Warehouse Lender's right, title and interest in certain Mortgage Loans identified therein upon payment to Warehouse Lender. "Warehouse Lender's Wire Instructions": The wire instructions, set forth in a letter in the form of Exhibit E-2, from a Warehouse Lender to the related Purchaser, setting forth wire instructions for all amounts due and payable to such Warehouse Lender. "Wet Mortgage Loan": Mortgage Loans for which the Custodian has not yet received a completed set of documents required to be delivered to the Custodian pursuant to this Agreement. Section 2. [Reserved]. Section 3. Custodian as Custodian for, and Bailee of, Purchaser, Assignee and Warehouse Lender. (a) With respect to each Mortgage Note, each Assignment of Mortgage and all other documents constituting each Submission Package that are delivered to Custodian or that at any time come into Custodian's possession, Custodian, subject to the provisions of paragraphs (b) and (c) of this Section 3, shall act solely and exclusively in the capacity of custodian for, and bailee of, the related Purchaser after the payment by the related Purchaser to the related Seller of the Purchase Price therefor. Custodian shall, subject to the provisions of paragraphs (b) and (c) of this Section 3 and except as otherwise required by Section 4: (i) hold all documents constituting a Submission Package received by it for the exclusive use and benefit of the related Purchaser; (ii) make disposition thereof only in accordance with this Agreement and the directions of the related Purchaser; and (iii) have no discretion or authority to act in a manner which is in any respect contrary to its role as custodian with respect to its obligations under this Agreement. Custodian shall segregate and maintain continuous custody of all documents constituting a Submission Package received by it in secure and fire resistant facilities in accordance with customary standards for such custody and shall mark its books and records to indicate that the related Purchaser is the owner of the Mortgage Loans and that the Submission Package is being held for such Purchaser. (b) With respect to each Mortgage Loan purchased by the related Purchaser from the related Seller, the related Purchaser shall have the right to assign to Assignee such Mortgage Loan as described in Section 9. Purchaser shall provide Custodian with at least 5 Business Days notice of its intention to assign any Mortgage Loans to an Assignee, except if the Assignee is an Affiliate of Purchaser or a commercial paper conduit of Purchaser, in which case, -6- upon receipt of written notice by Custodian such assignment, upon notice in the form of Exhibit H hereto by Assignee to Custodian of such Purchaser's default, Assignee may (i) require Custodian to act with respect to the related Submission Packages solely in the capacity of custodian for, and bailee of, Assignee, but nevertheless subject to and only in accordance with the terms of this Agreement, (ii) require Custodian to hold such Submission Packages for the exclusive use and benefit of Assignee, and (iii) assume the rights of such Purchaser under this Agreement to furnish instructions to Custodian as to the disposition of such Submission Packages and such rights shall be exercisable solely by Assignee. Custodian shall give Assignee written acknowledgment of the receipt of such notice by signing such notice and returning a copy thereof to Assignee; provided that the Custodian shall not be required to provide such acknowledgement until the date which is three (3) Business Days following the date that the Custodian has received all information necessary to allow the Custodian to complete its internal "Know Your Customer" procedures with respect to such Assignee, except if the Assignee is an Affiliate of Purchaser or a commercial paper conduit of Purchaser. In the event that, prior to receipt of such notice from Assignee, Custodian delivered any Submission Package specified in such notice to the related Purchaser, Takeout Investor or such Purchaser's designee, Custodian shall so notify Assignee, and Custodian shall not be deemed to hold such Submission Package for Assignee unless and until such Submission Package is redelivered to Custodian. The failure of Custodian to give the written acknowledgment referred to above shall not affect the validity of such assignment, pledge or grant of a security interest from the related Purchaser to its Assignee. The effects of Assignee's notice to Custodian set forth above shall continue until Custodian is otherwise notified in writing by Assignee. The terms of this Agreement shall not apply to any Submission Package delivered by Custodian to Assignee. (c) Sellers and Purchasers acknowledge that Warehouse Lender, if any, identified from time to time in each Warehouse Lender's Release to be received by Custodian pursuant to Section 4(b)(i), is a warehouse lender for the related Seller. The related Seller and Purchasers acknowledge that, in accordance with the terms of each Warehouse Lender's Release to be received by the Custodian pursuant to Section 4(b)(i), pursuant to which each such Warehouse Lender conditionally releases its security interest in the Mortgage Loan referred to in the related Warehouse Lender's Release, such release shall not be effective until the Release Payment is remitted to the Warehouse Lender in accordance with the Warehouse Lender's Wire Instructions. Until remittance of a Release Payment to Warehouse Lender, the interest of the related Warehouse Lender in a Mortgage Loan shall continue and remain in full force and effect. The related Seller agrees that to the extent the Release Payment is greater than the Purchase Price, the related Seller shall transfer on the Purchase Date the difference between the Release Payment and the Purchase Price to the Warehouse Lender in accordance with the Warehouse Lender's Wire Instructions. (d) If any additional documents relating to the Submission Package come into the Custodian's possession, the provisions of paragraphs (a), (b) and (c) of this Section 3 shall apply to such additional documents in the same manner as such provisions apply to the related Submission Package. Section 4. Certification by Custodian; Delivery of Documents; Disbursement Account; Settlement Account. -7- (a) (1) With respect to each Mortgage Loan (excluding Wet Mortgage Loans), being offered by related Seller for sale to the related Purchaser pursuant to a Conduit Transaction, Sellers shall insure that Custodian and Purchaser have each received the Loan Identification Data and the related Seller's Wire Instructions necessary to complete a Request for Certification no later than 3:00 p.m. New York City time one (1) Business Day preceding the related Purchase Date (the "Dry Notice Time"). Further for each Mortgage Loan (excluding Wet Mortgage Loans), Sellers shall insure that Custodian shall be in possession of a Submission Package for each Mortgage Loan identified on a Request for Certification no later than the Dry Notice Time and that no more than 500 loan files are to be delivered to Custodian with respect to any one Purchase Date. With respect to each Wet Mortgage Loan being offered by related Seller for sale to the related Purchaser pursuant a Conduit Transaction, Sellers shall (i) provide Purchaser with an estimate of the Purchase Price of such Wet Mortgage Loans no later than prior to 3:00 pm New York City time one (1) Business Day prior to the requested Purchase date and (ii) ensure that Custodian and Purchaser have each received the Loan Identification Data and the related Seller's Wire Instructions necessary to complete a Request for Certification no later than 3:00 p.m. New York City time on the related Purchase Date. Upon receipt by Custodian of such Request for Certification, Custodian shall ascertain whether it is in possession of a Submission Package for each Mortgage Loan (except for Wet Mortgage Loans) identified on a Request for Certification and shall certify in accordance with Section 20 herein, each Submission Package and, no later than 12 Noon New York City time on the Business Day of the related Purchase Date with respect to Mortgage Loans (except for Wet Mortgage Loans) and 4:00 pm New York City time on the Business Day of the related Purchase Date with respect to Wet Mortgage Loans, issue to the related Purchaser by facsimile a Trust Receipt substantially similar to Exhibit D-1 or Exhibit D-2, as applicable. Separate Trust Receipts shall be delivered with respect to Wet Mortgage Loans substantially similar to Exhibit D-2. With the exception of Wet Mortgage Loans as indicated on the Loan Identification Data, if Custodian is not in possession of a Submission Package relating to a Mortgage Loan identified on a Request for Certification, Custodian shall notify Sellers and shall not include such Mortgage Loan in any Trust Receipt. Each Trust Receipt or Wet Mortgage Loan Trust Receipt issued shall supersede any Trust Receipt or Wet Mortgage Loan Trust Receipt bearing an earlier date. (2) With respect to Wet Mortgage Loans, Custodian shall establish and maintain an account (the "Disbursement Account"), entitled "Disbursement Account, Deutsche Bank National Trust Company, as Custodian for Aspen Funding, Gemini Securitization Corp., LLC and Newport Funding Corp., Account No. 53079," into which Purchasers shall deposit the Purchase Price for Wet Mortgage Loans with Custodian. With respect to any Wet Mortgage Loan, Purchasers shall remit the Purchase Price to either (i) the Custodian for deposit into the Disbursement Account no later than Noon New York City time on the related Purchase Date or (ii) the applicable Warehouse Lender. Any funds in the Disbursement Account shall remain uninvested. Provided that Custodian has received (i) the related wire transfer as provided in the prior sentence and (ii) written notification from the Purchaser to release such funds, on any -8- related Purchase Date, the Custodian shall be permitted to disburse funds from the Disbursement Account pursuant to the related Seller's Wire Instructions provided by the related Seller. In no event shall Custodian be obligated to disburse funds if Custodian has not received sufficient funds pursuant to Section 4(a)(2) above. Custodian shall have no obligation to review or verify Seller's Wire Instructions. In connection with the funding of any Wet Mortgage Loans or the release of any other Mortgage Loan from the warehouse facility of the related Seller simultaneously with the purchase of such Mortgage Loan by the related Buyer, the Sellers shall deposit into the Disbursement Account (or provide to Custodian for deposit into the Disbursement Account on such Business Day) an amount (the "Seller Funded Wire Amount") equal to the difference between the amount required to originate or release such Mortgage Loan from warehouse lender's interest and the amount to be funded by such Buyer from the Disbursement Account in accordance herewith. Custodian shall not be authorized to disburse funds from the Disbursement Account unless and until Sellers cover any shortfalls related to the Disbursement Account. (b) With respect to each Request for Certification, prior to the delivery of the a Trust Receipt by Custodian: (i) Custodian shall review each applicable set of documents comprising the Submission Package and shall ascertain whether (A) each document required by this Agreement to be in such Submission Package is in the Custodian's possession, (B) each document in the Custodian's possession conforms to the loan number, property address, property city, property state, property zip code, original rate and original balances as set forth in the Loan Identification Data attached as Schedule B, (C) each document appears regular on its face, (D) each document appears on its face to conform to the requirements of Exhibit A-1 or Exhibit B-1, as applicable and (E) each Mortgage Loan is listed on a schedule attached to a Warehouse Lender's Release or a Seller's Release, as the case may be. (ii) If Custodian determines that the documents in the Submission Package and the Mortgage Loan to which they relate conform in all respects with Section 4(b)(i), Custodian shall include such Mortgage Loan in the Trust Receipt and, assuming the related Purchaser does not notify Custodian that it will not purchase a particular Mortgage Loan, in the Trust Receipt issued that day to Purchasers. With the exception of Wet Mortgage Loans as indicated on the Loan Identification Data attached as Schedule B, if documents in the Submission Package do not conform in all respects with Section 4(b)(i) or are missing and/or do not conform (except as specified in Section 4(b)(i)), Custodian shall not include such Mortgage Loan in any Trust Receipt. (c) As outlined in Section 4(a), Custodian shall deliver to Purchasers, no later than 6:00 p.m. Pacific Time on the Business Day of the related Purchase Date, by facsimile transmission followed by overnight courier a cumulative Trust Receipt. Each cumulative Trust Receipt should include: (i) all Mortgage Loans that Custodian has certified on all prior Purchase Dates that Purchasers have not communicated to Custodian their release of interest in and (ii) the collateral location pursuant to the Mortgage Loan Schedule of each Mortgage Loan appearing on this report. Each Trust Receipt shall be deemed a certification by the Custodian that the -9- Custodian has completed the procedures set forth in Sections 4(a) and 4(b)(i) hereof and a certification that it is holding each related Submission Package for the benefit of Purchaser in accordance with the terms hereof. (d) With respect to Wet Mortgage Loans, the delivery of the Loan Identification Data to the Custodian by the related Seller shall be deemed to constitute required documents with respect to the related Wet Mortgage Loan (and shall be deemed to be a certification by such Seller that such Mortgage Loan is a Wet Mortgage Loan) and the documents specified in Section 4(b)(i) above shall not be required to be delivered with respect to such Wet Mortgage Loan on the related Purchase Date. Notwithstanding the foregoing, the related Seller shall deposit with the Custodian the documents described in Section 4(b)(i) above for such Wet Mortgage Loan as soon as possible and, in any event, within seven (7) Business Days of the related Purchase Date. The Custodian shall notify the related Purchaser within one (1) Business Day of the failure by the related Seller to deliver any document by the time provided in the previous sentence. Upon deposit of such documents with Custodian, Custodian shall review such documents, shall promptly notify the related Purchaser if such documents do not comply with the requirements contained in Section 4(b)(i) and shall indicate on its records that Custodian maintains possession of such documents for the related Purchaser hereunder. Each Seller hereby represents, warrants and covenants to each Purchaser and Custodian that each Seller and any person or entity acting on behalf of such Seller that has possession of any of the documents described in Section 4(b)(i) above for such Wet Loan prior to the deposit thereof with Custodian will hold such documents in trust for the related Purchaser. (e) All documents comprising a Submission Package relating to Mortgage Loans included in a Trust Receipt shall be delivered by Custodian to the Takeout Investor specified by Seller via overnight courier in accordance with the Delivery Instructions and under cover of a fully completed Notice of Bailment prepared by Custodian in accordance with the terms of the applicable Bailee Letter. Custodian shall not deliver any Submission Package to any potential Takeout Investor unless such Takeout Investor was identified by Sellers to the related Purchaser on the Purchase Date in the Loan Identification Data or as agreed to in writing (which may be an electronic writing) by such Purchaser. Custodian shall confirm prior to delivery of any documents to any Takeout Investor that such Takeout Investor has executed a Bailee Letter. In those cases where a copy of any intervening mortgage assignment, or an unrecorded original of any intervening mortgage assignment are delivered to the Custodian, Sellers shall promptly cause the original of such instrument to be recorded. Upon receipt of one written approval from a Purchaser, such written approval shall, unless Custodian receives written or electronic notice from a Purchaser to the contrary, be deemed to apply to all Delivery Instructions delivered in the future by Sellers that list such location. Unless required to be held by applicable law, following delivery by Custodian of the Submission Package to Takeout Investor, all remaining documents, if any, not included in such Submission Package shall be delivered to the Seller. (f) At any time following the delivery of a Trust Receipt, in the event Custodian becomes aware of any noncompliance in any respect with Section 4(b)(i) with respect to a related Submission Package or the related forms, including the return of documents to the Custodian from Takeout Investor due to a defect in such documents or if Takeout Investor fails to purchase any Mortgage Loan by the related Cure Date, the Custodian shall give prompt electronic notice of such defect to the related Purchaser, followed by a written specification -10- thereof to the related Purchaser within one Business Day. In addition, Custodian shall provide written notice to the related Purchaser and the related Seller in the event that any documents remain in the possession of a Takeout Investor for ten days and the related Mortgage Loans have not been purchased by Takeout Investor prior to such date. (g) (i) Upon release of a Mortgage Loan, the Custodian shall amend the Trust Receipt to reflect such release, and shall deliver to the related Purchaser such amended Trust Receipt. (ii) The Custodian has established and shall maintain that certain non interest bearing segregated trust account, Acct No. 53135 (the "Settlement Account"), in the name of the Sellers. The Purchasers shall possess all right, title, and interest in all funds from time to time on deposit in, and assets credited to, the Settlement Account and in all proceeds thereof. The Custodian and Sellers hereby acknowledge and agree that the Settlement Account is subject to the exclusive dominion and control of the Purchasers, and the Custodian shall transfer funds from the Settlement Account solely in accordance with instructions from a Purchaser. Funds held in the Settlement Account shall not be invested. (iii) The Custodian shall pay to Purchasers all amounts on deposit in the Settlement Account by 4:00 p.m. (New York City time) on each Business Day. All amounts deposited in the Settlement Account after 4:00 pm. (New York City time) on each Business Day shall be paid by the Custodian to the Purchasers on the following Business Day. The sellers shall provide the Purchasers and Custodian with a daily reconciliation of amounts received in the Settlement Account (h) The Custodian is hereby authorized upon receipt of written request of Servicer to release Mortgage Files relating to Mortgage Loans in the possession of the Custodian, for the purpose of liquidation, servicing or correcting documentary deficiencies relating thereto against a request for release of the Mortgage Files and receipt (a "Request for Release and Receipt") executed by Servicer in the form of Exhibit M hereto, which Request for Release and Receipt must also be executed by the related Purchaser(s) in the event that more than one hundred (100) Mortgage Files would be released following such requested release. The Custodian shall promptly notify the related Purchaser(s) of the occurrence of each such release of Mortgage Files and shall keep track of each such release of Mortgage Files. The related Purchaser(s) hereby agrees to respond to a Request for Release and Receipt, via facsimile, no later than one (1) Business Day after such Purchaser's receipt thereof. The Servicer shall return to the Custodian each Mortgage File previously released by the Custodian within ten (10) Business Days after receipt thereof, unless Servicer has marked the related Request for Release "Mortgage Loan Paid in Full". Each Seller and Servicer hereby further represent and warrant, jointly and severally, to the Purchasers that any such request by the Servicer for release of Collateral shall be solely for the purposes set forth in the Request for Release and Receipt. Section 5. [Reserved]. Section 6. Default. If Sellers fail to fulfill any of their obligations under the Purchase Agreement or hereunder or in connection with the exercise by Purchaser of any remedy pursuant to Section 3 of the Purchase Agreement then, subject to the provisions of Section 3(b) -11- hereof, a Purchaser may, by written or electronic notice to Custodian, (a) appoint Custodian as its delegate to complete the endorsements on behalf of such Purchaser on the Mortgage Notes held by Custodian and to complete and record at Purchasers' expense the related blank Assignments of Mortgages relating to the affected Mortgage Loans in accordance with such Purchaser's instructions and, when applicable, (b) require Custodian to deliver to Purchaser, Takeout Investor or Successor Servicer the Submission Packages (or any portion thereof specified by Purchaser) in Custodian's possession or under Custodian's control to which the failure relates. If Purchasers fail to purchase Mortgage Loans as provided for under the Purchase Agreement or hereunder, Custodian shall hold the Mortgage Loans for the benefit of the related Seller and shall act under instructions from the related Seller. Section 7. Access to Documents. Upon 48 hours prior written notice to Custodian, each Purchaser (and if the Mortgage Loans have been assigned, Assignee) and its agents, accountants, attorneys and auditors will be permitted during normal business hours at its office to examine and copy at their expense the Submission Packages, documents, records and other papers in possession of or under the control of Custodian relating to any or all of the Mortgage Loans in which a Purchaser has an interest. Upon the written or electronic request of Purchaser (or, if applicable, Assignee) and at the cost and expense of Purchasers (or, if applicable, Assignee), Custodian shall provide Purchasers (or, if applicable, Assignee) with copies of the Mortgage Notes, Assignments of Mortgage and other documents in Custodian's possession relating to any of the Mortgage Loans in which a Purchaser (or, if applicable, Assignee) has an interest. In addition, upon the written or electronic request of a Purchaser, Custodian shall provide such Purchaser with an electronic transmission containing a list of all the Mortgage Loans for which the Custodian holds documents pursuant to this Custodial Agreement and a list of the documents held by Custodian with respect to each such Mortgage Loan. Section 8. Custodian's Fees and Expenses; Successor Custodian; Standard of Care. (a) The Sellers agree to pay the Custodian such fees and expenses for its services under this Agreement as are set forth in a separate agreement among Custodian and Sellers, and shall further pay or reimburse the Custodian upon its request for all reasonable expenses, disbursements and advances incurred or made by the Custodian in accordance with this Agreement or any other documents executed in connection herewith (including, without limitation, attorney's fees and expenses). The payment of the Custodian's fees and expenses in connection herewith, shall be the joint and several obligation of Sellers. Custodian has no lien on, and shall not attempt to place a lien on, or assert an interest in, any of the Submission Package, Mortgage Loans or proceeds thereof to secure the payment of its fees and expenses. The obligations of the Sellers under this Section 8 shall survive the termination of this Agreement and the resignation or removal of Custodian. (b) Custodian or any successor Custodian may resign at any time by giving sixty (60) days' prior written notice to Sellers and Purchasers. Such resignation shall take effect upon the earlier of (i) the appointment of a successor Custodian by Purchasers with the prior written consent of the Sellers and delivery of all the Submission Packages and -12- any related documents in Custodian's possession to the successor Custodian in accordance with the written or electronic direction of the Purchasers, and (ii) the delivery of all the Submission Packages and any related documents in Custodian's possession to the Purchasers or their designee pursuant to (c) below after expiration of said sixty (60) days. Sellers shall be responsible for reimbursing Custodian for its expenses associated with delivery of the Submission Packages and related documents to Purchasers. (c) In the event of any such resignation, Custodian shall promptly transfer to the successor Custodian all Submission Packages and related documents in Custodian's possession and the successor Custodian shall hold such Submission Packages and related documents in accordance with this Agreement. If Purchasers direct the removal of Custodian, Purchasers shall be responsible for all expenses associated with the transfer of the Submission Packages and any related documents in Custodian's possession and for any fee of the successor Custodian in excess of the fees of the initial Custodian hereunder. In any case, Custodian shall not be responsible for payment of fees to any successor Custodian. The Purchasers shall have sixty (60) days in which to appoint and designate an acceptable successor Custodian with the prior written consent of the Sellers. If the Purchasers fail to appoint a successor Custodian within such 60-day period, then Custodian shall deliver possession and custody of the Submission Packages and any related Submission Packages in Custodian's possession to Purchasers at the address specified on the cover page hereof, or if a timely written designation is received by Custodian, to any designee of Purchasers. (d) Custodian shall have responsibility only for the Submission Packages and their contents which have been actually delivered to it and which have not been released to Sellers, Purchasers, the Takeout Investor or Assignee or their respective agent or designee in accordance with this Agreement. The standard of care to be exercised by Custodian in the performance of its duties under this Agreement shall be to exercise the same degree of care as Custodian exercises when it holds similar mortgage loan documents as security for similar loans or warehouse loans. Custodian is an agent, bailee and custodian only and is not intended to be, nor shall it be construed to be (except only as agent, bailee and custodian), a representative, trustee or fiduciary of or for either Sellers, Purchasers or Assignee. The Custodian shall not be bound in any way by any agreement or contract other than this Agreement and the exhibits and schedules hereto and any other agreement to which it is a party. The Custodian shall not be required to ascertain or inquire as to the performance or observance of any of the conditions or agreements to be performed or observed by any other party, except as specifically provided in this Agreement and the exhibits and schedules hereto. The Custodian disclaims any responsibility for the validity or accuracy of the recitals to this Agreement and any representations and warranties contained herein, unless specifically identified as recitals, representations or warranties of the Custodian. (i) Throughout the term of this Agreement, the Custodian shall have no responsibility for ascertaining the value, collectability, insurability, recordability, enforceability, priority, perfection, effectiveness or suitability of any Collateral, the title of any party therein, the validity or adequacy of the security afforded thereby, or the validity of this Agreement (except as to Custodian's authority to enter into this Agreement and to perform its obligations hereunder). (ii) The Custodian shall not be under any duty to determine or pass upon the genuineness, validity or legal sufficiency of any of the documents constituting part of any -13- Submission Package, and shall be entitled to assume that all documents constituting part of such files are genuine and valid and that they are what they purport to be, and that any endorsements or assignments thereof are genuine and valid. (iii) No provision of this Agreement shall require the Custodian to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights and powers, if, in its sole judgment, it shall believe that repayment of such funds or indemnity satisfactory to it against such risk or liability is not assured to it. (iv) The Custodian is not responsible for preparing or filing any reports or returns relating to federal, state or local income taxes with respect to this Agreement, other than for the Custodian's compensation or for reimbursement of expenses. (v) In the absence of bad faith on the part of Custodian, Custodian may conclusively rely, as to the truth of the statements expressed therein, upon any certificates furnished to Custodian which conform to the requirements of this Agreement. (vi) Neither the Custodian nor any of its officers, directors, employees and agents shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with any direction of the Purchasers given under this Agreement. (vii) Custodian may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. (viii) Custodian may consult with counsel and any written opinion of counsel shall be full and complete authorization and protection in respect of any action taken or omitted by it hereunder in good faith and in accordance with such advice or opinion of counsel. (ix) Custodian shall not invest or reinvest any cash held in the Disbursement Account in the absence of timely and specific written investment direction from the Purchasers. In no event shall Custodian be liable for the selection of investments or for investment losses incurred thereon. Custodian shall have no liability in respect of losses incurred as a result of the liquidation of any investment prior to its stated maturity or as a result of the failure of the Purchaser to provide timely written investment direction. (x) Each Seller, jointly and severally, hereby indemnifies, defends and holds Custodian and its officers, directors, employees and agents harmless from and against any claim, legal action, liability or loss that is initiated against or incurred by Custodian and its officers, directors, employees and agents, including court costs and reasonable attorney's fees and disbursements, in connection with Custodian's performance of its duties under this Agreement, including those involving ordinary negligence, but excluding only those involving gross negligence or willful misconduct of Custodian. Notwithstanding anything to the contrary contained herein, this provision shall survive -14- the termination of this Agreement. The Custodian shall have the power to employ such agents as it may reasonably deem necessary or appropriate in the performance of its duties and the exercise of its powers under this Agreement. (e) Neither the Custodian nor any of its officers, directors, employees and agents shall incur any liability to any Person for its acts or omissions hereunder, except as may result from its negligence or willful misconduct. The parties each (for itself and any person or entity claiming though it) hereby releases, waives, discharges, exculpates and covenants not to sue the Custodian for any action taken or omitted under this Agreement except to the extent caused by the Custodian's gross negligence or willful misconduct. Notwithstanding anything contained herein to the contrary, the parties agree that no party hereunder nor any of its directors, officers or employees shall be liable to any other party hereunder for any special, consequential or punitive damages whatsoever. (f) Custodian undertakes to perform such duties and only such duties as are specifically set forth in this Agreement, it being expressly understood that there are no implied duties hereunder. Whenever in the administration of the provisions of this Agreement the Custodian shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Custodian, be deemed to be conclusively proved and established by a certificate signed by one of the Purchaser's officers and delivered to the Custodian and such certificate, in the absence of negligence or bad faith on the part of the Custodian, shall be full warrant to the Custodian for any action taken, suffered or omitted by it under the provisions of this Agreement upon the faith thereof. In order to comply with laws, rules, regulations and executive orders in effect from time to time applicable to banking institutions, including those relating to the funding of terrorist activities and money laundering ("Applicable Law"), the Custodian is required to obtain, verify and record certain information relating to individuals and entities which maintain a business relationship with the Custodian. Accordingly, each of the parties agrees to provide to the Custodian upon its request from time to time such identifying information and documentation as may be available for such party in order to enable the Custodian to comply with Applicable Law. Section 9. Assignment by Purchasers. Each Purchaser shall have free and unrestricted use of the Mortgage Loans and may assign all of its right, title and interest in and to some or all of the Mortgage Loans purchased by such Purchaser pursuant to the Purchase Agreement and all rights of such Purchaser under the Purchase Agreement (and this Agreement) in respect of such Mortgage Loans represented thereby to any Assignee. The Sellers hereby irrevocably consent to any such assignment subject to the rights of any Takeout Investor. Upon receipt of written notice to the Custodian of any such assignment in the form attached hereto as Exhibit I, the Custodian shall mark its records to reflect the pledge or assignment of the Mortgage Loans by the related Purchaser to the Assignee. The Custodian's records shall reflect the pledge or assignment of the Mortgage Loans by the related Purchaser to the Assignee until such time as the Custodian receives written instructions from such Purchaser with consent from the Assignee that the Mortgage Loans are no longer pledged or assigned by such Purchaser to the Assignee, at which time the Custodian shall change its records to reflect the release of the pledge -15- or assignment of the Mortgage Loans, and that the Custodian is holding the Mortgage Loans, as custodian for, and for the benefit of, such Purchaser. If the related Purchaser has notified the Custodian in writing of such assignment or pledge by delivery to the Custodian of a written notice in the form of Exhibit I hereto, then, upon delivery of notice in the form of Exhibit H by Assignee to the Custodian of the such Purchaser's default, Assignee may, subject to any limitations in any agreement between Assignee and such Purchaser, (i) require Custodian to act with respect to the related Mortgage Loans solely in the capacity of custodian for, and bailee of, Assignee, but nevertheless subject to and only in accordance with the terms of this Custodial Agreement, (ii) require Custodian to hold such Mortgage Loans for the exclusive use and benefit of Assignee, and (iii) assume the rights of such Purchaser under this Agreement to furnish instructions to the Custodian as to the disposition of such Mortgage Loans and such rights shall be exercisable solely by Assignee. In addition, within three (3) Business Days of receipt of such notice to the Custodian in the form of Exhibit H and receipt by the Custodian of the Trust Receipt from the Assignee, the Custodian shall deliver, in accordance with the written instructions of the Assignee, a Trust Receipt issued in the name of the Assignee and to the place indicated in any such written direction from the Assignee. The Custodian shall assume that any assignment from a Purchaser to Assignee is subject to no limitations that are not expressly set forth in this Custodial Agreement; provided that the Custodian shall not be required to issue a Trust Receipt to such Assignee until the date which is three (3) Business Days following the date that the Custodian has received all information necessary to allow the Custodian to complete its internal "Know Your Customer" procedures with respect to such Assignee, except if the Assignee is an Affiliate of Purchaser or a commercial paper conduit of Purchaser. Until such time as the Custodian receives notice in the form of Exhibit H from the Assignee that there exists an event of default with respect to a pledge or assignment of its interest in the Mortgage Loans and Mortgage Files, the Custodian shall take directions solely from the related Purchaser. Section 10. Insurance. Custodian shall, at its own expense, maintain at all times during the existence of this Agreement such (a) fidelity insurance, (b) theft of documents insurance, (c) forgery insurance and (d) errors and omissions insurance as Custodian deems appropriate, prudent and customary. Section 11. Representations, Warranties and Covenants. (a) By Custodian. Custodian hereby represents and warrants to, and covenants with, Sellers and Purchasers that, as of the date hereof and at all times while Custodian is performing services under this Agreement: (i) Custodian is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and fully satisfies the requirements for acting as a GNMA custodian, a Fannie Mae custodian and a Freddie Mac custodian; (ii) Custodian has the full power and authority to hold each Mortgage Loan and to enter into and perform its duties and obligations as contemplated by this Agreement, has duly authorized the execution, delivery and performance of this Agreement and has duly executed and delivered this Agreement, and this Agreement -16- constitutes a legal, valid and binding obligation of Custodian, enforceable against it in accordance with its terms, except as the enforcement thereof may be limited by applicable receivership, conservatorship or similar debtor relief laws and except that certain equitable remedies may not be available regardless of whether enforcement is sought in equity or law; and (iii) Custodian is not an affiliate of any Seller. (b) By Sellers. Each Seller, jointly and serverally, hereby represent and warrant to, and covenants with, Custodian and Purchasers that, as of the date hereof and throughout the term of this Agreement: (i) Each Seller is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation; (ii) Each Seller has the full power and authority to hold each Mortgage Loan and to enter into and consummate all transactions contemplated by this Agreement, has duly authorized the execution, delivery and performance of this Agreement and has duly executed and delivered this Agreement, and this Agreement constitutes a legal, valid and binding obligation of each Seller, enforceable against it in accordance with its terms, except as the enforcement thereof may be limited by applicable receivership, conservatorship or similar debtor relief laws and except that certain equitable remedies may not be available regardless of whether enforcement is sought in equity or law; and (iii) Sellers will provide, as a condition of closing, an executed Officer's Certificate regarding title insurance in the form of Exhibit L. (iv) No Seller is an Affiliate of the Custodian. (c) By Purchasers. Each Purchaser hereby represents and warrants to, and covenants with, Custodian and Sellers that, as of the date hereof and throughout the term of this Agreement: (i) Each Purchaser is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation; and (ii) Each Purchaser has the full power and authority to hold each Mortgage Loan and to enter into and consummate all transactions contemplated by this Agreement, has duly authorized the execution, delivery and performance of this Agreement and has duly executed and delivered this Agreement, and this Agreement constitutes a legal, valid and binding obligation of each Purchaser, enforceable against it in accordance with its terms, except as the enforcement thereof may be limited by applicable receivership, conservatorship or similar debtor relief laws and except that certain equitable remedies may not be available regardless of whether enforcement is sought in equity or law. Section 12. No Adverse Interests. By its acceptance of each Submission Package, Custodian covenants and warrants to the related Purchaser that: (a) as of the date of payment by such Purchaser of the Purchase Price, Custodian, solely in its capacity as Custodian, (i) holds no -17- adverse interests, by way of security or otherwise, in the related Mortgage Loan, and (ii) has no interest in or lien upon the Submission Packages which it holds as custodian for Purchasers; and (b) Custodian hereby waives and releases any such interest in such Mortgage Loan which it, acting solely in its capacity as Custodian, has or which it may thereafter acquire prior to the time of release of such Mortgage Loan from the terms of this Agreement. Section 13. Amendments. This Agreement may be amended only by written agreement of Sellers, Purchasers and Custodian except that, if this Agreement shall have been assigned by a Purchaser with written notice of such assignment given to Sellers and Custodian, no amendment shall be effective unless the amendment is also signed by Assignee. Purchasers shall give at least five (5) days' prior written notice to Assignee of any proposed amendment to this Agreement and shall furnish Assignee with a copy of each such amendment within five (5) days after it is executed and delivered. This Agreement, together with the Exhibits, Schedules and other writings referred to herein or delivered pursuant hereto, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. Section 14. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. Section 15. Agreement for Exclusive Benefit of Parties; Assignment. This Agreement is for the exclusive benefit of the parties hereto and their respective successors and permitted assigns hereunder and shall not be deemed to give any legal or equitable right, remedy or claim to any other person whatsoever. This Agreement shall bind the parties hereto and their respective successors, but, except for the assignments provided in Sections 3(b) and 9, shall not be assigned or pledged by any party without the prior written consent of the other parties. Written notice from Assignee to Custodian (with a copy to the related Purchaser) that the related Purchaser has defaulted in any material respect under any funding or loan agreement relating to the financing of a such Purchaser's purchase of Mortgage Loans shall be conclusive for all purposes of this Agreement. Section 16. Effect of Invalidity of Provisions. In case any one or more of the provisions contained in this Agreement should be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall in no way be affected, prejudiced or disturbed thereby. Section 17. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflict of laws rules. Section 18. Consent to Service. Each party irrevocably consents to the service of process by registered or certified mail, postage prepaid, to it at its address given in or pursuant to Section 19. Section 19. Notices. Any notices, consents, directions and other communications given under this Agreement shall be in writing and shall be deemed to have been duly given -18- when delivered by facsimile or electronic transmission, or personally delivered at, or sent by overnight courier to the addresses of the parties hereto set forth on the cover page hereof or such other address as any party shall give in a notice to the other parties pursuant to this Section 19. Section 20. Construction. The headings in this Agreement are for convenience only and are not intended to influence its construction. References to Sections and Exhibits in this Agreement are to the Sections of and Exhibits to this Agreement. The Exhibits are part of this Agreement. In this Agreement, the singular includes the plural, the plural the singular, and the words "and" and "or" are used in the conjunctive or disjunctive as the sense and circumstances may require. Section 21. Submission to Jurisdiction. With respect to any claim arising out of this Agreement each party (a) irrevocably submits to the nonexclusive jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City, and (b) irrevocably waives (i) any objection which it may have at any time to the laying of venue of any suit, action or proceeding arising out of or relating hereto brought in any such court, (ii) any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum and (iii) the right to object, with respect to such claim, suit, action or proceeding brought in any such court, that such court does not have jurisdiction over such party. Nothing herein will be deemed to preclude any party hereto from bringing an action or proceeding in respect of this Agreement in any jurisdiction other than as set forth in this Section 21. Section 22. WAIVER OF JURY TRIAL. EACH PARTY HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 23. Joint and Several Liability. The liability of the Sellers hereunder is joint and several. The Sellers hereby: (a) acknowledge and agree that the Purchasers shall have no obligation to proceed against one Seller before proceeding against the other Seller, (b) waive any defense to their obligations under this Agreement, based upon or arising our of the disability or other defense or cessation of liability of one Seller versus the other or of any other Seller, (c) waive any right or subrogation or ability to proceed against any Person until all amounts owed to Purchasers by Sellers pursuant to this Agreement are paid in full and (d) any Purchase may proceed against any Seller. [signature page follows] -19- IN WITNESS WHEREOF, Sellers, Purchasers and Custodian have caused this Agreement to be duly executed as of the date and year first above written. AMERICAN HOME MORTGAGE CORP., as a Seller By: /s/ Alan B. Horn ------------------------------------ Name: Alan B. Horn Title: Executive Vice President, General Counsel and Secretary AMERICAN HOME MORTGAGE INVESTMENT CORP., as a Seller By: /s/ Alan B. Horn ------------------------------------ Name: Alan B. Horn Title: Executive Vice President, General Counsel and Secretary AMERICAN HOME MORTGAGE SERVICING INC., as Servicer By: /s/ Alan B. Horn ------------------------------------ Name: Alan B. Horn Title: Executive Vice President, General Counsel and Secretary ASPEN FUNDING CORP., as a Purchaser By: /s/ Doris J. Hearn ------------------------------------ Name: Doris J. Hearn Title: Vice President GEMINI SECURITIZATION CORP. LLC, as a Purchaser By: /s/ R. Douglas Donaldson ------------------------------------ Name: R. Douglas Donaldson Title: Treasurer NEWPORT FUNDING CORP., as a Purchaser By: /s/ Doris J. Hearn ------------------------------------ Name: Doris J. Hearn Title: Vice President DEUTSCHE BANK NATIONAL TRUST COMPANY, as Custodian By: /s/ Angel Sanchez ------------------------------------ Name: Angel Sanchez Title: Authorized Signer EXHIBITA-1 [RESERVED] -22- EXHIBIT A-2 [RESERVED] -23- SCHEDULE A TO EXHIBIT A-2 [RESERVED] -24- SCHEDULE B TO EXHIBIT A-2 [RESERVED] -25- EXHIBIT B-1 CONDUIT SUBMISSION PACKAGE With respect to each Mortgage Loan being offered by the related Seller for sale to the related Purchaser, pursuant to a Conduit Transaction, such Seller shall deliver and release to Custodian the following documents: (i) The original Mortgage Note bearing all intervening endorsements from the originator to the last endorsee endorsed, "Pay to the order of _______, without recourse" and signed in the name of such Seller by an authorized officer of such Seller; (if applicable), the original assumption agreement, together with the original of any surety agreement or guaranty agreement relating to the Mortgage Note or any such assumption agreement, and if the Mortgage Note has been signed by a third party on behalf of the Mortgagor, a copy of the power of attorney or other instrument that authorized and empowered such Person to sign; (ii) A Mortgage meeting one of the following requirements: (A) The original Mortgage bearing evidence that the Mortgage has been duly recorded in the records of the jurisdiction in which the Mortgaged Property is located; or (B) A copy of the Mortgage certified by the originator or the related title company or escrowed closing agent or a certificate from the county recorders office; (iii) If the related Seller did not originate the Mortgage Loan, all original intervening assignments duly executed and acknowledged and in recordable form, evidencing the chain of mortgage assignments from the originator of the Mortgage Loan to the holder or record and/or a copy of each such intervening mortgage assignment or a certificate from the county recorder's office or a certificate from the related escrow closing agent the original of which has been duly recorded or delivered for recordation in the appropriate records of the jurisdiction where the Mortgage Property is located; (iv) Except with respect to any MERS Mortgage Loan, an original Assignment of Mortgage, in blank, in recordable form but unrecorded signed in the name of the related holder of record by an authorized officer; (v) If applicable, a Warehouse Lender's Release, from any Warehouse Lender having a security interest in the Mortgage Loans or, or if there is no Warehouse Lender with respect to such Mortgage Loans, a Seller's Release, from the related Seller, addressed to the related Purchaser, releasing any and all right, title and interest in such Mortgage Loans; (vi) Delivery Instructions; and (vii) A copy of the Commitment. EXHIBIT B-2 [LETTERHEAD OF CUSTODIAN] CONDUIT MASTER BAILEE LETTER ___________, _____ [ADDRESS] [_________] Attention: Ladies and Gentlemen: The undersigned Deutsche Bank National Trust Company ("Custodian"), as custodian for [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.] ("Purchaser") shall from time to time deliver to ________ ("Takeout Investor") original promissory notes ("Mortgage Notes") evidencing certain mortgage loans ("Mortgage Loans"), along with certain other documents comprising the related files ("Custodial Files") and, in each case, a Notice of Bailment in the form of Schedule A hereto with respect to each Mortgage Loan ("Notice of Bailment"), for inspection by Takeout Investor prior to the possible purchase by Takeout Investor of such Mortgage Loans pursuant to commitments ("Commitments") from certain sellers of Mortgage Loans ("Sellers"). Prior to its delivery to Takeout Investor, all of Seller's right, title and interest in each Mortgage Loan and proceeds thereof shall have been conveyed to Purchaser in accordance with each Seller's agreement with Purchaser. Except as otherwise provided herein, each Custodial File so delivered to Takeout Investor is to be held by Takeout Investor, as agent for Custodian, and subject to only Purchaser's direction and control until released as provided herein. The proceeds of the sale of each Mortgage Loan accepted for purchase by Takeout Investor must be remitted immediately upon settlement by Takeout Investor, by wire transfer in immediately available funds, in accordance with the following wire instructions: ________________________ ________________________ ABA #___________ A/C #____________ ________________________ Attn: _________________ Takeout Investor shall be responsible for making certain that all of the proceeds from the sale of each Mortgage Loan are received in accordance with the wire transfer instructions set forth on each Notice of Bailment and Purchaser's interest in the Mortgage Loans shall not be released until such funds are received by Purchaser. Upon Purchaser's receipt of all of the proceeds from the sale of a Mortgage Loan in accordance with the wiring instructions in the applicable Notice of Bailment, all of Purchaser's legal or equitable interest in the Mortgage Loan shall terminate. All Mortgage Loan documents held by Takeout Investor which are received by Takeout Investor from Custodian with respect to a Mortgage Loan that is not purchased must be returned immediately to Custodian at the address for delivery of documents set forth on the Notice of Bailment. Purchaser reserves the right at any time, until a Mortgage Loan has been purchased by Takeout Investor, to demand the return of the related Mortgage Documents to Custodian, and Takeout Investor agrees to return to Custodian the Mortgage Documents pertaining to a Mortgage Loan not purchased by Takeout Investor immediately upon such demand by Purchaser. The persons listed on the attached Schedule B are the authorized representatives ("Authorized Representatives") of Purchaser. Takeout Investor shall not honor any communication from Sellers or any third party relating to a Mortgage Loan, which is not confirmed by the written or telephonic consent of an Authorized Representative of Purchaser, or until Purchaser has received the required amount of proceeds of the sale of such Mortgage Loan. In the event Takeout Investor is not able for any reason to comply with the terms of this Bailee Letter, Takeout Investor shall immediately return the Submission Package to Custodian at the above address. Takeout Investor acknowledges that the Custodial File is being delivered in accordance with its instructions. Takeout Investor shall not deliver a Custodial File to any third party without the prior written consent of Purchaser unless such third party is a wholly owned subsidiary of Takeout Investor or a custodian and bailee of Takeout Investor who is receiving such Custodial File with written notice of the bailment created by this Master Bailee Letter. In the event Takeout Investor is not able for any reason to comply with the terms of this Master Bailee Letter, Takeout Investor shall immediately return each Custodial File in Takeout Investor's possession to Custodian at the address for delivery of documents set forth in the related Notice of Bailment. No deviation in performance of the terms of any previous bailment agreement will alter any of Takeout Investor's duties or responsibilities as provided herein. By accepting delivery of a Custodial File containing a Notice of Bailment, Takeout Investor shall be bound by the terms hereof. Please execute and return the enclosed copy of this Master Bailee Letter in the enclosed self-addressed envelope. Sincerely, Deutsche Bank National Trust Company, as Custodian By: ------------------------------------ Name: Title: Dated: As of the date first set forth above Agreed to: [CONDUIT] (Takeout Investor) By: ----------------------------- Name: Title: Dated: As of the date first set forth above SCHEDULE A TO EXHIBIT B-2 NOTICE OF BAILMENT [Conduit Address] Re: [Insert Description of Loan, including Borrower's Name, Loan Amount and Fannie Mae's Loan Number] Ladies and Gentlemen: Pursuant to the Master Bailee Letter, dated , ____ (the "Master Bailee Letter"), between you and Deutsche Bank National Trust Company (the "Custodian"), you are hereby notified that the enclosed original promissory note with respect to the referenced loan together with certain other documents comprising the related file with respect to that loan (the "Mortgage Documents") being hereby delivered to you herewith are to be held by you as agent of Custodian (which holds the Mortgage Documents as custodian and bailee for the benefit of [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.] ("Purchaser")). Any Mortgage Documents (or portion thereof) not purchased by you in accordance with the provisions of the Applicable Guide shall be sent to the Custodian by overnight courier to: [insert address for return of documents]. In the event you elect to purchase the Mortgages subject to the Master Bailee Letter, you shall pay the Trade Price to the Purchaser by wire transfer based upon the following instructions: ______________________ ______________________ ABA #____________ A/C #____________ ______________________ Attn:_________________ Any questions relating to the Mortgage Documents should be referred to the Purchaser at (203) 625-2700. Sincerely, By: _________________________________ Name: Title: SCHEDULE B TO EXHIBIT B-2 AUTHORIZED REPRESENTATIVES OF PURCHASER Name Title Authorized Signature - ---- ----- -------------------- - ------------------- ------------------- --------------------- - ------------------- ------------------- --------------------- - ------------------- ------------------- --------------------- - ------------------- ------------------- --------------------- EXHIBIT C REQUEST FOR CERTIFICATION
- -------------------------------------------------------------------------------------------------------------------- Conduit Transaction - -------------------------------------------------------------------------------------------------------------------- Loan # Original Mortgagor Property Address Original Note ARM data (margin, Maturity Loan Loan Amount First and (street, city, Loan Term Rate index,cap,floor,1st Date Type Last Name state, zip) rate adj, max rate, (fixed 1st pay date) or adjustable - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
EXHIBIT D-1 TRUST RECEIPT MORTGAGE LOANS Date: Deutsche Bank National Trust Company, as custodian (the "Custodian"), hereby acknowledges that on the date of this Trust Receipt, [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.] ("Purchaser") has been identified as the registered owner of this Trust Receipt evidencing ownership of certain mortgage loans (the "Mortgage Loans") listed by identifying number on the schedule attached to this Trust Receipt and further identified in the books and records of the Custodian, interim serviced by American Home Mortgage Servicing, Inc. ("Servicer"). The Mortgage Note and copy of the recorded Mortgage (or deed of trust) for each Mortgage Loan are held by Custodian, pursuant to the terms and conditions of that certain Custodial Agreement dated as of June [__], 2006 (the "Agreement") among Purchaser, Seller, [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.], American Home Mortgage Corp., American Home Mortgage Investment Corp. and Custodian. To the extent not defined herein, the capitalized terms used herein have the meanings assigned in the Agreement. This Trust Receipt is issued under and is subject to the terms, provisions and conditions of the Agreement, to which Agreement the holder of this Trust Receipt by virtue of the acceptance hereof assents and by which such holder is bound. Any transfer of this Trust Receipt may be registered upon presentation of this Trust Receipt by the transferee hereof, duly assigned to the transferee, at the office of the Custodian. This Trust Receipt supersedes any Trust Receipt or Wet Mortgage Loan Trust Receipt bearing an earlier date. This Trust Receipt shall not be valid or become obligatory for any purpose unless and until the Certificate of Authentication appearing below has been duly executed by the Custodian. IN WITNESS WHEREOF, the Custodian has caused this Trust Receipt to be duly executed. Deutsche Bank National Trust Company, as Custodian By: ---------------------------------- Authorized Officer CERTIFICATE OF AUTHENTICATION This Trust Receipt is one of the Trust Receipts issued under the above-described Agreement. Dated: By: -------------------------- Authorized Officer EXHIBIT D-2 WET LOAN TRUST RECEIPT Date: Deutsche Bank National Trust Company, as custodian (the "Custodian"), hereby acknowledges that on the date of this Wet Loan Trust Receipt, [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.]("Purchaser") has been identified to it as the registered owner of this Wet Loan Trust Receipt evidencing ownership of certain mortgage loans (the "Mortgage Loans") listed by identifying number on the schedule attached to this Wet Loan Trust Receipt and further identified in Loan Identification Data, to be interim serviced by American Home Mortgage Servicing, Inc.("Servicer"). To the extent not defined herein, the capitalized terms used herein have the meanings assigned in the Agreement. This Wet Mortgage Loan Trust Receipt is issued under and is subject to the terms, provisions and conditions of the Agreement, to which Agreement the holder of this Wet Mortgage Loan Trust Receipt by virtue of the acceptance hereof assents and by which such holder is bound. Any transfer of this Wet Mortgage Loan Trust Receipt may be registered upon presentation of this Wet Mortgage Trust Receipt by the transferee hereof, duly assigned to the transferee, at the office of the Custodian. This Wet Mortgage Trust Receipt supersedes any Wet Mortgage Trust Receipt bearing an earlier date. This Wet Mortgage Loan Trust Receipt shall not be valid or become obligatory for any purpose unless and until the Certificate of Authentication appearing below has been duly executed by the Custodian. IN WITNESS WHEREOF, the Custodian has caused this Wet Mortgage Loan Trust Receipt to be duly executed. Deutsche Bank National Trust Company, as Custodian By: ---------------------------------- Authorized Officer CERTIFICATE OF AUTHENTICATION This Trust Receipt is one of the Trust Receipts issued under the above-described Agreement. Dated: By: ------------------------------ Authorized Officer TRUST RECEIPT NO. MORTGAGE LOANS Following are the identifying numbers of the Mortgage Loans subject to this Trust Receipt: EXHIBIT E-1 [WAREHOUSE LENDER'S RELEASE] [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.] Ladies and Gentlemen: We hereby release all right, interest or claim of any kind with respect to the mortgage loan(s) referenced below, such release to be effective automatically without any further action by any party, upon payment in full, in one or more installments, from [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.], in accordance with the wire instructions which we delivered to you in a letter dated _______ __, 200__ ,in immediately available funds, of an aggregate amount equal to the [______________________] Loan * Mortgagor Address City State Zip - ------------- -------------- --------- -------- --------- -------- Very truly yours, [WAREHOUSE LENDER] By: ------------------------------ Name: Title: EXHIBIT E-2 Date: [WAREHOUSE LENDER'S WIRE INSTRUCTIONS] [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.]. Re: Aspen Funding Corp., Gemini Securitization Corp., LLC and Newport Funding Corp. Whole Loan Purchase Program with American Home Mortgage Corp. and American Home Mortgage Investment Corp. Ladies and Gentlemen: Set forth below are [Warehouse Lender's] wire instructions applicable to the above-referenced Whole Loan Purchase Program. Wire Instructions: Bank Name: City, State: ABA#: Account #: Account Name: Please acknowledge receipt of this letter in the space provided below. This letter supersedes and replaces (i) any prior notice specifying the name of [Warehouse Lender] and setting forth wire instructions and (ii) any contrary wire instructions contained in any form of release delivered by [Warehouse Lender] to [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.] shall remain in effect until superseded and replaced by a letter, in the form of this letter, executed by each of us and acknowledged by you. Very truly yours, [AMERICAN HOME MORTGAGE CORP./ [AMERICAN HOME MORTGAGE INVESTMENT CORP.] By: ________________________ Name: Title: [WAREHOUSE LENDER(S)](1) By: ________________________ Name: Title: Receipt Acknowledged By: [ASPEN FUNDING CORP./GEMINI SECURITIZATION CORP., LLC/NEWPORT FUNDING CORP.] By: ________________________ Name: Title: By: ________________________ Name: Title: - ---------------------------- (1) The authorized officer of each Warehouse Lender executing this letter must be the same authorized officer as signs the Warehouse Lender's Release. Not applicable if there is no Warehouse Lender. EXHIBIT F-1 [SELLER'S RELEASE] [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.] 60 Wall Street New York, New York 10005 Ladies and Gentlemen: With respect to the mortgage loan(s) referenced below (a) we hereby certify to you that the mortgage loan(s) is not subject to a lien of any warehouse lender and (b) we hereby release all right, interest or claim of any kind with respect to such mortgage loan, such release to be effective automatically without any further action by any party upon payment from Purchasers to the related Seller of an aggregate amount equal [_____________________________________]. Loan Mortgagor Street Address City State Zip - -------- ----------- -------------------- --------------- ------ -------- Very truly yours, [AMERICAN HOME MORTGAGE CORP.] [AMERICAN HOME MORTGAGE INVESTMENT CORP.] By: __________________________________ Name: Title: EXHIBIT F-2 Date: [SELLER'S WIRE INSTRUCTIONS] [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.] Re: Custodial Agreement dated as of June [__], 2006, by and among Aspen Funding Corp., Gemini Securitization Corp., LLC, Newport Funding Corp., American Home Mortgage Corp., American Home Mortgage Investment Corp. and Deutsche Bank National Trust Company Ladies and Gentlemen: Capitalized terms used herein and not defined herein shall have the meanings ascribed to such terms in the above-referenced Custodial Agreement. Set forth below are the related Seller's Wire Instructions applicable to the above-referenced Custodial Agreement. Wire Instructions: Bank Name: City, State: ABA#: Account #: A/C Name: Please acknowledge receipt of this letter in the space provided below and return it to the related Seller. This letter supersedes and replaces any prior notice specifying the name of the related Seller and such Seller's Wire Instructions and shall remain in effect until superseded and replaced by a letter, in the form of this letter, executed by us and acknowledged by you. Very truly yours, [AMERICAN HOME MORTGAGE CORP./AMERICAN HOME MORTGAGE INVESTMENT CORP.](2) By: ------------------------------------ Name: Title: Receipt acknowledged by: [ASPEN FUNDING CORP./GEMINI SECURITIZATION CORP., LLC/NEWPORT FUNDING CORP.] By: --------------------------- Name: Title: By: --------------------------- Name: Title: (2) The authorized officer executing this letter must be the same authorized officer as signs the Seller's Release. Applicable only if there is no Warehouse Lender. Exhibit G-1 [PURCHASER'S WIRE INSTRUCTIONS TO SELLER] Wire Instructions: Bank Name: City, State: ABA#: Account #: A/C Name: EXHIBIT G-2 [PURCHASER'S WIRE INSTRUCTIONS TO CUSTODIAN] Date: Deutsche Bank National Trust Company 1761 St. Andrew Place Santa Ana, CA 92705 Re: Whole Loan Purchase Program Ladies and Gentlemen: Set forth below are the Purchaser's Wire Instructions to Custodian (as defined in all Conforming Custodial Agreements used in the above-referenced program). Wire Instructions: Bank Name: City, State: ABA #: Account #: Account Name: Please acknowledge receipt of this letter in the space provided below and return it to [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.] ("Purchaser"). This letter supersedes and replaces any prior notice specifying the name of Purchaser and the Purchaser's Wire Instructions to Custodian and shall remain in effect until superseded and replaced by a letter, in the form of this letter, executed by us and acknowledged by you. Very truly yours, [ASPEN FUNDING CORP./GEMINI SECURITIZATION CORP., LLC/NEWPORT FUNDING CORP.] By: ___________________________________ Name: Title: By: ___________________________________ Name: Title: Receipt acknowledged by: Deutsche Bank National Trust Company, as Custodian DEUTSCHE BANK NATIONAL TRUST COMPANY By: ____________________________ Name: Title: EXHIBIT G-3 [PURCHASER'S DELIVERY INSTRUCTIONS TO CUSTODIAN] Deutsche Bank National Trust Company 1761 St. Andrew Place Santa Ana, CA 92705 Attention: Re: Delivery of Submission Package Dear ______: Please deliver, via overnight courier, each of the Submission Packages relating to the Mortgage Loans listed below to: Very truly yours, [ASPEN FUNDING CORP./GEMINI SECURITIZATION CORP., LLC/NEWPORT FUNDING CORP.] By: __________________________________ Name: Title: By: __________________________________ Name: Title: Initially capitalized terms are defined in the Custodial Agreement, dated as of June [__], 2006 by and among Aspen Funding Corp., Gemini Securitization Corp., LLC, Newport Funding Corp., American Home Mortgage Corp., American Home Mortgage Investment Corp. and Deutsche Bank National Trust Company. Very truly yours, [ASPEN FUNDING CORP./GEMINI SECURITIZATION CORP., LLC/NEWPORT FUNDING CORP.] By: ____________________________________ Name: Title: By: ____________________________________ Name: Title: EXHIBIT H [NOTICE BY ASSIGNEE TO CUSTODIAN OF PURCHASER'S DEFAULT] Deutsche Bank National Trust Company 1761 St. Andrew Place Santa Ana, CA 92705 Re: Whole Loan Purchase Program Ladies and Gentlemen: Notice is hereby given that the related Purchaser has materially defaulted in its obligations under an agreement between Assignee and such Purchaser relating to the financing by Assignee of such Purchaser's purchase of Mortgage Loans described on Schedule 1 hereto. Assignee hereby (i) directs that Custodian act with respect to the related mortgage files solely in the capacity of custodian for, and bailee of, Assignee, (ii) directs that Custodian hold such mortgage files for the exclusive use and benefit of Assignee and (iii) assumes the rights of the related Purchaser to furnish instructions to Custodian as to the disposition of such mortgage files and such rights shall be exercisable solely by Assignee. Please acknowledge the foregoing by signing below and returning a copy of this notice to us at [address] Very truly yours, [ASSIGNEE] By: __________________________________ Name: Title: RECEIPT ACKNOWLEDGED: Deutsche Bank National Trust Company, as Custodian By: Name: Title: cc: [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.] EXHIBIT I [NOTICE OF ASSIGNMENT] To: Deutsche Bank National Trust Company 1761 East St. Andrew Place Santa Ana, CA 92705 From: _________________________________________ Date: _________________________________________ You are hereby notified that as of [date] the undersigned has [assigned/pledged] all of its right, title and interest in and to the Mortgage Loans identified in the schedule attached hereto to [Assignee's name and address]. You are hereby instructed to hold such Mortgage Loans pursuant to the terms of the Custodial Agreement, dated as of June [__], 2006 (the "Custodial Agreement"), by and among Aspen Funding Corp., Gemini Securitization Corp., LLC, Newport Funding Corp. (each individually, a "Purchaser"), American Home Mortgage Corp., American Home Mortgage Investment Corp. (each a "Seller"), Deutsche Bank National Trust Company (the "Custodian"), for the sole and exclusive benefit of [name of Assignee] subject to the terms of the Custodial Agreement by which [name of Assignee] hereby agrees to be bound. When you have received written instructions from the related Purchaser with the Assignee's consent thereon that the Mortgage Loans are no longer [assigned/pledged] by the Purchaser to the Assigness, you shall change your records to reflect the release of the [pledge/assignment] of the Mortgage Loans and that you are holding the Mortgage Loans as custodian for, and for the benefit of, the Purchaser. [ASPEN FUNDING CORP./GEMINI SECURITIZATION CORP., LLC/NEWPORT FUNDING CORP.] By: ________________________________________ Name: Title: Date: By: ________________________________________ Name: Title: Date: [NAME OF ASSIGNEE] By: ________________________________________ Name: Title: Date: EXHIBIT J [LETTERHEAD OF SELLER] [DATE] To: [____________] Please deliver the Submission Package(s) as indicated on the attached list, in accordance with the terms of the agreement, to the following: Company Name: Address: City, State, Zip: Attn: [LETTERHEAD OF SELLER] [DATE] LOANS TO BE DELIVERED BY CUSTODIAN FOR [AMERICAN HOME MORTGAGE CORP./AMERICAN HOME LOAN MORTGAGE INVESTMENT CORP.] Loan #: Borrower's Name: Loan Amount: ------- ---------------- ------------ 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. EXHIBIT K-1 [TRADE ASSIGNMENT] ("Takeout Investor") [Address] Attention: Ladies and Gentlemen: Attached hereto is a correct and complete copy of your confirmation of commitment (the "Commitment"), trade-dated _, ____, to purchase $ of mortgage loans (the "Mortgage Loans") at a purchase price of . This is to confirm that (i) the Commitment is in full force and effect, (ii) the Commitment is hereby assigned to [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.](["AFC"/ "GSC"/"NFC"]), (iii) you will accept delivery of such Mortgage Loans directly from Purchase, (iv) you will pay [AFC/GSC/NFC] for such Mortgage Loans, (v) upon["AFC"/ "GSC"/"NFC"]'s acceptance of this assignment, [AFC/GSC/NFC] is obligated to make delivery of such Mortgage Loans to you in accordance with the attached Commitment and (vi) upon [AFC/GSC/NFC] acceptance of this assignment, you will release the related Seller from its obligation to deliver the Mortgage Loans to you under the Commitment. Upon [AFC/GSC/NFC] determination not to accept an assignment, [AFC/GSC/NFC] will notify you that this assignment is rejected. Not later than 2:00 P.M. New York City time one business day prior to your satisfaction of the Commitment, you shall fax a purchase confirmation to [AFC/GSC/NFC] at (___) ___-____, Attention: ___________. Payment will be made to [AFC/GSC/NFC] in immediately available funds. Very truly yours, [AMERICAN HOME MORTGAGE CORP./AMERICAN HOME MORTGAGE INVESTMENT CORP.] By: ____________________________ Name: __________________________ Title: _________________________ Agreed to, confirmed and accepted: [TAKEOUT INVESTOR] By: ____________________________ Name: __________________________ Title: _________________________ EXHIBIT K-2 [TRADE ASSIGNMENT] (Blanket) _______("Takeout Investor") [Address] Attention: Ladies and Gentlemen: This is to confirm that (i) your commitments ("Commitment"), made from time to time, to purchase mortgage loans (the "Mortgage Loans") from the related Seller may be assigned to [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.](["AFC"/ "GSC"/"NFC"]), (ii) you will accept delivery of such Mortgage Loans directly from [AFC/GSC/NFC], (iii) you will pay [AFC/GSC/NFC] for such Mortgage Loans, (iv) upon [AFC/GSC/NFC]'s acceptance of this assignment with respect to any Commitment, [AFC/GSC/NFC] will be obligated to make delivery of such Mortgage Loans to you in accordance with such Commitment and (v) upon [AFC/GSC/NFC] acceptance of such assignment with respect to any Commitment, you will release the related Seller from its obligation to deliver the related Mortgage Loans to you under such Commitment but the related Seller will not be released from any of its other obligations under the Loan Purchase and Sale Agreement. Your agreement to the foregoing shall remain in effect until terminated by your giving notice of such termination to the related Seller in the form attached hereto as Exhibit 1. Upon [AFC/GSC/NFC] determination not to accept an assignment, [AFC/GSC/NFC] will notify you that this assignment is rejected with respect to the related Commitment. Not later than 9:00 A.M. New York City time on the business day that you purchase the Mortgage Loans, you shall fax a purchase list containing the information required by the Mortgage Loan Settlement Summary to [AFC/GSC/NFC] at (___) ___-____, Attention: _________. You may also transmit such information electronically by 10:00 A.M. on such business day. Payment will be made to [AFC/GSC/NFC] in immediately available funds. Very truly yours, [AMERICAN HOME MORTGAGE CORP./ AMERICAN HOME MORTGAGE INVESTMENT CORP.] By: ____________________________ Name: __________________________ Title: _________________________ Agreed to, confirmed and accepted: [TAKEOUT INVESTOR] By: ____________________________ Name: __________________________ By: Title: _________________________ EXHIBIT 1 to EXHIBIT K-2 [WITHDRAWAL OF CONSENT TO BLANKET TRADE ASSIGNMENT] [American Home Mortgage Corp./American Home Mortgage Investment Corp.] 538 Broadhollow Road, Suite 155 Melville, New York 11747 Ladies and Gentlemen: The undersigned hereby terminates its agreement to the related Seller's assignment of Commitments to [AFC/GSC/NFC], which approval was given pursuant to the Trade Assignment dated _______ __, 200_. This termination shall be effective as of but shall not affect the assignment of any Commitment which assignment was made prior to the date hereof. Capitalized terms not defined herein shall have the meanings set forth in the Trade Assignment. Very truly yours, [TAKEOUT INVESTOR] By: ____________________________ Name: __________________________ Title: _________________________ Copy to: [Aspen Funding Corp./Gemini Securitization Corp., LLC/Newport Funding Corp.] EXHIBIT L OFFICER'S CERTIFICATE OF SELLERS The undersigned, [Vice] President of American Home Mortgage Corp., ("AHMC") and the [Vice] President of American Home Mortgage Investment Corp. (together, the "Sellers") hereby represent, warrant, covenant and certify, as of the date of this certificate, to each of Aspen Funding Corp., Gemini Securitization Corp., LLC and Newport Funding Corp. (collectively, the "Purchasers") as follows: 1. Each Mortgage Loan purchased under that certain Whole Loan Purchase and Sale Agreement ("Purchase Agreement"), dated as of June 23, 2006, by and among Purchasers, Sellers and American Home Mortgage Servicing, Inc. ("AMHSI") is covered or will be covered as of the related Purchase Date by an ALTA lender's title insurance policy or other generally acceptable form of policy of insurance acceptable to Fannie Mae or Freddie Mac that: (A) is issued by a title insurer acceptable to Fannie Mae or Freddie Mac and qualified to do business in the jurisdiction where the Mortgaged Property is located, (B) insures the mortgagee, its successors and assigns, as to the first or second priority lien, as applicable, of the Mortgage in the original principal amount of the Mortgage Loan, and against any loss by reason of the invalidity or unenforceability of the lien resulting from the provisions of the Mortgage providing for adjustment in the Mortgage Interest Rate and Monthly Payment, (C) affirmatively insures ingress and egress, and against encroachments by or upon the Mortgaged Property or any interest therein, (D) does not contain any special exceptions (other than the standard exclusions) for zoning and uses and has been marked to delete the standard survey exception or to replace the standard survey exception with a specific survey reading, (E) sets forth the mortgagee and its successors and assigns as the sole insured thereof, and (F) is in full force and effect as of the date hereof. 2. The Sellers are or will be in possession of an original policy of title insurance (or a commitment for title insurance, if the policy is being held by the title insurance company pending recordation of the Mortgage) or attorney's opinion of title for each of the Mortgage Loans purchased under the Purchase Agreement. Capitalized terms not defined herein have the meanings assigned to them in the Purchase Agreement. [signature page to follow] Each of the undersigned has executed this Certificate as of this 23rd day of June, 2006. AMERICAN HOME MORTGAGE CORP. By: _____________________________ Name: Title: AMERICAN HOME MORTGAGE INVESTMENT CORP. By: _____________________________ Name: Title: EXHIBIT M REQUEST FOR RELEASE Date: __________, ____ AMERICAN HOME MORTGAGE SERVICING, INC. (the "Servicer") acting as bailee of, and custodian for the exclusive benefit of [ASPEN FUNDING CORP./GEMINI SECURITIZATION CORP., LLC/NEWPORT FUNDING CORP.] (the "Purchaser(s)") (capitalized terms not otherwise defined herein are defined in that certain Custodial Agreement, dated as of June __, 2006 (the "Custodial Agreement") by and among the Purchasers, Deutsche Bank National Trust Company (the "Custodian") and American Home Mortgage Corp., and American Home Mortgage Investment Corp. (together, the "Sellers"), Servicer and Custodian, or if not defined in the Custodial Agreement, then in that certain Whole Loan and Purchase and Sale Agreement dated as of June __, 2006 by and among Servicer, Sellers, and Purchasers (the "Purchase Agreement")), hereby acknowledges receipt of the following described documentation for the identified Mortgage Loan, possession of which is entrusted to the Servicer solely for the purpose referenced below. Mortgagor Name Loan Number Note Amount Mtg. Loan Document Reason for Requesting File (check one) _____ 1. Mortgage Loan Paid in Full. _____ 2. Correction of Document Deficiencies. _____ 3. Mortgage Required for Servicing. _____ 4. Foreclosure. _____ 5. Other [Describe]. If item 2, 3, 4 or 5 is checked, it is hereby acknowledged that the related Purchaser maintains a 100% undivided ownership interest the Mortgage Loan pursuant to the Purchase Agreement. If item 2, 3, 4 or 5 is checked, in consideration of the aforesaid delivery by the Custodian, the Servicer hereby agrees to hold said Mortgage Loan in trust for the related Purchaser as provided under and in accordance with all provisions of the Custodial Agreement and to return said Mortgage Loan to the Custodian no later than the close of business on the tenth day following the date hereof or, if such day is not a Business Day, on the immediately succeeding Business Day. Please deliver the requested file to [ADDRESS], Attention: _____________, via overnight courier. [signature page follows] AMERICAN HOME MORTGAGE SERVICING, INC. By:___________________________ Name: Title: Acknowledged and Consented to: [ASPEN FUNDING CORP./GEMINI SECURITIZATION CORP., LLC NEWPORT FUNDING CORP.] By: _______________________________ Name: Title: Date:_______________________________ Documents returned to : DEUTSCHE BANK NATIONAL TRUST COMPANY By: _______________________________ Name: Title: Date:_______________________________ SCHEDULE A LIST OF CONDUITS SCHEDULE B LOAN IDENTIFICATION DATA loan_no alt_loan_no svc_loan_no originator custodian mortgagor_name prop_addr prop_addr2 prop_city prop_state prop_zip prop_county product product_code loan_type note_type note_date orig_rate orig_term amort_term orig_balance first_pay_date mature_date pmi_coverage pmi_insurer_code margin balloon_flag adjustable first_pymt_adj_freq pymt_adj_freq first_rate_chg_date pymt_chg_date first_rate_adj_freq rate_adj_freq first_rate_cap period_rate_cap min_int_rate max_int_rate io_flag io_term prepay_flag prepay_type prepay_term neg_amort_flag neg_amort_limit payment_type period_pymt_cap pi_constant orig_pi_pymt purpose_code appraisal_value purchase_price silent_2nd manuf_housing_flag prop_type units occupied_flag doc_type fico_score tape_ltv tape_cltv front_ratio debt_ratio jumbo_flag self_employ_flag highcost_flag lien_position other_lien_balance fund_date grade channel_code corresp_broker_code corresp_broker mers_flag mers_id net_margin prop_value net_rate service_fee ltv_ratio loan_ltv cltv_ratio reo_flag heloc_flag orig_draw draw_term orig_date pledge_amt arm_index as_of_date act_balance curr_balance paid_to_date next_due_date curr_note_rate fpd_flag pi_pymt foreclosure bankruptcy rate_chg_date commit_exp_date inv_code investor takeout_amt takeout_inv_code takeout_inv_name takeout_price takeout_wire_amt trust_receipt wet_status title_co title_co_code wire_amt EX-31.1 4 am063006-ex31_1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Michael Strauss, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of American Home Mortgage Investment Corp.; 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 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 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 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. /s/ Michael Strauss - ----------------------------------------------- Michael Strauss Chairman, Chief Executive Officer and President August 9, 2006 EX-31.2 5 am063006-ex31_2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Stephen A. Hozie, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of American Home Mortgage Investment Corp.; 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 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 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 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. /s/ Stephen A. Hozie - ---------------------------------------------------- Stephen A. Hozie Executive Vice President and Chief Financial Officer August 9, 2006 EX-32.1 6 am063006-ex32_1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER 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 of American Home Mortgage Investment Corp. (the "Registrant") on Form 10-Q for the quarter ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael Strauss, Chairman of the Board, Chief Executive Officer and President of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, 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 Registrant. August 9, 2006 /s/ Michael Strauss ----------------------------------- Michael Strauss Chairman, Chief Executive Officer and President EX-32.2 7 am063006-ex32_2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER 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 of American Home Mortgage Investment Corp. (the "Registrant") on Form 10-Q for the quarter ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen A. Hozie, Executive Vice President and Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, 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 Registrant. August 9, 2006 /s/ Stephen A. Hozie ---------------------------------------- Stephen A. Hozie Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----