UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q

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

For the quarterly period ended March 31,June 30, 2007

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: 1-13991

MFA MORTGAGE INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)

Maryland
13-3974868

(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification No.)
350 Park Avenue, 21st Floor, New York, New York
10022

(Address of principal executive offices)		13-3974868
(I.R.S. Employer
Identification No.)

10022
(Zip Code)
 

(212) 207-6400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [x]  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 [    ] Accelerated filer [x][ X ] 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] X 

81,164,99782,936,712 shares of the registrant’s common stock, $0.01 par value, were outstanding as of April 27,July 30, 2007.


TABLE OF CONTENTS

    Page    

PART I
Financial Information

Page
PART I
Financial Information
Item 1.         Financial Statements            
    
Consolidated Balance Sheets as of March 31,June 30, 2007 (Unaudited) and December 31, 2006       1   
    
Consolidated Statements of IncomeResults of Operations (Unaudited) for the Three and Six Months Ended March 31,June 30, 2007 and March 31,June 30, 2006       2   
    
Consolidated StatementsStatement of Changes in Stockholders’ Equity (Unaudited) for the ThreeSix Months Ended March 31,June 30, 2007       3
 
          Consolidated Statements of Cash Flows (Unaudited) for the ThreeSix Months Ended March 31,June 30, 2007 and March 31,June 30, 2006       4
 
          Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended March 31,June 30, 2007 and March 31,June 30, 2006       5
 
          Notes to the Consolidated Financial Statements (Unaudited)       6
 
Item 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations       2524
 
Item 3.         Quantitative and Qualitative Disclosures About Market Risk       32   
Item 4.         Controls and Procedures       3635   
 
PART II
Other Information
Item 1.         Legal Proceedings       3736
 
Item 1A.         Risk Factors       3736
Item 4.Submission of Matters to a Vote of Security Holders36
 
Item 6.         Exhibits       37   
Signatures        
Signatures39   


MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Per Share Amounts)    March 31,
2007
   December 31,
2006
    June 30,
2007
   December 31,
2006
    (Unaudited)
 		   
 		    (Unaudited)   
Assets:
                                  
Mortgage-backed securities (“MBS”), at fair value (including pledged MBS of $6,094,399 and $6,065,021 at March 31, 2007 and December 31, 2006, respectively) (Notes 3 and 6)     $6,385,605       $6,340,668  
Mortgage-backed securities (“MBS”), at fair value (including pledged MBS of $6,713,606 and $6,065,021 at June 30, 2007 and December 31, 2006, respectively) (Notes 3 and 6)     $6,994,244       $6,340,668  
Income notes (Note 3)       1,980         —          1,890         —   
Cash and cash equivalents       53,697         47,200         54,329         47,200  
Accrued interest receivable       33,437         33,182         36,352         33,182  
Interest rate cap agreements (“Caps”), at fair value (Note 4)       129          361          —          361   
Swap agreements (“Swaps”), at fair value (Note 4)       526          2,412         15,759         2,412  
Real estate (Note 5)       11,724         11,789         11,693         11,789  
Goodwill       7,189         7,189         7,189         7,189  
Prepaid and other assets       1,607         1,166         1,370         1,166  
Total Assets     $6,495,894       $6,443,967       $7,122,826       $6,443,967  
Liabilities:
                                  
Repurchase agreements (Note 6)     $5,763,357       $5,722,711       $6,379,485       $5,722,711  
Accrued interest payable       21,415         23,164         26,311         23,164  
Mortgages payable on real estate       9,573         9,606         9,532         9,606  
Swaps, at fair value (Note 4)       4,707         1,893         735          1,893  
Dividends payable       —          4,899         —          4,899  
Accrued expenses and other liabilities       2,187         3,136         2,460         3,136  
Total Liabilities       5,801,239         5,765,409         6,418,523         5,765,409  
Commitments and contingencies (Note 7)            
Stockholders’ Equity:
                                  
Preferred stock, $.01 par value; series A 8.50% cumulative redeemable; 5,000 shares authorized; 3,840 shares issued and outstanding at March 31, 2007 and December 31, 2006 ($96,000 aggregate liquidation preference) (Note 8)       38          38   
Common stock, $.01 par value; 370,000 shares authorized; 80,764 and 80,695 issued and outstanding at March 31, 2007 and December 31, 2006, respectively (Note 8)       808          807   
Preferred stock, $.01 par value; series A 8.50% cumulative redeemable; 5,000 shares authorized; 3,840 shares issued and outstanding at June 30, 2007 and December 31, 2006 ($96,000 aggregate liquidation preference) (Note 8)       38          38   
Common stock, $.01 par value; 370,000 shares authorized; 82,937 and 80,695 issued and outstanding at June 30, 2007 and December 31, 2006, respectively (Note 8)       829          807   
Additional paid-in capital, in excess of par       777,280         776,743         793,308         776,743  
Accumulated deficit       (60,827)         (68,637)         (59,249)         (68,637)  
Accumulated other comprehensive loss (Note 10)       (22,644)         (30,393)         (30,623)         (30,393)  
Total Stockholders’ Equity       694,655         678,558         704,303         678,558  
Total Liabilities and Stockholders’ Equity     $6,495,894       $6,443,967       $7,122,826       $6,443,967  
 

The accompanying notes are an integral part of the consolidated financial statements.

1


MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF INCOMERESULTS OF OPERATIONS

    For the Three Months Ended March 31,
       Three Months Ended
June 30,
   Six Months Ended
June 30,
   
    2007
   2006
    2007
   2006
   2007
   2006
(In Thousands, Except Per Share Amounts)    (Unaudited)
 		       (Unaudited)   
Interest Income:
                       
MBS income (Note 3)     $84,341       $53,329       $90,341       $45,645       $174,682       $98,974  
Interest income on short-term cash investments       448          666          634          540          1,082         1,206  
Interest income on income notes       6          —          51          —          57          —   
Interest Income
       84,795         53,995         91,026         46,185         175,821         100,180  
Interest Expense
       72,260         42,785         78,348         38,818         150,608         81,603  
Net Interest Income
       12,535         11,210         12,678         7,367         25,213         18,577  
Other Income:
                                  
Net gain on sale of MBS (Note 3)       3          1,597  
Revenue from operations of real estate       413          382   
Net loss on sale of MBS (Note 3)       (116)         (24,746)         (113)         (23,149)  
Revenue from operations of real estate (Note 5)       413          388          826          770   
Gain on termination of Swap       176          —          176          —   
Miscellaneous other income, net       115          239          109          205          224          444   
Other Income
       531          2,218  
Other Income (Loss)
       582          (24,153)         1,113         (21,935)  
Operating and Other Expense:
                                  
Compensation and benefits       1,612         1,558         1,409         1,530         3,021         3,088  
Real estate operating expense       253          245   
Mortgage interest on real estate       167          173   
Mortgage interest and real estate operating expense       429          400          849          818   
Other general and administrative expense       1,184         1,117         1,244         961          2,428         2,078  
Operating and Other Expense
       3,216         3,093         3,082         2,891         6,298         5,984  
Income from Continuing Operations
       9,850         10,335  
Income (Loss) from Continuing Operations
       10,178         (19,677)         20,028         (9,342)  
Discontinued Operations: (Note 5)
                                  
Loss from discontinued operations, net       —          (77)         —          (56)         —          (133)  
Mortgage prepayment penalty       —          (135)         —          —          —          (135)  
Gain on sale of real estate, net of tax       —          4,840         —          —          —          4,840  
Income from Discontinued Operations
       —          4,628  
Income (Loss) from Discontinued Operations
       —          (56)         —          4,572  
Net Income Before Preferred Stock Dividends
       9,850         14,963  
Income (Loss) Before Preferred Stock Dividends
       10,178         (19,733)         20,028         (4,770)  
Less: Preferred Stock Dividends       2,040         2,040         2,040         2,040         4,080         4,080  
Net Income Available to Common Stockholders
     $7,810       $12,923  
Net Income (Loss) Available to Common Stockholders
     $8,138       $(21,773)       $15,948       $(8,850)  
Earnings Per Share of Common Stock: (Note 9)
                 
Income from continuing operations — basic and diluted     $0.10       $0.10  
Earnings (Loss) Per Share of Common Stock: (Note 9)
      
Income (loss) from continuing operations — basic and diluted     $0.10       $(0.27)       $0.20       $(0.17)  
Income from discontinued operations — basic and diluted       —          0.06         —          —          —          0.06  
Earnings per share of common stock — basic and diluted     $0.10       $0.16  
Earnings (loss) per share — basic and diluted     $0.10       $(0.27)       $0.20       $(0.11)  
Dividends declared per share of common stock (Note 8c)     $0.08       $0.05       $0.08       $0.05  
 

The accompanying notes are an integral part of the consolidated financial statements.

2


MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

     For the
ThreeSix Months
Ended
March 31,June 30, 2007
(In Thousands, Except Per Share Amounts)
     (Unaudited)
8.50%Preferred Stock, Series A 8.50% Cumulative Redeemable Preferred Stock — Liquidation
Preference $25.00 per Share:share:
                 
Balance at June 30, 2007 and December 31, 2006 and March 31, 2007 (3,840 shares)           $38   
 
Common Stock, Par Value $0.01:
                 
Balance at December 31, 2006 (80,695 shares)             807   
Issuance of common stock (69(2,242 shares)             122   
Balance at March 31,June 30, 2007 (80,764(82,937 shares)             808829   
 
Additional Paid-in Capital, in Excess of Par:
                 
Balance at December 31, 2006             776,743  
Issuance of common stock, net of expenses             36316,339  
Share-based compensation expense             174226   
Balance at March 31,June 30, 2007             777,280793,308  
 
Accumulated Deficit:
                 
Balance at December 31, 2006             (68,637)  
Net income             9,85020,028  
Dividends declaredon common stock(6,484)  
Dividends on preferred stock             (2,0404,080)  
Payments on dividend equivalent rights (“DERs”)(76)  
Balance at March 31,June 30, 2007             (60,82759,249)  
 
Accumulated Other Comprehensive Loss:
                 
Balance at December 31, 2006             (30,393)  
Unrealized gainslosses on MBS,investment securities, net             12,500(14,652)  
Unrealized losses on Caps, net             (5183)  
Unrealized lossesgains on Swaps, net             (4,70014,505)  
Balance at March 31,June 30, 2007             (22,64430,623)  
 
Total Stockholders’ Equity at March 31,June 30, 2007
           $694,655704,303  
 

The accompanying notes are an integral part of the consolidated financial statements.

3


MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

    Three Months Ended March 31,
       Six Months Ended
June 30,
   
(In Thousands)    2007
   2006
    2007
   2006
    (Unaudited)
 		       (Unaudited)   
Cash Flows From Operating Activities:
                                  
Net income     $9,850       $14,963  
Adjustments to reconcile net income to net cash provided by operating activities:      
Gain on sales of MBS       (3)         (2,094)  
Loss on sale of MBS       —          497   
Net income/(loss)     $20,028       $(4,770)  
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:      
Losses on sale of MBS       116          25,245  
Gains on sales of MBS       (3)         (2,096)  
Gain on termination of Swap       (176)         —   
Amortization of purchase premiums on MBS, net of accretion of discounts       8,343         8,123         16,504         15,992  
Amortization of premium cost for Caps       181          383          278          837   
(Increase)/decrease in interest receivable       (255)         4,042         (3,170)         7,774  
Depreciation and amortization on real estate, including discontinued operations       102          198          205          358   
Increase in other assets and other       (478)         (1,196)         (313)         (1,207)  
(Decrease)/increase in accrued expenses and other liabilities       (949)         1,066  
Decrease in accrued interest payable       (1,749)         (22,512)  
Decrease in accrued expenses and other liabilities       (676)         (1,544)  
Increase/(decrease) in accrued interest payable       3,147         (30,836)  
Gain on sale of real estate from discontinued operations       —          (6,660)         —          (6,660)  
Share-based compensation expense       174          120          226          340   
Negative amortization and principal accretion on investment securities       (87)         (868)  
Net cash provided/(used) by operating activities       15,129         (3,938)  
Negative amortization on investment securities       (176)         (1,480)  
Net cash provided by operating activities       35,990         1,953  
Cash Flows From Investing Activities:
                                  
Principal payments on MBS       492,381         443,109  
Principal payments on MBS and other investment securities       976,331         832,260  
Proceeds from sale of MBS       6,830         788,490         55,296         1,823,361  
Purchases of MBS       (539,901)         (71,412)  
Purchases of income notes       (1,980)         —  
Purchases of MBS and other investment securities       (1,718,186)         (394,700)  
Proceeds from termination of Swap       176          —   
Proceeds from sale of real estate       —          15,978         —          15,958  
Net cash (used)/provided by investing activities       (42,670)         1,176,165         (686,383)         2,276,879  
Cash Flows From Financing Activities:
                                  
Principal payments on repurchase agreements       (8,604,712)         (9,139,598)  
Proceeds from borrowings on repurchase agreements       8,645,358         7,993,066  
Proceeds from issuances of common stock       364          —   
Principal payments made on repurchase agreements       (18,275,825)         (11,878,087)  
Proceeds from borrowings under repurchase agreements       18,932,599         9,613,755  
Proceeds from issuance of common stock       16,361         —   
Dividends paid on preferred stock       (2,040)         (2,040)         (4,080)         (4,080)  
Common stock repurchased       —          (2,879)         —          (5,697)  
Dividends paid on common stock and DERs       (4,899)         (4,058)         (11,459)         (8,070)  
Principal payments on and satisfaction of mortgages, including discontinued operations       (33)         (6,075)         (74)         (6,075)  
Net cash provided/(used) by financing activities       34,038         (1,161,584)         657,522         (2,288,254)  
Net increase in cash and cash equivalents       6,497         10,643  
Net increase/(decrease) in cash and cash equivalents       7,129         (9,422)  
Cash and cash equivalents at beginning of period       47,200         64,301         47,200         64,301  
Cash and cash equivalents at end of period     $53,697       $74,944       $54,329       $54,879  
 

The accompanying notes are an integral part of the consolidated financial statements.

4


MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

    Three Months Ended March 31,
       Three Months Ended
June 30,
   Six Months Ended
June 30,
   
(In Thousands)    2007
   2006
(Dollars In Thousands)
    2007
   2006
   2007
   2006
    (Unaudited)
 		       (Unaudited)      
Net income before preferred stock dividends     $9,850       $14,963  
Net income/(loss) before preferred stock dividends     $10,178       $(19,733)       $20,028       $(4,770)  
Other Comprehensive Income:            
Unrealized gain/(loss) on MBS, net       12,500         (8,464)  
Unrealized loss on investment securities, net       (27,152)         (1,594)         (14,652)         (10,058)  
Reclassification adjustment for net loss included in net income       —          24,568         —          24,568  
Unrealized (loss)/gain on Caps, net       (51)         345          (32)         12          (83)         357   
Unrealized loss on Swaps, net       (4,700)         (3)  
Unrealized gain/(loss) on Swaps, net       19,205         (766)         14,505         (769)  
Comprehensive income before preferred stock dividends       17,599         6,841       $2,199       $2,487       $19,798       $9,328  
Dividends on preferred stock       (2,040)         (2,040)         (2,040)         (2,040)         (4,080)         (4,080)  
Comprehensive Income     $15,559       $4,801       $159        $447        $15,718       $5,248  
 

The accompanying notes are an integral part of the consolidated financial statements.

5


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Organization

MFA Mortgage Investments, Inc. (the “Company”) was incorporated in Maryland on July 24, 1997 and began operations on April 10, 1998. The Company has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes. In order to maintain its qualification as a REIT, the Company must comply with a number of requirements under federal tax law, including that it must distribute at least 90% of its annual net taxable income to its stockholders, subject to certain adjustments.

2. Summary of Significant Accounting Policies

(a) Basis of Presentation

The accompanying interim unaudited financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted according to such SEC rules and regulations. Management believes, however, that these disclosures are adequate to make the information presented therein not misleading. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at March 31,June 30, 2007 and results of operations for all periods presented have been made. The results of operations for the three-monthsix-month period ended March 31,June 30, 2007 should not be construed as indicative of the results to be expected for the full year.

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(b) Investment Securities

The Company’s investment securities are comprised primarily of hybrid and adjustable-rate MBS (collectively, “ARM-MBS”) that are issued or guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. government, such as Ginnie Mae (collectively, “Agency MBS”), or are rated AAA by at least one nationally recognized rating agency. Hybrid MBS have interest rates that are fixed for a specified period and, thereafter, generally reset annually. To a lesser extent, the Company also holds investments in non-Agency MBS, mortgage-related securities and other investments that are rated below AAA. At June 30, 2007, the Company held securities with a carrying value of $13.5 million rated below AAA, including unrated investment securities.

The Company accounts for its investment securities primarily comprised of MBS, in accordance with Statement of Financial Accounting Standards (“FAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which requires that investments in securities be designated as either “held-to-maturity,” “available-for-sale” or “trading” at the time of acquisition. All of the Company’s investment securities are designated as available-for-sale and are carried at their estimated fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income, a component of Stockholders’ Equity. The Company determines the fair value of its investment securities based upon prices obtained from a third-party pricing services.service. If pricing is not available for a security from such pricing services,service, the Company uses the average broker quotes received for such security.

Although the Company generally intends to hold its investment securities until maturity, it may, from time to time, sell any of its securities as part of the overall management of its business. The available-for-sale designation provides the Company with the flexibility to sell any of its investment securities in order to act on potential market opportunities or conditions, remove securities from the portfolio if their actual performance differs from expectations, or changes in economic conditions to ensure future liquidity and to meet other general corporate purposes as they arise. Upon the sale of investment securities, unrealized gains and losses are reclassified out of accumulated other comprehensive income to earnings as realized gains and losses using the specific identification method. (See Note 3.)

The Company’s adjustable-rate assets are comprised primarily of hybrid and adjustable-rate MBS (collectively, “ARM-MBS”) that are issued or guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. government, such as Ginnie Mae (collectively, “Agency MBS”), or are rated AAA by at least one nationally recognized rating agency. Hybrid MBS have interest rates that are fixed for a specified period and, thereafter, generally reset annually. To a lesser extent, the Company also holds investments in MBS, mortgage-related securities and other investments that are rated below AA. At March 31, 2007, the Company held securities with a carrying value of $12.1 million rated below AA, including unrated investment securities. Certain of the Company’s investment securities were purchased at a deep discount, which a portion thereof is considered credit protection against future credit losses under various economic environments.

6


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Interest income is accrued based on the outstanding principal balance of the investment securities and their contractual terms. Premiums and discounts associated with the Agency MBS and MBS rated AA or higherAAA are amortized into interest income over the life of such securities using the effective yield method, adjusted for actual prepayment activity in accordance with FAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” Certain of the Agency MBS owned by the Company contractually provide for negative amortization, which occurs when the full amount of the stated coupon interest due on the distribution date for an MBS is not received.received from the underlying mortgages. The Company recognizes such interest shortfall on its Agency MBS as interest income with a corresponding increase in the related Agency MBS principal value (i.e., par) as the interest shortfall is guaranteed by the issuing agency.

Interest income on the Company’s securities rated below AA,AAA, including unrated securities, is recognized in accordance with Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) Consensus No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”). Pursuant to EITF 99-20, initial cash flows from a security are estimated applying assumptions that were used to determine the fair value of such security and the excess of the future cash flows over the initial investment is recognized as interest income under the effective yield method. The Company reviews and makes adjustments to its cash flow projections at least quarterly and monitors these projections based on input and analysis received from external sources, internal models, and its judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in interest income recognized on such securities. Certain of these securities rated below AAA were purchased at a discount to par value, with a portion of such discount considered credit protection against future credit losses under various economic environments. The initial credit protection (i.e., discount) of these MBS may be adjusted over time, based on review of the investment or, if applicable, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of these securities is more favorable than forecasted, a portion of the amount designated as credit protection may be accreted into interest income over time. Conversely, if the performance of these securities is less favorable than forecasted, impairment charges and a corresponding write down of such security to a new cost basis could result. The Company did not have any impairment charges against such investments during the three or six months ended June 30, 2007 and 2006.

(c) Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less. The carrying amount of cash equivalents approximates their fair value.

(d) Other-Than-Temporary Impairment/Credit Risk

The Company limits its exposure to credit losses on its investment portfolio by requiring that at least 50% of its investment portfolio consist of Agency MBS. Pursuant to its operating policies,hybrid and adjustable-rate MBS that are either (i) issued or guaranteed by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. government, such as Ginnie Mae, or (ii) rated in one of the two highest rating categories by at least one nationally recognized rating agency. The remainder of the Company’s assetsinvestment portfolio may consist of investments in: (i) residential mortgage loans; (ii) residential MBS; (iii) direct or indirect investments in multi-family apartment properties;in: (i) other types of MBS; (ii) residential mortgage loans; (iii) collateralized debt obligations and other related securities; (iv) investments inreal estate; (v) securities issued by REITs, limited partnerships REITs orand closed-end funds; or (v) investments in(vi) high-yield corporate securities and other fixed income instruments (corporate or government).; and (vii) other types of assets approved by the Company’s Board of Directors (the “Board”) or a committee thereof. At March 31,June 30, 2007, 95.5%85.9% of the Company’s assets consisted of Agency MBS and related receivables, 3.2%12.7% were MBS rated AAA by Standard & Poor’s Corporation, a nationally recognized rating agency, and related receivables and 0.8% were cash and cash equivalents; combined these assets comprised 99.5%99.4% of the Company’s total assets.

The Company assesses its investment securities for other-than-temporary impairment on at least a quarterly basis. When the fair value of an investment is less than its amortized cost at the balance sheet date of the reporting period for which impairment is assessed, the impairment is designated as either “temporary” or “other-than-temporary.” If it is determined that impairment is other-than-temporary, then an impairment loss is recognized in earnings reflecting the entire difference between the investment’s cost basis and its fair value at the balance sheet date of the reporting period for which the assessment is made. The measurement of the impairment is not permitted to include partial recoveries subsequent to the balance sheet date. Following the recognition of an other-than-temporary impairment, the fair value of the investment becomes the new cost basis of the investment and is not adjusted for subsequent recoveries in fair value through earnings. Because management’s assessments are based on

7


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

factual information as well as subjective information available at the time of assessment, the determination as to whether an other-than-temporary decline exists and, if so, the amount considered impaired is also subjective and, therefore, constitutes material estimates that are susceptible to significant change.

Upon a decision to sell an impaired available-for-sale investment security on which the Company does not expect the fair value of the investment to fully recover prior to the expected time of sale, the investment shall be deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other-than-temporary even if a decision to sell has not been made. The Company had no other-than-temporarily impaired MBS at March 31,June 30, 2007 and did not recognize any impairment charges against its MBS portfolio during the quarterssix months ended March 31,June 30, 2007 or March 31,and June 30, 2006.

7


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(e) Goodwill

The Company accounts for its goodwill in accordance with FAS No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”) which provides, among other things, how entities are to account for goodwill and other intangible assets that arise from business combinations or are otherwise acquired. FAS 142 requires that goodwill be tested for impairment annually or more frequently under certain circumstances. At March 31,June 30, 2007 and December 31, 2006, the Company had goodwill of $7.2 million, which represents the unamortized portion of the excess of the fair value of the common stock issued over the fair value of net assets acquired in connection with its formation in 1998. Goodwill is tested for impairment at least annually at the entity level. Through March 31,June 30, 2007, the Company had not recognized any impairment against its goodwill.

(f) Real Estate

At March 31,June 30, 2007, the Company indirectly held 100% of the ownership interest in Lealand Place, a 191-unit apartment property located in Lawrenceville, Georgia (“Lealand Place”), which is consolidated with the Company. This property was acquired through a tax-deferred exchange under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”). (See Note 5.)

The property, capital improvements and other assets held in connection with this investment are carried at cost, net of accumulated depreciation and amortization. Maintenance, repairs and minor improvements are charged to expense in the period incurred, while real estate assets, except land, and capital improvements are depreciated over their useful life using the straight-line method.

(g) Real Estate Held-for-Sale/Discontinued Operations

The Company accounts for its held-for-sale real estate assets in accordance with FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” (“FAS 144”). Among other things, FAS 144 provides that a long-lived asset classified as held-for-sale shall: (i) not be depreciated while classified as held-for-sale; (ii) be measured at the lower of its carrying amount or fair value less cost to sell; (iii) result in a loss recognized for any initial or subsequent write-down to fair value less cost to sell or a gain recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized. A gain or loss, not previously recognized, that results from the sale of a long-lived asset shall be recognized at the date of sale. In accordance with FAS 144, as amended by Statement No. 154, “Accounting Changes and Error Corrections” (“FAS 154”), revenues and expenses for the Company’s indirect interest in a property classified as held-for-sale or sold have been restated as discontinued operations, on a net basis for each of the periods presented. This reclassification/restatement had no effect on the Company’s reported net income. (See Note 5.)

During the first quarter of 2006, the Company sold its 100% indirect membership interest in Greenhouse Holdings, LLC (“Greenhouse”), which held a 128-unit multi-family apartment building in Omaha, Nebraska known as “The Greenhouse”. The transaction resulted in a gain of $4.8 million net of selling costs and a built-in gains tax of $1.8 million. In addition, a $135,000 mortgage prepayment penalty was incurred on the satisfaction of the mortgage secured by such property. Prior to the quarter in which the sale of Greenhouse occurred, there was no definitive plan to sell such property.

On June 30, 2006, the Company classified its indirect investment in Cameron at Hickory Grove Apartments, a 201-unit multi-family apartment complex in Charlotte, North Carolina (“Cameron”), as held-for-sale. Upon the reclassification, Cameron was reviewed for impairment and it was determined that Cameron’s carrying value approximated its fair value less cost to sell. The sale of Cameron during the fourth quarter of 2006 ultimately resulted in a net loss of $408,000. In addition, a prepayment penalty of $577,000 was incurred on the satisfaction of the mortgage secured by such property.

8


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

In accordance with FAS 144, the historical results of operations from Greenhouse and Cameron have been restated, on a net basis, as a component of discontinued operations.

8


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(h) Repurchase Agreements

The Company finances the acquisition of its MBS through the use of repurchase agreements. Under these repurchase agreements, the Company sells securities to a lender and agrees to repurchase the same securities in the future for a price that is higher than the original sale price. The difference between the sale price that the Company receives and the repurchase price that the Company pays represents interest paid to the lender. Although structured as a sale and repurchase, under repurchase agreements, the Company pledges its securities as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral, while the Company retains beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, the Company is required to repay the loan and concurrently receives back its pledged collateral from the lender. With the consent of the lender, the Company may renew a repurchase agreement at the then prevailing financing rate. Margin calls, whereby a lender requires that the Company pledge additional securities or cash as collateral to secure borrowings under its repurchase agreements with such lender, are routinely experienced by the Company as the value of the MBS pledged as collateral declines due to scheduled monthly amortization and prepayments of principal on such MBS. In addition, margin calls may also occur when the fair value of the MBS pledged as collateral declines due to increases in market interest rates or other market conditions. Through March 31,June 30, 2007, the Company had satisfied all of its margin calls. (See Note 6.)

Original terms to maturity of the Company’s repurchase agreements generally range from one month to 3648 months. Should a counterparty decide not to renew a repurchase agreement at maturity, the Company must either refinance elsewhere or be in a position to satisfy this obligation. If, during the term of a repurchase agreement, a lender should file for bankruptcy, the Company might experience difficulty recovering its pledged assets and may have an unsecured claim against the lender’s assets for the difference between the amount loaned to the Company plus interest due to the counterparty and the estimated fair value of the collateral pledged to such lender. To reduce this risk, the Company enters into repurchase agreements only with institutions whose long-term debt rating is single A or better or, if applicable, whose parent or holding company is rated single A or better (“QualityQualifying Institutions”) as determined by at least one nationally recognized rating agency, such as Moody’s Investors Services, Inc., Standard & Poor’s Corporation or Fitch, Inc. (collectively, the “Rating Agencies”), where applicable. If the minimum criterion is not met, the Company will not enter into repurchase agreements with a lender without the specific approval of the Company’s Board of Directors (the “Board”).Board. In the event an existing lender is downgraded below single A, the Company will seek the approval of the Board before entering into additional repurchase agreements with that lender. The Company generally seeks to diversify its exposure by entering into repurchase agreements with at least four separate lenders with a maximum loan from any lender of no more than three times the Company’s stockholders’ equity. At March 31,June 30, 2007, the Company had outstanding balances under repurchase agreements with 1415 separate lenders with a maximum net exposure (the difference between the amount loaned to the Company including interest payable and the fair value of the security pledged by the Company as collateral) to a single lender of $64.2$61.3 million.

Historically, the Company had, in some cases, purchased MBS from a counterparty and subsequently financed the acquisition of such MBS through repurchase agreements, which financing was also collateralized by such MBS, with the same counterparty (a “Same Party Transaction”). The Company recorded the acquisition of these MBS as assets and the related financings under repurchase agreements as liabilities on its consolidated balance sheets, with changes in the fair value of these MBS recorded in other comprehensive income, a component of stockholders’ equity. The corresponding interest income earned on these MBS and interest expense incurred on the related repurchase agreements were reported gross on the Company’s consolidated statements of income.

Based uponIn June 2007, the Company’s understanding of a technical interpretation of the provisions ofFASB discussed proposed FASB Staff Position (“FSP”) FAS No. 140,140-d, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“FAS 140”),Repurchase Financing Transactions,” which addresses Same Party Transactions mayTransactions. Among other things, the FASB tentatively determined that: (1) the FSP should be effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years and that earlier application should not qualifybe permitted; (2) the guidance should be applied to existing repurchase financings as of the beginning of the fiscal year in which the FSP is initially applied as a purchase bycumulative effect adjustment; and (3) the cumulative effect of the change in accounting principle should be recognized as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position). The FASB expects that the proposed FSP will be issued in July 2007. The comment period for the proposed FSP will be the later of 30 days after issuance or August 31, 2007. Based on the FASB’s tentative position, the Company because the MBS purchased by the Company in Same Party Transactions maydoes not be determined to be legally isolated from the counterparty in such transactions. The result of this technical interpretation would be to preclude the Company from having presented (i) these MBS and the related financings under repurchase agreements on a gross basis on its balance sheet and (ii) the related interest income earned and interest expense incurred on a gross basis on its income statement. Instead, the Company might have been required to present Same Party Transactions on a net basis, reporting derivatives on its balance sheet and the corresponding change in fair value of such derivatives on its income statement. The value of

9


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

expect that the derivatives created by these types of transactions would reflect the changes in the valueissuance of the underlying MBS and the changes in the value of the underlying credit provided by the applicable counterparty.

IfFSP will have any impact on its prior financial statements. At June 30, 2007, the Company were to determine it was required to apply this technical interpretation of FAS 140, the potential change in its accounting treatment would not affect the economics of the Same Party Transactions, but would affect how these transactions were reported on its consolidated financial statements. This issue was presented to the Emerging Issues Task Force of the FASB in early 2006 for guidance and, during the third quarter of 2006, the FASB determined it would consider the issue. To date,had no further guidance has been issued on this matter by the FASB. Beginning in the first quarter of 2006, the Company discontinued entering into Same Party Transactions.

(i) Earnings per Common Share (“EPS”)

Basic EPS is computed by dividing net income available to holders of common stock by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed by dividing net income available to holders of common stock by the weighted average shares of common stock and common equivalent shares outstanding during the period. For the diluted EPS calculation, common equivalent shares outstanding includes the weighted average number of shares of common stock outstanding adjusted for the effect of dilutive unexercised stock options outstanding using the treasury stock method. Under the treasury stock method, common equivalent shares are calculated assuming that all dilutive common stock equivalents are exercised and the proceeds along with future compensation expenses for unvested stock options are used to repurchase shares of the Company’s outstanding common stock at the average market price during the reported period. No common share equivalents are included in the computation of any diluted per share amount for a period in which a net operating loss is reported. (See Note 9.)

(j) Comprehensive Income/Loss

Comprehensive income for the Company includes net income, the change in net unrealized gains and losses on MBSinvestment securities and derivative instruments, and is reduced by dividends on preferred stock. (See Note 10.)

(k) U.S. Federal Income Taxes

The Company has elected to be taxed as a REIT under the provisions of the Code and the corresponding provisions of state law. The Company expects to operate in a manner that will enable it to continue to be taxed as a REIT. A REIT is not subject to tax on its earnings to the extent that it distributes its taxable income to stockholders. As such, no provision for current or deferred income taxes has been made in the accompanying consolidated financial statements.

Under the “Built-in Gain Rules” of the Code, a REIT is subject to a corporate tax if it disposes of an asset acquired from a C corporation during the ten-year period following the initial acquisition of such asset. Such built-in gain tax is imposed at the highest regular corporate tax rate on the lesser of (i) the amount of gain recognized by the REIT at the time of the sale or disposition of such asset or (ii) the amount of such asset’s built-in gains at the time the asset was acquired from the non-REIT C corporation. During the first quarter of 2006, the Company was subject to a built-in gains tax of $1.8 million in connection with the sale of one of its real estate properties, which, net of such tax and selling expenses, resulted in a gain of $4.8 million. (See Note 5.)

(l) Derivative Financial Instruments/Hedging Activity

The Company hedges a portion of its interest rate risk through the use of derivative financial instruments, comprised of Swaps and Caps (collectively, “Hedging Instruments”). The Company accounts for Hedging Instruments in accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“FAS 133”) as amended by FAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” and FAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” The Company’s Hedging Instruments are carried on the balance sheet at their fair value, as assets, if their fair value is positive, or as liabilities, if their fair value is negative. Since the Company’s Hedging Instruments are designated as “cash flow hedges,” the change in the fair value of any such instrument is recorded in other comprehensive income for hedges that qualify as effective and is transferred from other comprehensive income to earnings as the hedged liability affects earnings. The ineffective amount of all Hedging Instruments, if any, is recognized in earnings each quarter. To date, the Company has not recognized any change in the value of its Hedging Instruments in earnings as a result of the hedge or a portion thereof being ineffective.

Upon entering into hedging transactions, the Company documents the relationship between the Hedging Instruments and the hedged liability. The Company also documents its risk-management policies, including

10


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

objectives and strategies, as they relate to its hedging activities. The Company assesses, both at inception of a hedge and on an on-going basis, whether or not the hedge is “highly effective,” as defined by FAS 133. The Company would discontinuediscontinues hedge accounting on a prospective basis and recognizerecognizes changes in the estimated fair value reflected in earnings when: (i) it is determined that the derivative is no longer effective in offsetting cash flows of a hedged item (including hedged items such as forecasted transactions); (ii) it is no longer probable that the forecasted transaction will occur; or (iii) it is determined that designating the derivative as a Hedging Instrument is no longer appropriate. To date,During the second quarter of 2007, the Company has not discontinued hedge accounting for anyterminated a Swap resulting in a gain of its Hedging Instruments, as such instruments have remained highly effective.$176,000.

10


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The Company utilizes Hedging Instruments to manage a portion of its interest rate risk and does not anticipate entering into derivative transactions for speculative or trading purposes. (See Note 4.) In order to limit credit risk associated with the counterparties to derivative instruments, the Company’s policy is to enter into derivative contracts with QualityQualifying Institutions.

Interest Rate Swaps

There is no cost incurred by the Company at the inception of a Swap; however, in certain cases, the Company is required to pledge cash or securities equal to a specified percentage of the notional amount of the Swap to the counterparty as collateral. When the Company enters into a Swap, it agrees to pay a fixed rate of interest and to receive a variable interest rate, generally based on the London Interbank Offered Rate (“LIBOR”). The Company’s Swaps are designated as cash flow hedges against the benchmark interest rate risk associated with its borrowings.

All changes in the value of Swaps are recorded in accumulated other comprehensive income. 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 and throughout the term of the hedging relationship, then the related gain or loss in accumulated other comprehensive income would be recognized through earnings.

Realized gains and losses resulting from the termination of a Swap are initially recorded in accumulated other comprehensive income as a separate component of stockholders’ equity. The gain or loss from a terminated Swap remains in accumulated other comprehensive income until the forecasted interest payments affect earnings. IfHowever, if it becomesis probable that the forecasted interest payments will not occur, then the entire gain or loss would beis recognized though earnings. (See Note 4.)

Interest Rate Caps

The Company purchases Caps by incurring aA one-time fee (i.e., a premium) at inceptionis paid upon entering into the Cap Agreement.purchasing a Cap. Pursuant to the terms of a Cap, the Company will receive cash payments if the interest rate index specified in a Cap increases above the contractually specified level. Therefore, Caps have the effect of capping the interest rate on a portion of the Company’s borrowings, equal to the notional amount of the active Caps, to the rate specified in the Cap agreement. (See Note 4.)

In order for the Company’s Caps to qualify for hedge accounting, upon entering into the Cap, the Company must anticipate that the hedge will be “highly effective,” as defined by FAS 133, in limiting the Company’s cost beyond the Cap threshold on its matching (on an aggregate basis) anticipated repurchase agreements during the active period of the Cap. Provided that the hedge remains effective, changes in the estimated fair value of the Caps are included in other comprehensive income. Upon commencement of the Cap active period, the premium paid to enter into the Cap is amortized to interest expense. The periodic amortization of Cap premiums are based on an allocation of the premium, determined at inception of the hedge, for the monthly components on an estimated fair value basis. Payments received in connection with Caps, if any, reduce interest expense. If it is determined that a Cap is not effective, the premium would be reduced and a corresponding charge made to interest expense, for the ineffective portion of the Cap. The maximum cost related to the Company’s Caps is limited to the premium paid to enter into the Cap. (See Note 4.)

(m) Adoption of New Accounting Standards

On January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attributes 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. The Company’s adoption of FIN 48 did not have an material impact on the Company’s financial statements.

11


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Effective January 1, 2007, the Company adopted FAS No. 155, “Accounting for Certain Hybrid Instruments” (“FAS 155”), an amendment to FAS 133 and FAS 140.No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“FAS 140”). Among other things, FAS 155: (i) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; (ii) clarified which interest-only strips and principal-only strips are not subject to the requirements of FAS 133; (iii) established a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (iv) clarified that concentrations of credit risk in the form of subordination are not embedded derivatives; and (v) amended FAS 140 to eliminate the prohibition on a qualifying special-purpose entity

11


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.

Securitized interests which only contain an embedded derivative that is tied to the prepayment risk of the underlying prepayable financial assets and for which the investor does not control the right to accelerate the settlement of such financial assets are excluded under a scope exception adopted by the FASB. NoneAs a result of this scope exception, none of the Company’s assets were subject to FAS 155 as a result of this scope exception. Therefore, the155. The Company has continuedcontinues to record changes in the market value of its investment securities through other comprehensive income, a component of stockholders’ equity.income. Therefore, the adoption of FAS 155 did not have any impact on the Company’s financial position, results of operations or cash flows. However, if future investments by the Company in securitized financial assets do not meet the scope exception to FAS 155, the Company’s results of operations may exhibit future volatility if such investments are required to be bifurcated or marked to market value in their entirety through the income statement.

(n) Recently Issued Accounting Standards

In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (“FAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007 and, all interim periods within those fiscal years.with certain exceptions which are not believed to be applicable to the Company, is to be applied prospectively. Earlier application is permitted provided that the reporting entity has not yet issued interim or annual financial statements for that fiscal year. The Company did not elect to early adopt FAS 157 and is currently evaluating the impact that the adoption of FAS 157 will have on its consolidated financial statements.

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting datedate. FAS 159 is effective for the Company commencing January 1, 2008.2008 on a prospective basis, as the Company did not elect to early adopt FAS 159. A decision to elect the fair value option for an eligible item is irrevocable. The Company is currently evaluating the impact that the adoption of FAS 159 will have on its consolidated financial statements.

In June 2007, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 07-01 “Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide Investment Companies (the “Guide”). The SOP is effective for fiscal years beginning on or after December 15, 2007. While the Company maintains an exemption from the Investment Company Act of 1940, as amended (“Investment Company Act”) and is therefore not regulated as an investment company, it is none-the-less in the process of assessing whether SOP 07-1 is applicable.

(o) Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

12


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

3. Investment Securities

At March 31,June 30, 2007 and December 31, 2006, all of the Company’s investment securities were classified as available-for-sale and, as such, were carried at their estimated fair value. At March 31,June 30, 2007 and December 31, 2006, the Company’s investment securities portfolio consisted primarily of pools of ARM-MBS with carrying values of approximately $6.386$6.994 billion and $6.341 billion, respectively.

The Company’s investment securities portfolio is primarily comprised of Agency MBS which have an implied AAA rating, and non-Agency MBS that are rated AAA by one or more of the Rating Agencies. The following tables present certain information about all of the Company’s investment securities at March 31,June 30, 2007 and December 31, 2006.

     Amortized
Cost(1)
   Carrying Value/
Estimated
Fair Value
   Net
Unrealized
(Loss)/Gain
(In Thousands)     March 31, 2007
   
Agency MBS:                                          
Fannie Mae Certificates           $5,655,290       $5,642,855       $(12,435)  
Ginnie Mae Certificates             264,581         261,949         (2,632)  
Freddie Mac Certificates             264,777         263,266         (1,511)  
Non-Agency MBS(2):
                                          
AAA             208,295         205,245         (3,050)  
AA             2,187         2,165         (22)  
Single A and A-             2,167         2,161         (6)  
BBB and BBB-             1,870      ��  1,872         2   
BB and below             2,120         2,258         138   
Non-rated             2,813         3,834         1,021  
Total MBS           $6,404,100       $6,385,605       $(18,495)  
 
Income Notes:                                          
Non-rated             1,980         1,980         —   
Total Investment securities           $6,406,080       $6,387,585       $(18,495)  
 

    June 30, 2007
   
(In Thousands)
    Amortized
Cost(1)
   Carrying Value/
Estimated
Fair Value
   Net
Unrealized
(Loss)/Gain
Agency MBS:      
Fannie Mae Certificates     $5,667,528       $5,631,068       $(36,460)  
Ginnie Mae Certificates       225,474         223,605         (1,869)  
Freddie Mac Certificates       230,882         229,425         (1,457)  
Non-Agency MBS(2):
      
AAA       905,751         898,495         (7,256)  
AA       2,014         2,053         39   
Single A and A-       1,398         1,436         38   
BBB and BBB-       1,704         1,736         32   
BB and below       2,112         2,223         111   
Non-rated       3,004         4,203         1,199  
Total MBS     $7,039,867       $6,994,244       $(45,623)  
Other investments:      
Non-rated securities       1,914         1,890         (24)  
Total Investment Securities
    Amortized
Cost(1)
   Carrying Value/
Estimated
Fair Value
   Net
Unrealized
(Loss)/Gain
    December 31, 2006
   
    December 31, 2006
       Amortized
Cost(1)
   Carrying Value/
Estimated
Fair Value
   Net
Unrealized
(Loss)/Gain
Agency MBS:            
Fannie Mae Certificates     $5,506,188       $5,482,112       $(24,076)       $5,506,188       $5,482,112       $(24,076)  
Ginnie Mae Certificates       307,472         304,826         (2,646)         307,472         304,826         (2,646)  
Freddie Mac Certificates       301,016         299,505         (1,511)         301,016         299,505         (1,511)  
Non-Agency MBS(2):
            
AAA       237,805         234,275         (3,530)         237,805         234,275         (3,530)  
AA       2,253         2,218         (35)         2,253         2,218         (35)  
Single A and A-       3,029         3,014         (15)         3,029         3,014         (15)  
BBB and BBB-       9,007         8,972         (35)         9,007         8,972         (35)  
BB and below       2,140         2,255         115          2,140         2,255         115   
Non-rated       2,753         3,491         738          2,753         3,491         738   
Total MBS     $6,371,663       $6,340,668       $(30,995)       $6,371,663       $6,340,668       $(30,995)  
 

(1)    Includes principal payments receivable.


(2)    Based upon Standard & Poor’s ratings.

Agency MBS: Although not rated, Agency MBS carry an implied AAA rating. Agency MBS are guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. government, such as Ginnie Mae. The payment of principal and/or interest on Fannie Mae and Freddie

13


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Mac MBS is guaranteed by those respective agencies and the payment of principal and/or interest on Ginnie Mae MBS is backed by the full faith and credit of the U.S. government.

13


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Non-Agency MBS: Non-Agency MBS are certificates that are backed by pools of single-family and multi-family mortgage loans, which are not guaranteed by the U.S. government, any federal agency or any federally chartered corporation. Non-Agency MBS may be rated from AAA to B by one or more of the Rating Agencies. The rating indicates the credit worthiness of the investment (i.e., the obligor’s ability to meet its financial commitment on the obligation). In addition, as of March 31, 2007, the Company had $3.8 million of non-agency MBS which were non-rated.

Income Notes:Other Investments: At June 30, 2007, the Company’s other investment securities were comprised of income notes. Income notes are non-rated securities collateralized by capital securities of a diversified pool of issuers, consisting primarily of depository institutions and insurance companies, and are not rated.companies.

The Company’s MBS rated below investment grade and non-rated MBS were purchased at a discount, a portion of which was designated as credit protection against future credit losses. The initial credit protection (i.e., discount) of these MBS may be adjusted over time, based on review of the underlying collateral, economic conditions and other factors. If the performance of these securities is more favorable than initially forecasted, a portion of the amount designated as credit protection may be accreted into interest income over time. Conversely, if in the future the performance of these securities is less favorable than initially forecasted, impairment charges and a corresponding write down of such MBS to a new cost basis could result.

The following table presents the amortized cost, gross unrealized gains, gross unrealized losses and fair value of the Company’s investment securities at March 31,June 30, 2007 and December 31, 2006:

(In Thousands)    March 31,
2007
   December 31,
2006
    June 30,
2007
   December 31,
2006
Principal/notional balance     $6,297,430       $6,257,047       $6,938,720       $6,257,047  
Principal payment receivable       9,173         15,819         13,726         15,819  
       6,306,603         6,272,866  
Unamortized premium       97,528         98,838         92,310         98,838  
Unaccreted discount       (31)         (41)         (2,975)         (41)  
Gross unrealized gains       7,829         3,193         2,693         3,193  
Gross unrealized (losses)       (26,324)         (34,188)         (48,340)         (34,188)  
Carrying value/estimated fair value     $6,385,605       $6,340,668       $6,996,134       $6,340,668  
 

The Company monitors the performance and market value of its investment securities portfolio on an ongoing basis. At March 31,June 30, 2007, the Company had 219 MBS,208 securities, with an amortized cost of $1.533$1.310 billion, that had unrealized losses for 12 months or more. At March 31,June 30, 2007, these MBSsecurities had gross unrealized losses of $21.6$21.5 million. All of these MBS were either Agency MBS or investment grade (i.e., rated BBB- or higher).

14


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table presents the gross unrealized losses and the estimated fair value of the Company’s MBS,investment securities, aggregated by investment category or rating and length of time that such MBSsecurities have been in a continuous unrealized loss position, at March 31,June 30, 2007.

    Unrealized Loss Position for:
   
       Unrealized Loss Position for:
   
    Less than 12 Months
   12 Months or more
   Total
       Less than 12 Months
   12 Months or more
   Total
   
(In Thousands)
    Estimated
Fair Value
   Unrealized
losses
   Estimated
Fair Value
   Unrealized
losses
   Estimated
Fair Value
   Unrealized
losses
    Estimated Fair
Value
   Unrealized
losses
   Estimated Fair
Value
   Unrealized
losses
   Estimated Fair
Value
   Unrealized
losses
Agency MBS:            
Fannie Mae     $1,751,491       $3,873       $1,026,053       $15,014       $2,777,544       $18,887       $4,239,192       $22,110       $871,495       $15,314       $5,110,687       $37,424  
Ginnie Mae       53,403         184          185,216         2,555         238,619         2,739         20,845         56          158,961         1,942         179,806         1,998  
Freddie Mac       140,621         647          90,135         972          230,756         1,619         131,732         700          73,414         819          205,146         1,519  
AAA rated MBS       —          —          205,245         3,050         205,245         3,050         457,060         3,786         184,361         3,470         641,421         7,256  
AA rated MBS       —          —          2,165         22          2,165         22   
A rated MBS       —          —          1,512         7          1,512         7   
A- rated MBS       649          —          —          —          649          —   
BBB and BBB- rated MBS       —          —          862          —          862          —   
Non-rated MBS       77          118          —          —          77          118   
Non-rated other securities       1,890         25          —          —          1,890         25   
Total temporarily impaired securities     $1,946,164       $4,704       $1,511,188       $21,620       $3,457,352       $26,324       $4,850,796       $26,795       $1,288,231       $21,545       $6,139,027       $48,340  
 

At March 31,June 30, 2007, the Company determined that it had the intent and ability to continue to hold those MBSinvestment securities on which it had unrealized losses until recovery of such unrealized losses or until maturity, such that the impairment of these MBSsecurities was considered temporary. However, such assessment may change over time given, among other things, the dynamic nature of interest rate markets and other variables. Future sales or changes in the Company’s assessment of its ability and/or intent to hold impaired MBSinvestment securities until recovery or maturity could result in the Company recognizing other-than-temporary impairment charges or realized losses in the future.

During the quartersix months ended March 31,June 30, 2007, the Company sold onetwo MBS, for $6.8an aggregate of $55.3 million, realizing a gainresulting in net realized losses of $113,000, comprised of gross losses of $116,000 and gross gains of $3,000. During the quartersix months ended March 31,June 30, 2006, as part of the repositioning of the MBS portfolio, the Company had sold 83 MBS with an aggregate valuefor $1.823 billion, resulting in net realized losses of $788.5$23.1 million, realizing a net gaincomprised of $1.6gross losses of $25.2

14


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

million and gross gains of $2.1 million. TheIncluded in these sales were $821.5 million of MBS sold were among those identified as other-than-temporarily impaired, on which anthe Company had taken a $20.7 million impairment charge of $20.7 million had been takenagainst at December 31, 2005.

The following table presents interest income and premium amortization on the Company’s MBS portfolio for the three and six months ended March 31,June 30, 2007 and 2006:

    Three Months Ended March 31,
       Three Months Ended
June 30,
   Six Months Ended
June 30,
   
(In Thousands)    2007
   2006
    2007
   2006
   2007
   2006
Coupon interest on MBS     $92,684       $61,452       $98,501       $53,514       $191,186       $114,966  
Premium amortization       (8,344)         (8,233)         (8,215)         (7,869)         (16,560)         (16,111)  
Discount accretion       1          110          55          —          56          119   
Interest income on MBS, net     $84,341       $53,329       $90,341       $45,645       $174,682       $98,974  
 

15


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table presents certain information about the Company’s MBS that will reprice or be repaid based on contractual terms, which do not consider prepayments assumptions, at March 31,June 30, 2007 and December 31, 2006:

    March 31, 2007
   December 31, 2006
    June 30, 2007
 December 31, 2006
 
(Dollars in Thousands)
Months to Coupon Reset or
Contractual Payment
    Fair Value(1)
   % of Total
   WAC(2)
   Fair Value(1)
   % of Total
   WAC(2)
 Fair Value(1)
 % of
Total
 WAC(2)
 Fair Value(1)
 % of
Total
 WAC(2)
Within 30 Days     $708,311         11.1%         6.74%       $972,867         15.4%         6.32%   $672,585   9.6%  6.67% $972,867   15.4%  6.32%
30 to 90 Days       192,215         3.0         5.78         71,657         1.1         6.03    212,349   3.0   6.04   71,657   1.1   6.03 
Three to 12 Months       683,106         10.7         6.12         759,762         12.0         5.91    556,029   8.0   6.12   759,762   12.0   5.91 
12 to 24 Months       122,659         1.9         5.07         142,191         2.3         4.86    99,678   1.4   5.09   142,191   2.3   4.86 
24 to 36 Months       427,786         6.7         5.04         318,940         5.0         4.93    429,570   6.2   5.05   318,940   5.0   4.93 
36 to 60 Months       3,067,946         48.2         6.18         3,220,190         50.9         6.16    2,847,017   40.8   6.19   3,220,190   50.9   6.16 
Over 60 Months       1,174,409         18.4         6.11         839,242         13.3         6.16    2,163,290   31.0   5.98   839,242   13.3   6.16 
Total     $6,376,432         100.0%         6.11%       $6,324,849         100.0%         6.06%   $6,980,518   100.0%  6.08% $6,324,849   100.0%  6.06%
 

(1) Does not include principal payments receivable.

(2) “WAC” is the weighted average coupon rate on the Company’s MBS, which is higher than the net yield that will be earned on such MBS. The net yield is primarily reduced by net premium amortization and the contractual delay in receiving payments, which varies by issuer.

The table below presents information about the Company’s MBS pledged as collateral under repurchase agreements and Swaps at March 31,June 30, 2007.

    MBS Pledged Under Repurchase Agreements
   MBS Pledged Under Swaps
       MBS Pledged Under
Repurchase Agreements
   MBS Pledged Under Swaps
   
MBS Pledged
    Estimated
Fair Value/
Carrying Value
   Amortized
Cost
   Estimated
Fair Value/
Carrying Value
   Amortized
Cost
   Total Fair
Value of MBS
Pledged
    Estimated
Fair Value/
Carrying Value
   Amortized Cost
   Estimated
Fair Value/
Carrying Value
   Amortized Cost
   Total Fair
Value of MBS
Pledged
(In Thousands)    
 		   (In Thousands)
 
Fannie Mae     $5,477,696       $5,488,340       $13,888       $13,922       $5,491,584       $5,426,775       $5,461,430       $2,941       $2,932       $5,429,716  
Freddie Mac       219,541         220,709         —          —          219,541         210,709         212,138         —          —          210,709  
Ginnie Mae       184,326         186,042         —          —          184,326         186,405         188,052         —          —          186,405  
AAA Rated       198,948         201,867         —          —          198,948         886,776         893,955         —          —          886,776  
     $6,080,511       $6,096,958       $13,888       $13,922       $6,094,399       $6,710,665       $6,755,575       $2,941       $2,932       $6,713,606  
 

15


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

4. Hedging Instruments

In connection with the Company’s interest rate risk management, the Company periodically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts. The Company’s derivatives are comprised of Swaps and, to a lesser extent, Caps, which in effect modify the repricing characteristics of the Company’s repurchase agreements and cash flows on such liabilities. The use of Hedging Instruments creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the contracts. In addition, the Company is required to pledge assets as collateral for certain of its Swaps, which amount varies over time based on the market value, notional amount, and remaining term of the Swap. At March 31,June 30, 2007 and December 31, 2006, the Company had MBS pledged as collateral against its Swaps of $13.9$2.9 million and $13.5 million, respectively. In order to mitigate its exposure to counterparty-related risk associated with its Hedging Instruments, the Company’s policy is to enter into derivative transactions only with QualityQualifying Institutions. In the event of a default by the counterparty, the Company would not receive payments provided for under the terms of the Hedging Instrument, could incur a loss for the remaining unamortized premium cost of Caps and could have difficulty obtaining its assets pledged as collateral for Swaps.

16


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table sets forthpresents the impact of the Company’s Hedging Instruments on the Company’s other comprehensive income/(loss) for the three and six months ended March 31,June 30, 2007 and 2006.

    For the Three Months Ended
June 30,
   For the Six Months Ended
June 30,
   
    For the Three Months Ended March 31,
       2007
   2006
   2007
   2006
(In Thousands)    2007
   2006
    
Accumulated Other Comprehensive
Income/(Loss) from Hedging Instruments:
                       
Balance at beginning of year     $602        $3,517  
Balance at beginning of period     $(4,149)       $3,859       $602        $3,517  
Unrealized (losses)/gains on Hedging Instruments, net       (4,751)         342          19,173         (754)         14,422         (412)  
Balance at the end of period     $(4,149)       $3,859       $15,024       $3,105       $15,024       $3,105  
 

(a) Interest Rate Swaps

The Company’s Swaps are used to lock-in thea fixed Swapinterest rate related toon a portion of its current and anticipated future 30-day term repurchase agreements. For the three months ended March 31,June 30, 2007 and March 31,June 30, 2006, the Company’s Swaps reduced the cost of interest expense on repurchase agreements by $1.7$2.1 million and $783,000,$1.2 million, respectively. For the six months ended June 30, 2007 and June 30, 2006, the Company’s Swaps reduced the cost of interest expense on repurchase agreements by $3.8 million and $2.0 million, respectively.

The following table below presents information about the Company’s Swaps, all of which were active at March 31,June 30, 2007.

    Notional
Amount
   Weighted
Average
Swap Rate
   Estimated
Fair Value/
Carrying
Value
   Gross
Unrealized
Gains
   Gross
Unrealized
(Losses)
    Notional
Amount
   Weighted
Average
Swap Rate
   Estimated Fair
Value/Carrying
Value
   Gross
Unrealized
Gains
   Gross
Unrealized
(Losses)
(Dollars in Thousands)           
Currently Active     $2,084,524         4.98%       $(4,181)       $526        $(4,707)       $2,954,102         5.02%       $15,024       $15,760       $(736)  
 

(b) Interest Rate Caps

The Company’s Caps are designated as cash flow hedges against interest rate risk associated with the Company’s existing and forecasted repurchase agreements. When the 30-day LIBOR increases above the rate specified in the Cap Agreement during the effective term of the Cap, the Company receives monthly payments from its Cap counterparty. The Company had no Caps at June 30, 2007.

16


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table presents the impact on the Company’s interest expense of its Caps for the three and six months ended March 31,June 30, 2007 and 2006.

    For the Three Months Ended March 31,
       For the Three Months Ended
June 30,
   For the Six Months Ended
June 30,
   
    2007
   2006
    2007
   2006
   2007
   2006
(In Thousands)    
 		          
Premium amortization on Caps     $181        $383        $97        $453        $278        $837   
Payments earned on Caps       (196)         (576)         (131)         (812)         (327)         (1,388)  
Net decrease to interest expense related to Caps     $(15)       $(193)       $(34)       $(359)       $(49)       $(551)  
 

17


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table presents information about the Company’s one remaining Cap, which was active at March 31, 2007.

     Weighted
Average
Remaining
Active
Period
   Weighted
Average
LIBOR
Strike
Rate(1)
   Notional
Amount
   Unamortized
Premium
   Estimated
Fair Value/
Carrying Value
   Gross
Unrealized
Gain
(Dollars in Thousands)     
 		   
Currently active         2 Months       3.75%       $50,000       $97        $129        $32   
 

(1)
The 30-day LIBOR strike rate at which payments would become due to the Company under the terms of the Cap. At March 31, 2007, the 30-day LIBOR was 5.32%.

5. Real Estate and Discontinued Operations

(a) Real Estate

The Company’s investment in real estate at March 31,June 30, 2007 and December 31, 2006 was comprised of an indirect 100% ownership interest in Lealand Place, a 191-unit apartment property located in Lawrenceville, Georgia. The following table presents the summary of assets and liabilities of Lealand Place at March 31,June 30, 2007 and December 31, 2006:

    March 31, 2007
   December 31, 2006
    June 30,
2007
   December 31,
2006
(In Thousands)           
Real Estate Assets and Liabilities:            
Land and buildings     $11,724       $11,789       $11,693       $11,789  
Cash       428          126          397          126   
Prepaid and other assets       126          146          158          146   
Mortgage payable (1)       (9,573)         (9,606)         (9,532)         (9,606)  
Accrued interest and other payables       (155)         (122)         (191)         (122)  
Real estate assets, net     $2,550       $2,333       $2,525       $2,333  
 
(1)  
 

The mortgage collateralized by Lealand Place is non-recourse, subject to customary non-recourse exceptions, which generally means that the lender’s final source of repayment in the event of default is foreclosure of the property securing such loan. At March 31,June 30, 2007 and December 31, 2006, the mortgage had a fixed interest rate of 6.87%, contractually matures on February 1, 2011 and is subject to a penalty if prepaid. In January 2005, the Company loaned Lealand Place $150,000 to fund operations, of which $140,000 and $150,000 remained outstanding through March 31,at June 30, 2007 and December 31, 2006; this2006, respectively. This loan and the related interest isare eliminated in consolidation.


The following table presents the summary results of operations for Lealand Place, for the three and six months ended March 31,June 30, 2007 and 2006:

    Three Months Ended March 31,
       Three Months Ended
June 30,
   Six Months Ended
June 30,
   
    2007
   2006
    2007
   2006
   2007
   2006
(In Thousands)    
 		          
Revenue from operations of real estate     $413        $382        $413        $388        $826        $770   
Interest expense for mortgages on real estate       (167)         (173)         (164)         (163)         (331)         (336)  
Other real estate operations expense       (253)         (245)         (265)         (237)         (518)         (482)  
Loss from Real Estate Operations, net     $(7)       $(36)       $(16)       $(12)       $(23)       $(48)  
 

1817


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(b) Discontinued Operations

The Company’s discontinued operations for the quarterthree and six months ended March 31,June 30, 2006 reflect the operating results for Cameron, which was sold during the fourth quarter of 2006, and Greenhouse which was sold during the first quarter of 2006. The sale of Greenhouse on January 31, 2006, resulted in the Company realizing a gain of $4.8 million, net of a built-in gains tax of $1.8 million and incurring a mortgage prepayment penalty of $135,000 incurred upon the satisfaction ofsatisfying the mortgage secured by Greenhouse. The historical results of operations for both Cameron and Greenhouse, which are neither individually nor in the aggregate material to the Company, have been restated and reported as a net component of discontinued operations, as both properties were sold during 2006.operations.

6. Repurchase Agreements

The Company’s repurchase agreements are collateralized by the Company’s MBS and typically bear interest at rates that are LIBOR-based. At March 31,June 30, 2007, the Company had 324 repurchase agreements with a weighted average remaining contractual maturity of 1110 months and an effective repricing period of 1618 months given the impact of related derivative hedges. At December 31, 2006, the Company had 353 repurchase agreements with a weighted average remaining contractual maturity of 11 months and an effective repricing period of 15 months given the impact of related derivative hedges. The following table presents contractual repricing information about the Company’s repurchase agreements, which does not reflect the impact of related derivative hedges at March 31,June 30, 2007 and December 31, 2006.

    March 31, 2007
   December 31, 2006
   
        June 30, 2007
   December 31, 2006
   
    Balance
   Weighted Average
Contractual Rate
   Balance
   Weighted Average
Contractual Rate
    Balance
   Weighted Average
Contractual Rate
   Balance
   Weighted Average
Contractual Rate
(In Thousands)
                        
Within 30 days     $2,998,900         5.27%       $2,848,300         5.30%       $3,644,300         5.30%       $2,848,300         5.30%  
30 days to 3 months       597,200         5.31         1,017,900         5.10         907,300         5.32         1,017,900         5.10  
Over 3 months to 6 months       425,500         5.32         37,200         3.98         117,400         5.29         37,200         3.98  
Over 6 months to 12 months       28,800         5.35         —          —          364,900         5.26         —          —   
Over 12 months to 24 months       269,800         5.27         1,505,311         5.16         1,077,585         5.12         1,505,311         5.16  
Over 24 months to 36 months       1,401,157         5.19         314,000         5.33         268,000         5.44         314,000         5.33  
Over 36 months       42,000         4.69         —          —   
     $5,763,357         5.26%       $5,722,711         5.22%       $6,379,485         5.28%       $5,722,711         5.22%  
 

The following table presents information about the Company’s MBS that are pledged as collateral under repurchase agreements based upon the term to maturity of the repurchase agreements at March 31,June 30, 2007.

Collateral Pledged
Collateral Pledged
 Term to Maturity of Repurchase Agreement
   Collateral Pledged
 Term to Maturity of Repurchase Agreement
   
MBS Pledged
    Fair Value of
MBS Pledged
as Collateral
   Up to 30 Days
  ��30 to 90 Days
   Over 90 Days
   Total
    Fair Value of MBS
Pledged as Collateral
   Up to 30 Days
   30 to 90 Days
   Over 90 Days
   Total
(In Thousands)    
 		       
Fannie Mae     $5,477,696       $2,789,029       $494,100       $1,921,257       $5,204,386       $5,426,775       $2,820,900       $638,400       $1,718,555       $5,177,855  
Freddie Mac       219,541         56,290         7,400         116,900         180,590         210,709         41,400         —          109,330         150,730  
Ginnie Mae       184,326         114,281         57,300         16,800         188,381         186,405         83,900         107,900         —          191,800  
AAA Rated       198,948         39,300         38,400         112,300         190,000         886,776         698,100         161,000         —          859,100  
     $6,080,511       $2,998,900       $597,200       $2,167,257       $5,763,357       $6,710,665       $3,644,300       $907,300       $1,827,885       $6,379,485  
 

19


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

7. Commitments and Contingencies

Lease Commitments and Contingencies

The Company pays monthly rent pursuant to each of its operating leases. Effective March 31, 2007, the Company consolidated and extended its existing leases and entered into a new lease through April 30, 2017 for office space at its corporate headquarters.headquarters and entered into an amended lease for such office space as well as newly-leased additional office space, which extended the term of the lease for such office space through April 30, 2017. As a result, the Company increased its total leased space at its headquarters to meet its operating needs. In connection with this lease, the Company established a $350,000 irrevocable standby letter of credit in lieu of lease security for the benefit of the landlord through April 30, 2017. The letter of credit may be drawn upon by the landlord in the event that the Company defaults under certain terms of

18


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

the lease. In addition, the Company has a lease through December 2007 for its off-site back-up facilities located in Rockville Centre, New York, which provides for, among other things, annual rent of $26,000.

At March 31, 2007 the contractual minimum rental payments (exclusive of possible rent escalation charges and normal recurring charges for maintenance, insurance and taxes) were as follows:

Year Ended
December 31,
     At March 31,
2007
     (In Thousands)
 
2007           $459(1)  
2008             1,042  
2009             1,051  
2010             1,071  
2011             1,085  
Thereafter             7,341  
            $12,049  
 

(1) Represents contractual lease payments due from April 1, 2007 through December 31, 2007.

8. Stockholders’ Equity

(a) Stock Repurchase Program

On August 11, 2005, the Company announced the implementation of a stock repurchase program (the “Repurchase Program”) to repurchase up to 4.0 million shares of its outstanding common stock. Subject to applicable securities laws, repurchases of common stock under the Repurchase Program are made at times and in amounts as the Company deems appropriate, using available cash resources. From inception of the Repurchase Program through March 31,June 30, 2007, the Company repurchased 3,191,200 shares of common stock at an average cost per share of $5.90. On May 2, 2006, the Company announced an increase in the size of the Repurchase Program, by an additional 3,191,200 shares of common stock, resetting the number of shares of common stock that the Company is authorized to repurchase to 4.0 million shares. At March 31,June 30, 2007, 4.0 million shares remained authorized for repurchase. The Repurchase Program may be suspended or discontinued by the Company at any time and without prior notice. The Company has not repurchased any shares of its common stock since April, 2006.

Shares of common stock repurchased by the Company under the Repurchase Program are cancelled and, until reissued by the Company, are deemed to be the authorized but unissued shares of the Company’s common stock.

(b) Dividends on Preferred Stock

The following table presents cash dividends declared by the Company on its Preferred Stock, from January 1, 2006 through March 31,June 30, 2007.

Declaration Date
     Record Date
   Payment Date
   Dividend
Per share
2007
                                          
May 21, 2007June 1, 2007June 29, 2007  $0.53125
February 16, 2007         March 1, 2007   March 30, 2007       $0.53125  
 
2006
                                  
February 17, 2006         March 1, 2006   March 31, 2006     $0.53125  
May 19, 2006         June 1, 2006   June 30, 2006       0.53125  
August 21, 2006         September 1, 2006   September 29, 2006       0.53125  
November 20, 2006         December 1, 2006   December 29, 2006       0.53125  
 

20


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(c) Dividends on Common Stock

The Company typically declares quarterly dividends on its common stock in the month following the close of sucheach fiscal quarter, except that dividends for the fourth quarter of each year are declared in the fourththat quarter for tax reasons.

On April 3,July 2, 2007, the Company declared its 2007 firstsecond quarter common stock dividend of $0.08, payable$0.09 per share, which was paid on April 30,July 31, 2007, to stockholders of record on AprilJuly 13, 2007. (See Note 12.)

The following table presents cash dividends declared by the Company on its common stock from January 1, 2006 through March 31, 2007:June 30, 2007.

Declaration Date
     Record Date
   Payment Date
   Dividend
Per Shareshare
2007
April 3, 2007April 13, 2007April 30, 2007  $0.080
2006
April 3, 2006         April 17, 2006   April 28, 2006     $0.050  
July 5, 2006         July 17, 2006   July 31, 2006       0.050  
October 2, 2006         October 13, 2006   October 31, 2006       0.050  
December 14, 2006         December 29, 2006   January 31, 2007       0.060  
 

19


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(d) Shelf Registrations

On September 25, 2001, the Company filed a shelf registration statement on Form S-3 with the SEC under the Securities Act of 1933, as amended (the “1933 Act”), with respect to an aggregate of $300.0 million of common stock and/or preferred stock that may be sold by the Company from time to time pursuant to Rule 415 of the 1933 Act. On October 5, 2001, the Commission declared this shelf registration statement effective. At March 31,June 30, 2007, the Company had $8.7 million remaining on this shelf registration statement.

On June 27, 2003, the Company filed a shelf registration statement on Form S-3 with the SEC under the 1933 Act with respect to an aggregate of $500.0 million of common stock and/or preferred stock that may be sold by the Company from time to time pursuant to Rule 415 of the 1933 Act. On July 8, 2003, the SEC declared this registration statement effective. On July 21, 2004, the Company filed a post-effective amendment to this shelf registration statement, which was declared effective by the SEC on August 12, 2004. At March 31,June 30, 2007, the Company had $232.2$215.8 million available under this shelf registration statement.

On December 17, 2004, the Company filed a shelf registration statement on Form S-3 with the SEC under the 1933 Act for the purpose of registering additional common stock for sale through the Dividend Reinvestment and Stock Repurchase Plan (“DRSPP”). This shelf registration statement was declared effective by the SEC on January 4, 2005 and, when combined with the unused portion of the Company’s previous DRSPP shelf registration statement, registered an aggregate of 10 million shares of common stock. At March 31,June 30, 2007, 9.5 million shares of common stock remained available for issuance pursuant to the prior DRSPP shelf registration statement.

On December 17, 2004, the Company filed a registration statement on Form S-8 with the SEC under the 1933 Act for the purpose of registering additional common stock for issuance in connection with the exercise of awards under the Company’s 2004 Equity Compensation Plan (the “2004 Plan”), which amended and restated the Company’s Second Amended and Restated 1997 Stock Option Plan (the “1997 Plan”). This registration statement became effective automatically upon filing and, when combined with the previously registered, but unissued, portions of the Company’s prior registration statements on Form S-8 relating to awards under the 1997 Plan, related to an aggregate of 3.3 million shares of common stock, of which 2.3 million shares remainremained available for issuance.issuance at June 30, 2007.

(e) DRSPP

Commencing in September 2003, the Company’s DRSPP, which is designed to provide existing stockholders and new investors with a convenient and economical way to purchase shares of common stock (through the automatic reinvestment of dividends and/or optional monthly cash investments) became operational. During the threesix months ended March 31,June 30, 2007, the Company issued 3,4037,618 shares of common stock through the DRSPP, raising net proceeds of $25,000.$55,852. From the inception of the DRSPP through March 31,June 30, 2007, the Company issued 12,067,03512,071,250 shares pursuant to the DRSPP raising net proceeds of $110.9 million.

(f) Controlled Equity Offering Program

On August 20, 2004, the Company initiated a controlled equity offering program (the “CEO Program”) through which it may, from time to time, publicly offer and sell shares of common stock through Cantor Fitzgerald & Co. (“Cantor”) in privately negotiated and/or at-the-market transactions. The Company issued 2,206,000 shares of common stock in at-the-market transactions through the CEO Program during the six months ended June 30, 2007, raising net proceeds of $16,388,906 and, in connection with such transactions, paid Cantor fees and commissions of $364,752. From inception of the CEO Program through June 30, 2007, the Company issued 5,500,815 shares of common stock in at-the-market transactions through such program raising net proceeds of $44,040,610 and, in connection with such transactions, paid Cantor fees and commissions of $1,071,055.

2120


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(“Cantor”) in privately negotiated and/or at-the-market transactions. The Company issued 45,000 shares of common stock in at-the-market transactions through the CEO Program during the quarter ended March 31, 2007, raising net proceeds of $338,182 and, in connection with such transactions, paid Cantor fees and commissions of $8,672. From inception of the CEO Program through March 31, 2007, the Company issued 3,339,815 shares of common stock in at-the-market transactions through such program raising net proceeds of $27,989,886 and, in connection with such transactions, paid Cantor fees and commissions of $714,974.

9. EPS Calculation

The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted EPS for the three and six months ended March 31,June 30, 2007 and 2006.

    Three Months Ended March 31,
       Three Months Ended
June 30,
   Six Months Ended
June 30,
   
    2007
   2006
    2007
   2006
   2007
   2006
(In Thousands, except per share amounts)    
 		   
(In Thousands, Except Per Share Amounts)
       
Numerator:
                                  
Net income allocable to common stockholders:      
Net income     $9,850       $14,963  
Net income from discontinued operations       —          4,628  
Net income from continuing operations       9,850         10,335  
Net income/(loss) allocable to common stockholders:      
Net income/(loss)     $10,178       $(19,733)       $20,028       $(4,770)  
Net income/(loss) from discontinued operations       —          (56)         —          4,572  
Net income/(loss) from continuing operations       10,178         (19,677)         20,028         (9,342)  
Dividends declared on preferred stock       (2,040)         (2,040)         (2,040)         (2,040)         (4,080)         (4,080)  
Net income available to common stockholders from continuing operations
for basic and diluted earnings per share		       7,810         8,295  
Net income from discontinued operations       —          4,628  
Net income available to common stockholders from continuing operations     $7,810       $12,923  
Net income/(loss) available to common stockholders from continuing operations for basic and diluted earnings per share       8,138         (21,717)         15,948         (13,422)  
Net income/(loss) from discontinued operations       —          (56)         —          4,572  
Net income/(loss) available to common stockholders from continuing operations     $8,138       $(21,773)       $15,948       $(8,850)  
Denominator:
                                  
Weighted average common shares for basic earnings per share       80,762         79,950         81,874         79,254         81,321         79,600  
Weighted average effect of dilutive employee stock options       33          23          34          26          35          24   
Denominator for diluted earnings per share(1)       80,795         79,973         81,908         79,280         81,356         79,624  
Basic and diluted net earnings per share:
                 
Basic and diluted net earnings (loss) per share:
                 
Continuing operations     $0.10       $0.10       $0.10       $(0.27)       $0.20       $(0.17)  
Discontinued operations       —          0.06         —          —          —          0.06  
Total Basic and Diluted earnings per share     $0.10       $0.16       $0.10       $(0.27)       $0.20       $(0.11)  
 

22(1) The impact of dilutive stock options is not included in the computation of earnings per share from continuing operations and discontinued operations for periods in which their inclusion would be anti-dilutive.

10. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss at June 30, 2007 and December 31, 2006 was as follows:

     June 30,
2007
   December 31,
2006
(In Thousands)
        
Available-for-sale Investment Securities:                              
Unrealized gains           $2,693       $3,193  
Unrealized (losses)             (48,340)         (34,188)  
              (45,647)         (30,995)  
Hedging Instruments:                              
Unrealized (losses) gains on Swaps, net             15,024         519   
Unrealized gains on Caps             —          83   
              15,024         602   
Accumulated other comprehensive (loss)           $(30,623)       $(30,393)  
 

21


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

10. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss at March 31, 2007 and December 31, 2006 was as follows:

     March 31,
2007
   December 31,
2006
(In Thousands)
     
 		   
Available-for-sale MBS:                              
Unrealized gains          ��$7,829       $3,193  
Unrealized (losses)             (26,324)         (34,188)  
              (18,495)         (30,995)  
Hedging Instruments:                              
Unrealized (losses) gains on Swaps             (4,181)         519   
Unrealized gains on Caps             32          83   
              (4,149)         602   
Accumulated other comprehensive (loss)           $(22,644)       $(30,393)  
 

11. Equity Compensation, Employment Agreements and Other Benefit Plans

(a) 2004 Equity Compensation Plan

In accordance with the terms of the 2004 Plan, directors, officers and employees of the Company and any of its subsidiaries and other persons expected to provide significant services (of a type expressly approved by the Compensation Committee of the Board as covered services for these purposes) for the Company and any of its subsidiaries are eligible to be granted stock options (“Options”), restricted stock, phantom shares, dividend equivalent rights (“DERs”)DERs and other stock-based awards under the 2004 Plan.

In general, subject to certain exceptions, stock-based awards relating to a maximum of 3.5 million shares of common stock may be granted under the 2004 Plan; forfeitures and/or awards that expire unexercised do not count towards such limit. The Company issues authorized but unissued shares pursuant to the 2004 Plan. At March 31,June 30, 2007, 2.3 million shares of common stock remained available for grant under the 2004 Plan. Subject to certain exceptions, a participant may not receive stock-based awards in excess of 500,000 shares of common stock in any one-year and no award may be granted to any person who, assuming exercise of all Options and payment of all awards held by such person, would own or be deemed to own more than 9.8% of the outstanding shares of the Company’s capital stock. Unless previously terminated by the Board, awards may be granted under the 2004 Plan until the tenth anniversary of the date that the Company’s stockholders approved such plan.

Pursuant to Section 422(b) of the Code, in order for stock options granted under the 2004 Plan and vesting in any one calendar year to qualify as an incentive stock option (“ISO”) for tax purposes, the market value of the common stock, as determined on the date of grant, shall not exceed $100,000 during a calendar year. The exercise price of an ISO may not be lower than 100% (110% in the case of an ISO granted to a 10% stockholder) of the fair market value of the common stock on the date of grant. The exercise price for any other type of Option so issued may not be less than the fair market value on the date of grant. Each Option is exercisable after the period or periods specified in the award agreement, which will generally not exceed ten years from the date of grant. Options will be exercisable at such times and subject to such terms as determined by the Compensation Committee.

At March 31,June 30, 2007, an aggregate of 962,000 shares of common stock were subject to outstanding Options under the 2004 Plan, all of which were fully vested and exercisable, with a weighted average exercise price of $9.33. NoThere were no options were granted during the threesix months ended March 31,June 30, 2007 and March 31,June 30, 2006. The Company recorded expenses of $5,000 and $120,000compensation expense for Options of $0 and related DERs$5,000 for the three and six months ended March 31,June 30, 2007, respectively, and March 31,$120,000 and $240,000 for the three and six months ended June 30, 2006, respectively. As of March 31,June 30, 2007, the aggregate intrinsic value of total Options outstanding was $283,000.$241,000. During the threesix months ended March 31,June 30, 2007, no Options expired unexercised nor were any options exercised.

DuringThe Company issued 7,500 shares of restricted common stock during the three months ended March 31,June 30, 2007, and 16,502 shares of restricted common stock during the three months ended June 30, 2006. For the six months ended June 30, 2007 and 2006, the Company issued 20,50428,004 and 16,502 shares of restricted common stock, and recognized ancompensation expense of $107,000$114,000 and $100,000, respectively, related to the vesting of restricted shares. At March 31,June 30, 2007, the Company had unrecognized compensation expense of $77,000$70,000 related to unvested shares of restricted common stock previously granted.

23


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

A DER is a right to receive, as specified by the Compensation Committee at the time of grant, a distribution equal to the dividend distributions paid on a share of common stock. DERs may be granted separately or together with other awards and are paid in cash or other consideration at such times, and in accordance with such rules, as the Compensation Committee shall determine in its discretion. Dividends are paid on vested DERs only to the extent of ordinary income and DERs are not entitled to distributions representing a return of capital. Dividends paid on the Company’s DERs are charged to stockholders’ equity when declared. At March 31,June 30, 2007, the Company had 960,750 DERs outstanding, all of which were vested.

(b) Employment Agreements

The Company has an employment agreement with each of its five senior officers, with varying terms that provide for, among other things, base salary, bonuses and change-in-control provisions that are subject to the occurrence of certain triggering events.

(c) Deferred Compensation Plans

The Company administers the MFA Mortgage Investments, Inc. 2003 Non-employee Directors’ Deferred Compensation Plan and the MFA Mortgage Investments, Inc. Senior Officers Deferred Bonus Plan (collectively, the “Deferred

22


MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

“Deferred Plans”). Pursuant to the Deferred Plans, directors and senior officers of the Company may elect to defer a certain percentage of their compensation. The Deferred Plans are intended to provide non-employee directors and senior officers of the Company with an opportunity to defer up to 100% of certain compensation, as defined in the Deferred Plans, while at the same time aligning their interests with the interests of the Company’s stockholders. Amounts deferred are considered to be converted into “stock units” of the Company, which do not represent stock of the Company, but rather the right to receive a cash payment equal to the fair market value of an equivalent number of shares of the common stock. Deferred accounts increase or decrease in value as would equivalent shares of the Company’s common stock and are settled in cash at the termination of the deferral period, based on the value of the stock units at that time. The Deferred Plans are non-qualified plans under the Employee Retirement Income Security Act and are not funded. Prior to the time that the deferred accounts are settled, participants are unsecured creditors of the Company. Effective January 1, 2007, the Company’s Board of Directors resolved to suspend indefinitely the directors’ ability to defer additional compensation under the MFA Mortgage Investments, Inc. 2003 Non-employee Directors’ Deferred Compensation Plan.

At the time a participant’s deferral of compensation is made, it is intended that such participant will not recognize income for income tax purposes, nor will the Company receive a deduction until such time that the compensation is actually distributed to the participant. At March 31,June 30, 2007 and December 31, 2006, the Company had the following aggregate liability under the Deferred Plans, which included amounts deferred by participants, as well as the market value adjustments for the equivalent stock units:

(In Thousands)    March 31,
2007
   December 31,
2006
         June 30,    
2007
   December 31,
2006
Directors’ deferred     $599        $594        $573        $594   
Officers’ deferred       280          277          267          277   
     $879        $871        $840        $871   
 

(d) Savings Plan

The Company sponsors a tax-qualified employee savings plan (the “Savings Plan”). Pursuant to Section 401(k) of the Code, eligible employees of the Company are able to make tax deferred contributions, subject to limitations under applicable law. Participant’s accounts are self-directed and the Company bears all costs associated with administering the Savings Plan. The Company matches 100% of the first 3% of eligible compensation deferred by employees and 50% of the next 2%, subject to a maximum as provided by the Code. Subject to certain restrictions, all of the Company’s employees are eligible to participate in the Savings Plan. The Company has elected to operate the Savings Plan under the applicable safe harbor provisions of the Code, whereby among other things, the Company must make contributions for all eligible employees and all matches contributed by the Company immediately vest 100%. For the quartersthree months ended March 31,June 30, 2007 and 2006, the Company recognized expenses for matching contributions of $25,000 and $23,000, respectively, and $50,000 and $45,000 for the six months ended June 30, 2007 and 2006, respectively.

12. Subsequent Event

Common Stock Dividend Declared

On April 3,July 2, 2007, the Company declared a first quarter 2007 dividend of $0.08$0.09 per share on its common stock for the second quarter of 2007. Total dividends of $7.6 million were paid on July 31, 2007 to stockholders of record on AprilJuly 13, 2007. These dividends totaled $6.6 million and were paid on April 30, 2007.

2423


Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this quarterly report on Form 10-Q, we refer to MFA Mortgage Investments, Inc. and its subsidiaries as “we,” “us,” or “our,” unless we specifically state otherwise or the context indicates otherwise.

The following discussion should be read in conjunction with our financial statements and accompanying notes included in Item 1 of this quarterly report on Form 10-Q as well as our annual report on Form 10-K for the year ended December 31, 2006.

GENERAL

We are a self-advised REIT primarily engaged in the business of investing, on a leveraged basis, in ARM-MBS. Our MBS portfolio consists primarily of Agency MBS and, tosecurities that are either (i) issued or guaranteed by a lesser extent, high quality ARM-MBSfederally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. government, such as Ginnie Mae, or (ii) rated in one of the two highest rating categories by at least one of the Rating Agencies.nationally recognized rating agency. Our operating policies also permit us to invest in residential mortgage loans, residential MBS, direct or indirect investments in multi-family apartment properties,in: (i) other types of MBS; (ii) residential mortgage loans; (iii) collateralized debt obligations and other related securities; (iv) real estate; (v) securities issued by REITs, limited partnerships REITs orand closed-end fundsfunds; (vi) high-yield corporate securities and other corporate or government fixed income instruments.instruments (corporate or government); and (vii) other types of assets approved by the Board or a committee thereof. Our principal business objective is to generate net income for distribution to our stockholders resulting from the spread between the interest and other income we earn on our investments and the interest expense we pay on the borrowings that we use to finance our investments and our operating costs.

We have elected to be taxed as a REIT for U.S. federal income tax purposes. One of the requirements of maintaining our qualification as a REIT is that we must distribute at least 90% of our annual taxable net income to our stockholders, subject to certain adjustments.

At March 31,June 30, 2007, 99.5%99.4% of our assets consisted of Agency MBS, AAA-rated MBS, MBS-related receivables and cash. In addition, we also held all of the indirect interests in one multi-family apartment property, containing a total of 191 rental units, located in Georgia and $14.3$13.5 million of Non-Agency MBS and other investment securities rated below AAA or non-rated.

The results of our business operations are affected by a number of factors, many of which are beyond our control, and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, MBS in the market place. Our net interest income varies primarily as a result of changes in interest rates, the slope of the yield curve, borrowing costs (i.e., interest expense) and prepayment speeds on our MBS portfolio, the behavior of which involves various risks and uncertainties. Interest rates and prepayment speeds, as measured by the constant prepayment rate (or CPR), vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. With respect to our business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with our borrowings (i.e., repurchase agreements) to increase; (ii) the value of our MBS portfolio and, correspondingly, our stockholders’ equity to decline; (iii) prepayments on our MBS portfolio to slow, thereby slowing the amortization of MBS purchase premiums; and (iv) coupons on our MBS to reset, although on a delayed basis, to higher interest rates.rates; and (v) the value of our Swaps and, correspondingly, our stockholders’ equity to increase. Conversely, decreases in interest rates, in general, may over time cause: (i) prepayments on our MBS portfolio to increase, thereby accelerating the amortization of MBS purchase premiums; (ii) coupons on our MBS assets to reset, although on a delayed basis, to lower interest rates; (iii) the interest expense associated with our borrowings to decrease; and (iv) the value of our MBS portfolio and, correspondingly, our stockholders’ equity to increase.increase; and (v) the value of our Swaps and, correspondingly, our stockholders’ equity to decrease. In addition, our borrowing costs and credit lines are further affected by our perceived credit worthiness.

Core inflation measures continue to remain somewhat elevated relative to the goal of theBased on U.S. Federal Reserve (or the Fed) of 1% to 2%. While the Fed continues to expectstatements and publicly released minutes, it is their view that core inflation will slow gradually, recent data onhas improved modestly though a sustained moderation in inflation productivity growthhas yet to be demonstrated. In addition, the Fed has stated that high level of resource utilization has the potential to sustain inflationary pressures. We share this view and remain concerned that overall inflation measures, including food and energy prices, have increased the odds thatcontinuously exceeded core inflation may not moderate as expected.which excludes these items. Considering the U.S. economy’s recent moderate growth rate and the weaker housing market and the recent

24



moderate gross domestic product growth rate, but with inflation risks still the predominant concern, future U.S. Federal Open Market CommitteeFed actions are presently uncertain and remain dependent on future incoming data.

While the prolonged period of monetary tightening increased the target federal funds rate from 1.00% in June 2004 to 5.25%, in June 2006, the ten-year treasury rate was 4.65%5.03% as of March 31,June 30, 2007, resulting in an inverted yield curve.curve relevant to the mortgage market. In this interest rate environment, a fully indexed adjustable rate mortgage has a higher rate than a 30-year fixed rate mortgage. Newly originated adjustable rate mortgages are generally 5/1 or 7/1 hybrids that havemortgage, which has led to greater production of hybrid ARMs with longer initial fixed term rates approximately 25 basis points lower than 30-yearrate periods. As a result, during the first six months of 2007, we purchased hybrid MBS with longer initial fixed rate mortgages and often feature an interest-only period. Whileperiods, ranging from five to ten years (i.e., 5/1’s to 10/1’s). When the yield

25



curve is inverted, we believe that as the fixed rate period of a hybrid MBS ends and the rate becomes adjustable, the homeowner is likely to prepay and refinance rather than pay the higher fully-indexed rate. Historically, the yield curve has predominately had a positive slope, reflecting short-term rates lower than long-term rates, and we believe that this current period of yield curve inversion will not continue over the long term. We expect to return to higher spreads when the yield curve returns to its normal positive slope. Despite an inverted yield curve, we have been able to increase our common stock dividend in each of the last twothree quarters.

We expect that over time ARM-MBS experience higher prepayment rates than do fixed-rate MBS, as we believe that homeowners with adjustable-rate and hybrid mortgages exhibit more rapid housing turnover levels or refinancing activity compared to fixed-rate borrowers. In addition, we anticipate that prepayments on ARM-MBS accelerate significantly as the coupon reset date approaches. Over the last eight quarters, ending with March 31,June 30, 2007, the CPR on our MBS portfolio has ranged from a low of 23.8%22.5% to a high of 34.9%, with an average quarterly CPR of 28.1%27.1%. Prepayment speeds tend to follow a seasonal trend, usually increasing in the second quarter from the first quarter. We believe that our MBS will continue to prepay at a CPR in excess of 20% despite potential increases in interest rates, thereby reducing extension risk. As of March 31,June 30, 2007, assuming a 25% CPR, approximately 43.7%40.5% of our MBS assets were expected to reset or prepay during the next twelve12 months, with a total of 95.7%92.7% expected to reset or prepay during the next 60 months. Assuming a 25% CPR, the average time period until our assets prepay or reset was approximately 2425 months as of March 31,June 30, 2007. Our liabilities, which are in the form of repurchase agreements, a portion of which are hedged with corresponding Swaps, extended on average approximately 1618 months, resulting in an asset/liability mismatch of approximately eightseven months at March 31,June 30, 2007. At March 31,June 30, 2007, we had net purchase premiums of $97.5$89.3 million, or 1.5%1.3% of current par value, compared to $98.8 million, of net purchase premiums, or 1.6% of par balance, at December 31, 2006.

The ARMs collateralizing our MBS are comprised of hybrid mortgage loans, which have interest rates that are fixed for a specified period (typically three to seventen years) and, thereafter, generally adjust annually to an increment over a specified interest rate index, and, to a lesser extent, adjustable-rate mortgage loans, which have interest rates that generally adjust annually (although some may adjust more frequently) to an increment over a specified interest rate index.

It is our business strategy to hold our investment securities, primarily comprised of MBS, as long-term investments. As such, on an on-going basis, we assess both our ability and intent to continue to hold each of our investment securities. As part of this process, we monitor our investment securities for other-than-temporary impairment at least quarterly. A change in our ability and/or intent to continue to hold any of our investment securities could result in our recognizing an impairment charge or realizing future losses upon the sale of such securities. At June 30, 2007, we had gross unrealized losses of $48.3 million and gross unrealized gains of $2.7 million on our investment securities portfolio.

During the first six months of 2006, we had sold assetscertain MBS and reduced our leverage in response to the rising interest rate environment and the flat, and at times inverted, yield curve. Following this period of contraction, we werehave been able to take advantage of the investment opportunities and grow our portfolio duringcommencing in the last six monthsthird quarter of 2006 and maintain such levels through the first quarter ofJune 30, 2007. At March 31,June 30, 2007, our investmentMBS portfolio was $6.388increased by $653.6 million, or 10.3%, to $6.994 billion, relatively unchanged from $6.341 billion at December 31, 2006. Our leverage ratio, as measured by debt-to-equity, was also relatively unchanged at 8.3increased to 9.1 to 1 at March 31,June 30, 2007 from 8.4 to 1 as of December 31, 2006.

Although we have acquired primarily invest in Agency and AAA rated ARM-MBS to date,ARM-MBS; pursuant to our operating policies, we also may acquire fixed rate MBS and/or other investment securities of lower credit quality. At March 31,June 30, 2007, $13.5 million, or 0.2%, of our investment securities portfolio was comprised of mortgage-related securities and other investment securities that were rated below AAA or non-rated, of which an aggregate of $2.0 million of these assets were acquired during the quarter ended March 31, 2007.non-rated. While such lower credit quality investments do not represent a significant component of our total investment portfolio, we could increase our investment in this asset class, if spreads on such investments widen. We believe that a number of factors, including housing price declines, the continued pressure for many originators to stretch underwriting standards to maintain mortgage origination volume,increased delinquencies and foreclosures and the complex structures involved in many mortgage securitizations, may create additional investment opportunities for us over the remainder of 2007.

25



us. We remain positioned to selectively increase the allocation of our capital to fixed rate MBS, non-agency MBS, and other mortgage-related assets rated below AAA and fixed rate MBS should the risk-reward trade-off become compelling.

Through wholly-owned subsidiaries, we provide third-party investment advisory services which generates fee income. In addition, we will continue to explore alternative business strategies, investments and financing sources and other strategic initiatives, including, but not limited to, the acquisition and securitization of ARMs, the expansion of third-party advisory services, the creation of new investment vehicles to manage, the creation or acquisition of a mortgage origination platform and the creation and/or acquisition of a third-party asset management business to complement our core business strategy of investing, on a leveraged basis, in high quality ARM-MBS. However, no assurance can be provided that any such strategic initiatives will or will not be implemented in the future or, if undertaken, that any such strategic initiatives will favorably impact us.

26


RESULTS OF OPERATIONS

Quarter Ended March 31,June 30, 2007 Compared to the Quarter Ended March 31,June 30, 2006

In accordance with generally accepted accounting principles, revenues and expenses for our indirect interest in real estate properties which have been sold and that were not reported as discontinued operations in our Form 10-Q filed for the period ended March 31, 2006 have been restated and reported on a net basis as a component of discontinued operations for such quarter. (See Notes 2(g) and 5 to the consolidated financial statements, included under Item 1 of this quarterly report on Form 10-Q.)

For the firstsecond quarter of 2007, we had net income available to our common stockholders of $7.8$8.1 million, or $0.10 per common share. For the firstsecond quarter of 2006, we had a net income available to our common stockholdersloss of $12.9$21.8 million, or $0.16 per share, which included $4.6 million, or $0.06$(0.27) per common share, from discontinued operations. In addition, for the first quarterwhich reflected losses of 2006, we$24.7 million realized net gains of $1.6 million on the sale of certain MBS thatas we had previously impaired.repositioned our MBS portfolio.

Our interest income for the firstsecond quarter of 2007 increased by $30.8$44.8 million, or 57.0%97.1%, to $84.8$91.0 million compared to $54.0$46.2 million earned during the firstsecond quarter of 2006. TheThis increase in interest income primarily reflects the growth in the size of, and the increase in the yield earned on, our MBS portfolio. Excluding changes in market value,values, we increased our average MBS portfolio by $1.024$2.359 billion, or 19.4%54.4%, to $6.300$6.697 billion for firstsecond quarter of 2007 from $5.277$4.338 billion for firstthe second quarter of 2006. In addition, the yield earned on our MBS portfolio increased by 131119 basis points to 5.35%5.40% for the firstsecond quarter of 2007, compared to 4.04%from 4.21% for the firstsecond quarter of 2006. TheThis increase in the net yield primarily reflects a 12593 basis point increase in the gross yield on the MBS portfolio to 6.11%6.09% for the firstsecond quarter of 2007 from 4.86%5.16% for the firstsecond quarter of 2006 and, to a lesser extent, a nine26 basis point reduction in the cost of net premium amortization to 5550 basis points for the firstsecond quarter of 2007 from 6476 basis points for the firstsecond quarter of 2006. The decrease in the cost of our premium amortization during the firstsecond quarter of 2007 reflects a decrease in the average purchase premium on our MBS portfolio and thea decrease to 22.5% in the CPR experienced on our portfolio to 23.8% for the quarter ended March 31,June 30, 2007 from a CPR of 24.4%26.1% for the firstsecond quarter of 2006. Our net purchase premium as a percentage of the current face (or par value) of our MBS was 1.5%1.3% and 2.0%1.9% at March 31,June 30, 2007 and March 31,June 30, 2006, respectively.

The following table presents the components of the net yield earned on our MBS portfolio for the quarterly periods presented:

Quarter Ended
     Stated
Coupon
   Net Premium
Amortization
   Cost of
Delay for
Principal
Receivable
   Net Yield
March 31, 2007             6.11%         (0.55)%         (0.21)%         5.35%  
December 31, 2006             6.04         (0.64)         (0.22)         5.18  
September 30, 2006             5.74         (0.70)         (0.21)         4.83  
June 30, 2006             5.16         (0.76)         (0.19)         4.21  
March 31, 2006             4.86         (0.64)(1)         (0.18)         4.04  
 

(1) The cost of net premium amortization for the quarter ended March 31, 2006 reflects the impact of a $20.7 million impairment charge taken against certain MBS at December 31, 2005. This impairment charge resulted in a new cost basis for our MBS identified as impaired which reduced our purchase premiums on these assets, which in turn reduced our premium amortization on these assets. Following the first quarter 2006 sale of all of the impaired MBS, our premium as a percentage of current face and basis point cost of premium amortization increased.

The following table presents the quarterly average CPR experienced on our MBS portfolio on an annualized basis:

Quarter Ended
CPR
March 31, 200723.8%  
December 31, 200626.0
September 30, 200626.4
June 30, 200626.1
March 31, 200624.4
Quarter Ended
     Stated
Coupon
   Net Premium
Amortization
   Cost of
Delay for
Principal
Receivable
   Net Yield
June 30, 2007             6.09%         (0.50)%         (0.19)%         5.40%  
March 31, 2007             6.11         (0.55)         (0.21)         5.35  
December 31, 2006             6.04         (0.64)         (0.22)         5.18  
September 30, 2006             5.74         (0.70)         (0.21)         4.83  
June 30, 2006             5.16         (0.76)         (0.19)         4.21  
 

Interest income from our short-term cash investments, comprised of money market/sweep accounts, decreasedincreased by $218,000$94,000 to $448,000$634,000 for the firstsecond quarter of 2007 from $666,000$540,000 for the firstsecond quarter of 2006. Our cash investments yielded 5.27%4.97% for the firstsecond quarter of 2007 compared to 4.42%4.58% for the firstsecond quarter of 2006, reflecting

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market increases in short-term interest rates. Our average investment in short-term cash investments decreased to $34.4was $51.2 million for the firstsecond quarter of 2007 compared to $61.1$47.3 million for the firstsecond quarter of 2006. In general, we manage our short-term cash investments relative to our investing, financing and operating requirements and investment opportunities.

Our interest expense for the firstsecond quarter of 2007 increased by $29.5$39.5 million or 68.9%, to $72.3$78.3 million, from $42.8$38.8 million for the firstsecond quarter of 2006. This increase in interest expense for the firstsecond quarter of 2007 reflects a 142 95

26



basis point increase in the cost of our borrowings to 5.19% for the firstsecond quarter of 2007 from 3.77%4.24% for the firstsecond quarter of 2006, reflecting the increase in short-term market interest rates. In addition, our average liability under repurchase agreements for the firstsecond quarter of 2007 increased by $1.042$2.378 billion, or 22.6%64.8%, to $5.648$6.051 billion from $4.606$3.673 billion for the firstsecond quarter of 2006.2006, reflecting our use of leverage to increase the size of our investment portfolio. During the first six months of 2006, we had strategically reduced and maintained lower leverage in response to what we viewed as negative investment environment for us.

Our Hedging Instruments increase or decrease our interest expense depending on the rate specified in such instruments. Our Hedging Instruments decreased the cost of our borrowings by $1.7$2.2 million, or 1215 basis points, during the firstsecond quarter of 2007, while such instruments decreased the cost of our borrowings by $976,000,$1.5 million, or nine17 basis points, duringfor the firstsecond quarter of 2006. (See Notes 2(l) and 4 to the accompanying consolidated financial statements, included under Item 1.) Our Hedging Instruments, comprised entirely of Swaps at June 30, 2007, can be expected to result in interest savings in a rising interest rate environment; conversely, in a declining interest rate environment, our Swaps would result in us paying the stated fixed swap rate on each of our instruments, which could be higher than the market rate.

The following table presents certain quarterly information about our average interest earning assets and interest bearing liabilities, interest income and expense, yields, cost of funds and net interest income for the quarters presented.

For the
Quarter Ended
    Average
Amortized
Cost of
MBS(1)
   Interest
Income
on MBS
   Average
Cash and
Cash
Equivalents
   Total
Interest
Income
   Yield on
Average
Interest-
Earning
Assets
   Average
Balance of
Repurchase
Agreements
   Interest
Expense
   Average
Cost of
Funds
   Net
Interest
Income
  
Average
Amortized
Cost of
MBS(1)
  
Interest
Income
on MBS
  
Average
Cash and
Cash
Equivalents
  
Total
Interest
Income
  
Yield on
Average
Interest-
Earning
Assets
  
Average
Balance of
Repurchase
Agreements
  
Interest
Expense
  
Average
Cost of
Funds
  
Net
Interest
Income
(Dollars in Thousands)    
 		          
June 30, 2007     $6,696,979       $90,341       $51,160       $91,026         5.39%       $6,051,209       $78,348         5.19%       $12,678  
March 31, 2007     $6,300,491       $84,341       $34,443       $84,795         5.35%       $5,647,700       $72,260         5.19%       $12,535         6,300,491         84,341         34,443         84,795         5.35         5,647,700         72,260         5.19         12,535  
December 31, 2006       5,469,461         70,836         52,412         71,480         5.18         4,833,897         62,114         5.10         9,366         5,469,461         70,836         52,412         71,480         5.18         4,833,897         62,114         5.10         9,366  
September 30, 2006       3,899,728         47,061         39,240         47,532         4.83         3,245,774         38,205         4.67         9,327         3,899,728         47,061         39,240         47,532         4.83         3,245,774         38,205         4.67         9,327  
June 30, 2006       4,337,887         45,645         47,266         46,185         4.21         3,672,905         38,818         4.24         7,367         4,337,887         45,645         47,266         46,185         4.21         3,672,905         38,818         4.24         7,367  
March 31, 2006       5,276,973         53,329         61,126         53,995         4.05         4,605,790         42,785         3.77         11,210  
 

(1) Unrealized gains/(losses)gains and loses are not reflected in the average amortized cost of MBS.

For the first quarter ofended June 30, 2007, our net interest income increased by $1.3$5.3 million, or 11.8%, to $12.5$12.7 million, from $11.2$7.4 million for the first quarter ofended June 30, 2006. This increase in net interest income can be attributed primarily to the higher yield earned on our assets before the impact of leverage, anthe increased usesize of leverageour MBS portfolio, and the lowerimproved spread earned during the firstsecond quarter of 2007. The impact of prior increases in interest rates, along with the flattened and at times inverted yield curve, which has prevailed in prior trailing quarters, is apparent when comparing net interest income for the first quarter of 2007 to the first quarter of 2006. Our first quarter 2007 net interest spread and margin were 0.16% and 0.73%, respectively, compared to a net interest spread and margin of 0.28% and 0.79%, respectively, for the first quarter of 2006.

The following table presents quarterly information regarding our net interest spread and net interest margin for the quarters presented.

For the
Quarter Ended
    Net Interest
Spread
   Net Interest
Margin
    Net Interest
Spread
   Net Interest
Margin
June 30, 2007       0.20%         0.74%  
March 31, 2007       0.16%         0.73%         0.16         0.73  
December 31, 2006       0.08         0.72         0.08         0.72  
September 30, 2006       0.16         0.98         0.16         0.98  
June 30, 2006       (0.03)         0.66         (0.03)         0.66  
March 31, 2006       0.28         0.79  
 

For the quarter ended March 31,June 30, 2007, we earned net other operating income of $531,000$582,000 compared to $2.2net operating losses of $24.2 million for the quarter ended March 31,June 30, 2006. The firstsecond quarter of 2006 other operating incomelosses included a net gainloss of $1.6$24.7 million realized on the sale of previously impaired$1.035 billion of MBS. We sold MBS in the aggregate of $1.823 billion during the first six months of 2006 that had certain repricing and prepayment characteristics. Our revenue from operations of real estate and miscellaneous other income, which is primarily comprised of advisory fees, are not expected to be material to our future results of operations. (See Note 5b to the accompanying consolidated financial statements, included under Item 1.)

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For the firstsecond quarter of 2007, we had operating and other expense of $3.2$3.1 million, including real estate operating expenses and mortgage interest totaling $420,000$429,000 attributable to our one remaining real estate investment.

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For the firstsecond quarter of 2007, our non-real estate related overhead, comprised of compensation and benefits and other general and administrative expense, was $2.8$2.7 million, or 0.18%0.16% of average assets, compared to $2.7$2.5 million, or 0.20%0.23% of average assets, for the second quarter of 2006. This improvement in our efficiency was the direct result of the increased size of our MBS portfolio through the use of additional leverage and the investment and leveraging of new equity capital. Other general and administrative expenses, which were $1.2 million for the second quarter of 2007 compared to $961,000 for the second quarter of 2006, were comprised primarily of the cost of professional services, including auditing and legal fees, costs of complying with the provisions of the Sarbanes-Oxley Act of 2002, corporate insurance, office rent, Board fees and miscellaneous other operating overhead. Our operating expense for the second quarter of 2007 reflects the cost of our additional office space and the renewal our existing leases at our headquarters at current market rates.

For the quarter ended June 30, 2006, the net loss of $56,000 from discontinued operations reflects the reclassification of the net results of operations for Cameron which was sold during the fourth quarter of 2006. (See Note 2(g) to the accompanying consolidated financial statements, included under Item 1.)

Six-Month Period Ended June 30, 2007 Compared to the Six-Month Period Ended June 30, 2006

For the six months ended June 30, 2007, we had net income available to our common stockholders of $15.9 million, or $0.20 per common share. For the six months ended June 30, 2006, we had a net loss of $8.9 million, or $(0.11) per common share. The loss we experienced for the six months ended June 30, 2006 primarily reflects net losses of $23.1 million realized on the sale of MBS and was partially offset by $4.6 million of income from discontinued operations.

Our interest income for the six months ended June 30, 2007 increased by $75.6 million, or 75.5%, to $175.8 million compared to $100.2 million earned during the first six months of 2006. This increase in interest income primarily reflects the growth in the size of, and the increase in the yield earned on, our MBS portfolio. Excluding changes in market values, we increased our average MBS portfolio by $1.695 billion, or 35.3%, to $6.500 billion for the first six months of 2007 from $4.805 billion for the first six months of 2006. In addition, the yield earned on our MBS portfolio increased by 126 basis points, to 5.38% for the first six months of 2007 from 4.12% for the first six months of 2006. The increase in the net yield primarily reflects a 110 basis point increase in the gross yield on the MBS portfolio to 6.10% for the first six months of 2007 from 5.00% for the first six months of 2006 and, to a lesser extent, a 17 basis point reduction in the cost of net premium amortization to 53 basis points for the first six months of 2007 from 70 basis points for the comparable 2006 period. The decrease in the cost of our premium amortization during the first six months of 2007 reflects a decrease in the average purchase premium on our MBS portfolio and a decrease to 23.1% in the CPR experienced on our portfolio for the six months ended June 30, 2007 from a CPR of 25.1% for the first six months of 2006. Our net purchase premium as a percentage of the current face (or par value) of our MBS was 1.3% and 1.9% at June 30, 2007 and June 30, 2006, respectively.

Interest income from our short-term cash investments, comprised of money market/sweep accounts, decreased by $124,000 to $1.1 million for the first six months of 2007 from $1.2 million for the first six months of 2006. Our average investment in short-term cash investments decreased to $42.8 million for the first six months of 2007 compared to $54.2 million for the first six months of 2006 reflecting the growth in size of our investment portfolio, using available funds and leverage. Our cash investments yielded 5.09% for the first six months of 2007, compared to 4.49% for first six months of 2006, reflecting market increases in short-term interest rates. In general, we manage our short-term cash investments relative to our investing, financing and operating requirements and investment opportunities.

Our interest expense for the first six months of 2007 increased by $69.0 million, or 84.6%, to $150.6 million, from $81.6 million for the first six months of 2006. This increase in interest expense for the first six months of 2007 reflects an increase in the amount of our borrowings and the interest rates incurred on such borrowings. We experienced a 121 basis point increase in the cost of our borrowings to 5.19% for the first six months of 2007, from 3.98% for the first six months of 2006, reflecting the increase in short-term market interest rates. Our average liability under repurchase agreements for the first six months of 2007 increased by 41.4% to $5.851 billion, from $4.137 billion for the first six months of 2006, primarily reflecting an increase in our leverage and leveraging of new equity capital to fund the growth in our investment portfolio. Our Hedging Instruments decreased the cost of our repurchase agreements by $3.9 million, or 13 basis points, during the first six months of 2007 and decreased the cost

28



of our repurchase agreements by $2.5 million, or 12 basis points, during the first six months of 2006. (See Notes 2(l) and 4 to the accompanying consolidated financial statements, included under Item 1.)

For the six months ended June 30, 2007, our net interest income increased by $6.6 million, or 35.7%, to $25.2 million, from $18.6 million for the first six months of 2006. This increase can be attributed primarily to the higher yield earned on our assets before the impact of leverage, an increase in our leverage and the slight improvement to our spread for the first six months of 2007 compared to the first six months of 2006. Our net interest spread and margin were 0.18% and 0.73%, respectively, for the six months ended June 30, 2007, compared to 0.15% and 0.74%, respectively, for the first six months of 2006.

For the first six months of 2007, we earned net other income of $1.1 million compared to a net other loss of $21.9 million for the first six months of 2006. Our net other loss for the first six months of 2006 was comprised primarily of a net loss of $23.1 million on sales of MBS, as a result of the repositioning of our MBS portfolio. Our one remaining real estate investment generated revenue of $826,000 and $770,000 for the first six months of 2007 and 2006, respectively. Our revenue from operations of real estate and miscellaneous other income, which is primarily comprised of advisory fees, are not expected to be material to our future results of operations. (See Note 5b to the accompanying consolidated financial statements, included under Item 1.)

During the first six months of 2007, we had operating and other expenses of $6.3 million, including real estate operating expenses and mortgage interest totaling $849,000 attributable to our one remaining real estate investment. For the first six months of 2007, our non-real estate related overhead, comprised of compensation and benefits and other general and administrative expense, was $5.4 million, or 0.17% of average assets, compared to $5.2 million, or 0.21% of average assets, for the first quartersix months of 2006. Our expenses as a percentage of average assets decreased, reflecting the increase inas we increased our average assets for the first quartersix months of 2007, compared to the first quartersix months of 2006, as a result2006. Our asset growth was achieved by increasing our use of increasing the size of our MBS portfolio.leverage on existing equity capital and leveraging newly raised equity capital. Other general and administrative expenses, which were $1.2$2.4 million for the first quartersix months of 2007 compared to $1.1$2.1 million for the first quartersix months of 2006, are comprised primarily of the cost of professional services, including auditing and legal fees, costs of complying with the provisions of the Sarbanes-Oxley Act of 2002, corporate insurance, office rent, Board fees and miscellaneous other operating overhead. Commencing in

We had no discontinued operations for the secondfirst six months of 2007, while we reported income of $4.6 million from discontinued operations, or $0.06 per common share for the first six months of 2006. Discontinued operations for the first six months of 2006 was primarily comprised of a first quarter gain of $4.7 million on the sale of Greenhouse, and the reported net loss of $133,000 from the operations for Greenhouse (which was sold during the first quarter of 2007, we expect that these costs will increase, primarily as2006) and Cameron (which was sold during the fourth quarter of 2006,) on a result of our acquiring additional office space and renewing our existing leases at our headquarters at current market rates.net basis. (See Note 72(g) to the accompanying consolidated financial statements, included under Item 1.)

During the first quarter of 2006, we reported income from discontinued operations of $4.6 million, or $0.06 per common share, primarily comprised of a gain realized on the sale of our interest in Greenhouse, net of built-in gains taxes of $1.8 million. While the gain on the sale of Greenhouse was beneficial to us for the first quarter of 2006, this property had not been a significant component of our operating results.

29


LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of cash consist of borrowings under repurchase agreements, payments of principal and interest we receive on our MBS portfolio, and, depending on market opportunities, proceeds from capital market transactions. We use significant cash to repay principal and interest on our repurchase agreements, purchase MBS, make dividend payments on our capital stock, fund our operations and to make such other investments that we consider appropriate. In addition, based upon market conditions, we may use cash to repurchase shares of our common stock pursuant to our Repurchase Program.

Borrowings under our repurchase agreements were $5.763$6.379 billion at March 31,June 30, 2007 compared to $5.723 billion at December 31, 2006. During the first quarter ofsix months ended June 30, 2007, we increased the amount of our borrowings as we purchased MBS.increased the size of our MBS portfolio. Our debt-to-equity ratio was relatively stable at 8.3increased to 9.1 to 1 at March 31,June 30, 2007, compared to 8.4 to 1 at December 31, 2006. At March 31,June 30, 2007, we continued to have available capacity under our repurchase agreement credit limits. At March 31,June 30, 2007, our repurchase agreements had a weighted average borrowing rate of 5.26%5.28%, on loan balances of between $790,000$759,000 and $109.5$115.8 million.

During the first quarter ofsix months ended June 30, 2007, we paid cash dividends of $2.0$4.1 million on our preferred stock and $4.9$11.5 million on our common stock (which were declared in December 2006).stock. On April 3,July 2, 2007, we declared our firstsecond quarter 2007 dividend on our common stock, which totaled $6.6$7.6 million and was paid on April 30,July 31, 2007 to stockholders of record on AprilJuly 13, 2007.

We employ a diverse capital raising strategy under which we may issue our capital stock. During the first quartersix months of 2007, we issued 45,0002,206,000 shares of common stock pursuant to the CEO Program raising net proceeds of $338,182$16,388,906 and issued 3,4037,618 shares of common stock pursuant to the DRSPP raising net proceeds of $25,145.$55,852. At March 31,June 30, 2007, we had an aggregate of $240,973,221$224,566,399 available under our two effective shelf registration statements on Form S-3 and 9,510,7809,506,565 shares of common stock remained available for issuance pursuant to our DRSPP shelf registration. We may, as market conditions permit, issue additional shares of common stock and/or preferred stock pursuant to these registration statements.

To the extent we raise additional equity capital from future capital market transactions, we currently anticipate using the net proceeds to purchase additional MBS or other securities, to make scheduled payments of principal and interest on our repurchase agreements and for other general corporate purposes. We may also acquire additional interests in residential ARMs multi-family apartment properties and/or other investments consistent with our investment strategies and operating policies. There can be no assurance, however, that we will be able to raise additional equity capital at any particular time or on any particular terms.

In order to reduce our interest rate risk exposure, we may enter into derivative financial instruments, such as Swaps and Caps. Our Swaps and Caps are designated as cash-flow hedges against a portion of our current and anticipated LIBOR basedLIBOR-based repurchase agreements. During the first quarter ofsix months ended June 30, 2007, we continued to expand our use of Swaps as a financing strategy and entered into 1643 new Swaps with an aggregate notional amount of $501.0 million,$1.580 billion, which have a weighted average fixed pay rate of 4.90%5.04%. During the quartersix months ended March 31,June 30, 2007, we had Swaps with an aggregate notional amount of $85.0$391.8 million expire.expire and terminated one Swap with a notional amount of $43.7 million realizing a gain of $176,000. We paid a weighted average fixed rate of 4.97%4.98% on our Swaps and received a variable rate of 5.33% during the first quarter ofsix months ended June 30, 2007. At March 31,June 30, 2007, we had 4874 Swaps with an aggregate notional amount of $2.085 billion, which have maturities extending through March 28, 2012, with a weighted average fixed pay rate of 4.98% and a weighted average term of 41 months.$2.954 billion. Our Swaps resulted in a net reduction of interest expense of $1.7$3.8 million, or 1213 basis points, for the quartersix months ended March 31,June 30, 2007. At March 31, 2007, we had one Cap with an aggregate notional amount of $50.0 million, which had a remaining active period of two months and a cap rate of 3.75%. During the quartersix months ended March 31, 2007, we received payments of approximately $196,000 on our Caps and had $181,000 of Cap premium amortization. During the quarter ended March 31,June 30, 2007, we had Caps with $100.0$150.0 million notional amount expire and did not purchase any Caps as we expanded our use of Swaps to hedge our interest rate exposure. During the six months ended June 30, 2007, we received payments of approximately $327,000 on our Caps and had $278,000 of Cap premium amortization. At June 30, 2007, we had no Caps remaining. (See Note 4 to the accompanying consolidated financial statements, included under Item 1.)

Under our repurchase agreements we pledge additional assets as collateral to our repurchase agreement counterparties (i.e., lenders) when the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral (i.e., a margin call). Margin calls result from a decline in the value of our MBS collateralizing our repurchase agreements, generally due to changes in the estimated fair value of such MBS resulting from principal reduction of such MBS from scheduled amortization and prepayments on the mortgages underlying our MBS, changes in market interest rates and other market factors. To cover a margin call, we may pledge additional securities or cash. Cash held on deposit as collateral with lenders, if any, is reported on

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our balance sheet as “restricted cash”. At the time one of our repurchase agreement matures, any restricted cash on

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deposit is generally applied against the repurchase agreement balance, thereby reducing the amount borrowed.

Through March 31,June 30, 2007, we satisfied all of our margin calls with either cash or an additional pledge of MBS collateral. At March 31,June 30, 2007, we had MBS with a fair value of $291.2$280.6 million that were not pledged as collateral and $53.7$54.3 million of cash. We believe we have adequate financial resources to meet our obligations, including margin calls, as they come due and to fund dividends we declare as well as to actively pursue our investment strategies. However, should market interest rates and/or prepayment speeds on our MBS suddenly increase, margin calls on our repurchase agreements could result, causing an adverse change in our liquidity position.

INFLATION

Substantially all of our assets and liabilities are financial in nature. As a result, changes in interest rates and other factors impact our performance far more than does inflation. Our financial statements are prepared in accordance with GAAP and dividends are based upon net income as calculated for tax purposes; in each case, our results of operations and reported assets, liabilities and equity are measured with reference to historical cost or fair market value without considering inflation.

OTHER MATTERS

We intend to conduct our business so as to maintain our exempt status under, and not to become regulated as an investment company for purposes of, the Investment Company Act of 1940, as amended (or Investment Company Act). If we failed to maintain our exempt status under the Investment Company Act and became regulated as an investment company, our ability to, among other things, use leverage would be substantially reduced and, as a result, we would be unable to conduct our business as described in our annual report on Form 10-K for the year ended December 31, 2006 and this quarterly report on Form 10-Q for the quarter ended March 31,June 30, 2007. The Investment Company Act exempts entities that are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate” (or Qualifying Interests). Under the current interpretation of the staff of the SEC, in order to qualify for this exemption, we must maintain (i) at least 55% of our assets in Qualifying Interests (or the 55% Test) and (ii) at least 80% of our assets in real estate related assets (including Qualifying Interests) (or the 80% Test). MBS that do not represent all of the certificates issued (i.e., an undivided interest) with respect to the entire pool of mortgages (i.e., a whole pool) underlying such MBS may be treated as securities separate from such underlying mortgage loans and, thus, may not be considered Qualifying Interests for purposes of the 55% Test; however, such MBS would be considered real estate related assets for purposes of the 80% Test. Therefore, for purposes of the 55% Test, our ownership of these types of MBS is limited by the provisions of the Investment Company Act. In meeting the 55% Test, we treat as Qualifying Interests those MBS issued with respect to an underlying pool as to which we own all of the issued certificates. If the SEC or its staff were to adopt a contrary interpretation, we could be required to sell a substantial amount of our MBS under potentially adverse market conditions. Further, in order to insure that at all times we qualify for this exemption from the Investment Company Act, we may be precluded from acquiring MBS whose yield is higher than the yield on MBS that could be otherwise purchased in a manner consistent with this exemption. Accordingly, we monitor our compliance with both of the 55% Test and the 80% Test in order to maintain our exempt status under the Investment Company Act. As of March 31,June 30, 2007, we determined that we were in and had maintained compliance with both the 55% Test and the 80% Test.

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FORWARD LOOKING STATEMENTS

When used in this quarterly report on Form 10-Q, in future filings with the SEC or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend” and similar expressions, are intended to identify “forward-looking statements” within the meaning of Section 27A of the 1933 Act and Section 21E of the Securities Exchange Act of 1934 (or 1934 Act) and, as such, may involve known and unknown risks, uncertainties and assumptions.

These forward-looking statements are subject to various risks and uncertainties, including, but not limited to, those relating to: changes in interest rates and the market value of our MBS; changes in the prepayment rates on the

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mortgage loans collateralizing our MBS; our ability to use borrowings to finance our assets; changes in government regulations affecting our business; our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; and risks associated with investing in real estate, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that we file with the SEC, could cause our actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statements speak only as of the date they are made and we do not undertake, and specifically disclaim, any obligation to update or revise any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We seek to manage our interest rate, market value, liquidity, prepayment and credit risks, which are inherent in all financial institutions, in a prudent manner designed to insure our longevity while, at the same time, seeking to provide an opportunity to stockholders to realize attractive total returns through ownership of our capital stock. While we do not seek to avoid risk, we seek to;to: assume risk that can be quantified from historical experience, and actively manage such risk; earn sufficient returns to justify the taking of such risks and;risks; and, maintain capital levels consistent with the risks that we undertake.

INTEREST RATE RISK

We primarily invest in ARM-MBS on a leveraged basis. We take into account both anticipated coupon resets and expected prepayments when measuring the sensitivity of our ARM-MBS portfolio to changes in interest rates. In measuring our assets-to-borrowings repricing gap (or Repricing Gap), we measure the difference between: (a) the weighted average months until the next coupon adjustment or projected prepayment on the ARM-MBS portfolio; and (b) the months remaining until our repurchase agreements mature, applying the same projected prepayment rate and including the impact of Swaps. The CPR is applied in order to reflect, to a certain extent, the prepayment characteristics inherent in our interest-earning assets and interest-bearing liabilities. Based on historical results, we believe that applying a 25% CPR assumption, provides a realistic approximation of the Repricing Gap for our ARM-MBS portfolio over time. Over the last two years, on a quarterly basis, ending with March 31,June 30, 2007, the monthly CPR on our MBS portfolio ranged from a low of 23.8%22.5% to a high of 34.9%, with an average quarterly CPR of 28.1%27.1%.

The following table presents information at March 31,June 30, 2007 about our Repricing Gap based on contractual maturities (i.e., 0 CPR), and applying a 15% CPR and 25% CPR.

CPR
    Estimated Months
to Asset Reset
   Estimated Months to
Liabilities Reset (1)
   Repricing
Gap
   Estimated Months
to Asset Reset
   Estimated Months to
Liabilities Reset(1)
   Repricing
Gap in
Months
0%(2)
       42          16          26      49   18   31
15%       30          16          14      33   18   15
25%       24          16            8      25   18   7
 

(1) Reflects the effect of our Hedging Instruments.


(2) Reflects contractual maturities, which does not consider any prepayments.

At March 31,June 30, 2007, our financing obligations under repurchase agreements had remaining contractual terms of fourthree years or less.less, which does not reflect the impact of Swaps. Upon contractual maturity or an interest reset date, these borrowings are refinanced at then prevailing market rates.

The interest rates for most of our adjustable-rate assets are primarily dependent on LIBOR, the one-year constant

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maturity treasury (or CMT) rate, LIBOR, or the 12-month CMT moving average (or MTA), while our debt obligations, in the form of repurchase agreements, are generally priced off of LIBOR. While LIBOR and CMT generally move together, there can be no assurance that such movements will be parallel, such that the magnitude of the movement of one index will match that of the other index. At March 31,June 30, 2007, we had 12.4%79.9% of our ARM-MBS portfoliorepricing from LIBOR (of which 65.2% was repriced based on 12-month LIBOR, 14.7% on six-month LIBOR and 0.02% on one-month LIBOR), 11.9% repricing from the one-year CMT index, 77.3% repricing from the one-year LIBOR index, 9.4%7.5% repricing from MTA and 0.9%0.7% repricing from the 11th District Cost of Funds Index (or COFI).

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Our adjustable-rate assets reset on various dates that are not matched to the reset dates on our borrowings (i.e., repurchase agreements). In general, the repricing of our debt obligations occurs more quickly than the repricing of our assets. Therefore, on average, our cost of borrowings may rise or fall more quickly in response to changes in market interest rates than does the yield on its interest-earning assets.

As part of our overall interest rate risk management strategy, we periodically use Hedging Instruments to mitigate the impact of significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. TheOur interest rate risk management strategy at times involves modifying the repricing characteristics of certain assets and liabilities utilizing derivatives. Our Hedging Instruments are intended to serve as a hedge against future interest rate increases on our repurchase agreements, which are typically priced off of LIBOR.agreements. At March 31,June 30, 2007, we had Swaps with a notional amount of $2.085$2.954 billion, and had one Cap with an aggregate notional amount of $50.0 million, all of which were active. During the quartersix months ended March 31,June 30, 2007, we received or were due payments of $1.66$3.8 million related to our Swaps and approximately $196,500$327,000 from counterpartiesone counterparty on our Caps. The notional amount ofa Cap, which expired during the Swap is presented in the table below, as they impact the cost of a portion of our repurchase agreements. The notional amounts of ourquarter, such that we had no Caps which hedge against increases in interest rates on our LIBOR-based repurchase agreements, are not considered in the gap analysis, as they do not effect the timing of the repricing of the instruments they hedge, but rather, to the extent of the notional amount, cap the amount of interest rate change that can occur relative to the hedged liability. In addition, while the fair value of our Hedging Instruments are reflected in our consolidated balance sheets, the notional amounts are not.remaining at June 30, 2007.

The mismatch between repricings or maturities within a time period is commonly referred to as the “gap” for that period. A positive gap, where repricing of interest-rate sensitive assets exceeds the maturity of interest-rate sensitive liabilities, generally will result in the net interest margin increasing in a rising interest rate environment and decreasing in a falling interest rate environment; conversely, a negative gap, where the repricing of interest rate sensitive liabilities exceeds the repricing of interest-rate sensitive assets will generate opposite results. At March 31,June 30, 2007, we had a negative gap in our less than three month category. The following gap analysis below is prepared assuming a 25% CPR; however, actual future prepayment speeds could vary significantly. The gap analysis does not reflect the constraints on the repricing of ARM-MBS in a given period resulting from interim and lifetime cap features on these securities, nor the behavior of various indexes applicable to our assets and liabilities. The gap methodology does not assess the relative sensitivity of assets and liabilities to changes in interest rates and also fails to account for interest rate caps and floors imbedded in our MBS or include assets and liabilities that are not interest rate sensitive. The notional amount of the Swaps is presented in the following table, as they impact the cost of a portion of our repurchase agreements. In addition, while the fair value of our Hedging Instruments are reflected in our consolidated balance sheets, the notional amounts are not.

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The following table sets forthpresents our interest rate risk using the gap methodology applying a 25% CPR on MBS at March 31,June 30, 2007.

     At March 31, 2007
   
(In Thousands)     Less than
3 Months
   Three Months to
One Year
   One Year to
Two Years
   Two Years to
Year Three
   Beyond
Three Years
   Total
Interest-Earning Assets:
                                                                             
ARM-MBS           $1,289,245       $1,500,125       $966,421       $836,292       $1,793,522       $6,385,605  
Income notes             —          —          —          —          1,980         1,980  
Cash             53,697         —          —          —          —          53,697  
Total interest-earning assets           $1,342,942       $1,500,125       $966,421       $836,292       $1,795,502       $6,441,282  
 
Interest-Bearing Liabilities:
                                                                             
Repurchase agreements           $3,596,100       $454,300       $1,402,957       $310,000       $—        $5,763,357  
Mortgage loans             —          —          —          —          9,573         9,573  
Total interest-bearing liabilities           $3,596,100       $454,300       $1,402,957       $310,000       $9,573       $5,772,930  
 
Gap before Hedging Instruments           $(2,253,158)       $1,045,825       $(436,536)       $526,292       $1,785,929       $668,352  
Notional Amounts of Swaps             2,084,524         —          —          —          —        $2,084,524  
Cumulative Difference Between Interest-Earnings Assets and Interest Bearing Liabilities after Hedging Instruments           $(168,634)       $877,191       $440,655       $966,947       $2,752,876             
 
     Gap Table
   
     At June 30, 2007
   
(In Thousands)
     Less than
3 Months
   Three Months
to One Year
   One Year
to Two Years
   Two Years
to Year Three
   Beyond
Three Years
   Total
Interest-Earning Assets:
                                                                             
ARM-MBS           $1,321,234       $1,516,794       $1,093,573       $945,336       $2,117,307       $6,994,244  
Income notes             —          —          —          —          1,890         1,890  
Cash             54,329         —          —          —          —          54,329  
Total interest-earning assets           $1,375,563       $1,516,794       $1,093,573       $945,336       $2,119,197       $7,050,463  
 
Interest-Bearing Liabilities:
                                                                             
Repurchase agreements           $4,551,600       $482,300       $1,077,585       $268,000       $—        $6,379,485  
Mortgage loans             —          —          —          —          9,532         9,532  
Total interest-bearing liabilities           $4,551,600       $482,300       $1,077,585       $268,000       $9,532       $6,389,017  
 
Gap before Hedging Instruments           $(3,176,037)       $1,034,494       $15,988       $677,336       $2,109,665       $661,446  
Swaps, notional amount             2,954,102         (50,000)         —          (662,480)         (2,241,622)         —   
Cumulative Difference Between Interest-Earnings Assets and Interest Bearing Liabilities after Hedging Instruments           $(221,935)       $762,559       $778,547       $793,403       $661,446       $—   
 

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MARKET VALUE RISK

All of our investment securities are designated as “available-for-sale” assets. As such, they are reflected at their estimated fair value, with the difference between amortized cost and estimated fair value reflected in accumulated other comprehensive income, a component of Stockholders’ Equity.stockholders’ equity. (See Note 8 to the accompanying consolidated financial statements, included under Item 1.) The estimated fair value of our MBS fluctuate primarily due to changes in interest rates and other factors; however, given that, at March 31,June 30, 2007, these securities were primarily Agency MBS or AAA rated MBS, such changes in the estimated fair value of our MBS are generally not credit-related. At March 31,June 30, 2007, we held $14.3$13.5 million of investment securities that were rated below AAA, of which $5.8$6.1 million were non-rated securities. Therefore,Accordingly, to a limited extent, we are exposed to credit-related market value risk. Generally, in a rising interest rate environment, the estimated fair value of our MBS would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of such MBS would be expected to increase. If the estimated fair value of our MBS collateralizing our repurchase agreements decreases, we may receive margin calls from our repurchase agreement counterparties for additional collateral or cash due to such decline. If such margin calls were not met, the lender could liquidate the securities collateralizing our repurchase agreements with such lender, resulting in a loss to us. In such a scenario, we could apply a strategy of reducing borrowings and assets, by selling assets or not replacing securities as they amortize and/or prepay, thereby “shrinking the balance sheet”, as was applied during the first half of 2006. Such an action would likely reduce our interest income, interest expense and net income, the extent of which would be dependent on the level of reduction in assets and liabilities as well as the sale price of the assets sold. Further, such a decrease in our net interest income could negatively impact cash available for distributions, which in turn could reduce the market price of our issued and outstanding common stock and preferred stock.

LIQUIDITY RISK

The primary liquidity risk for us arises from financing long-maturity assets, which have interim and lifetime interest rate adjustment caps, with shorter-term borrowings in the form of repurchase agreements. Although the interest rate adjustments of these assets and liabilities are matchedfall within the guidelines established by our operating policies, maturities are not required to be, nor are they, matched.

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Our assets which are pledged to secure repurchase agreements are typically high-quality, liquid assets. As a result, we have not had difficulty rolling over (i.e., renewing) these agreements as they mature. However, we cannot assure that we will always be able to roll over our repurchase agreements. At March 31,June 30, 2007, we had cash and cash equivalents of $53.7$54.3 million and unpledged securities of $291.2$280.6 million available to meet margin calls on our repurchase agreements and for other corporate purposes. However, should market interest rates and/or prepayment speeds on the mortgage loans underlying our MBS suddenly increase, margin calls relating to our repurchase agreements could increase, causing an adverse change into our liquidity position.

PREPAYMENT AND REINVESTMENT RISK

As we receive repayments of principal on our MBS, from prepayments and scheduled amortization, premiums paid on such securities are amortized against interest income and discounts are accreted to interest income. Premiums arise when we acquire MBS at a price in excess of the principal balance of the mortgages securing such MBS (i.e., par value). Conversely, discounts arise when we acquire MBS at a price below the principal balance of the mortgages securing such MBS. For financial accounting purposes, interest income is accrued based on the outstanding principal balance of the investment securities and their contractual terms. In general, purchase premiums on our investment securities, currently comprised primarily of MBS, are amortized against interest income over the lives of the securities using the effective yield method, adjusted for actual prepayment activity. An increase in the prepayment rate, as measured by the CPR, will typically accelerate the amortization of purchase premiums, thereby reducing the yield/interest income earned on such assets.

For tax accounting purposes, the purchase premiums and discounts are amortized based on the constant effective yield calculated at the purchase date. Therefore, on a tax basis, amortization of premiums and discounts will differ from those reported for financial purposes under GAAP. At March 31,June 30, 2007, the gross premium for ARM-MBS for financial accounting purposes was $97.6$92.3 million (1.5%(1.3% of the carrying valueprincipal balance of MBS); while the gross premium for income tax purposes was estimated at $95.1$89.1 million.

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In general, we believe that we will be able to reinvest proceeds from scheduled principal payments and prepayments at acceptable yields; however, no assurances can be given that, should significant prepayments occur, market conditions would be such that acceptable investments could be identified and the proceeds timely reinvested.

TABULAR PRESENTATION

The information presented in the following table projects the potential impact of sudden parallel changes in interest rates on net interest income and portfolio value, including the impact of Hedging Instruments, over the next twelve12 months based on the assets in our investment portfolio on March 31,June 30, 2007. We acquire interest-rate sensitive assets and fund them with interest-rate sensitive liabilities. All changes in income and value are measured as the percentage change from the projected net interest income and portfolio value at the base interest rate scenario.

Change in
Interest Rates
     Percentage Change
in Net Interest Income
   Percentage Change
in Portfolio Value
+ 1.00%             (22.29%)        (0.90%) 
+ 0.50%             (5.83%)        (0.35%) 
– 0.50%             19.63%         0.14%  
– 1.00%             30.01%         0.09%  
Change in
Interest Rates
   Percentage Change
in Net Interest Income
 Percentage Change
in Portfolio Value
+1.00%    (18.17%)   (1.34%) 
+0.50%    (8.22%)   (0.56%) 
–0.50%    5.27%    0.35%  
–1.00%    8.51%    0.48%  
 

Certain assumptions have been made in connection with the calculation of the information set forth in the above table and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. The base interest rate scenario assumes interest rates at March 31,June 30, 2007. The analysis presented utilizes assumptions and estimates based on management’s judgment and experience. Furthermore, while we generally expect to retain such assets and the associated interest rate risk to maturity, future purchases and sales of assets could materially change our interest rate risk profile. It should be specifically noted that the information set forth in the above table and all related disclosure constitutes forward-looking statements within the meaning of Section 27A of the 1933 Act and Section 21E of the 1934 Act. Actual results could differ significantly from those estimated in the table.

The table quantifies the potential changes in net interest income and portfolio value should interest rates immediately change (or Shock). The table presents the estimated impact of interest rates instantaneously rising 50

35



and 100 basis points, and falling 50 and 100 basis points. The cash flows associated with the portfolio of MBS for each rate Shock are calculated based on assumptions, including, but not limited to, prepayment speeds, yield on future acquisitions, slope of the yield curve and size of the portfolio. Assumptions made on the interest rate sensitive liabilities, which are assumed to be repurchase agreements, include anticipated interest rates, collateral requirements as a percent of the repurchase agreement, amount and term of borrowing.

The impact on portfolio value is approximated using the calculated effective duration (i.e., the price sensitivity to changes in interest rates) of 0.490.91 and expected convexity (i.e., the approximate change in duration relative to the change in interest rates) of (0.81)(0.86). The impact on net interest income is driven mainly by the difference between portfolio yield and cost of funding of our repurchase agreements, which includes the cost and/or benefit from Hedging Instruments that hedge certain of our repurchase agreements. Our asset/liability structure is generally such that an increase in interest rates would be expected to result in a decrease in net interest income, as our repurchase agreements are generally shorter term than our interest-earning assets. When interest rates are Shocked, prepayment assumptions are adjusted based on management’s expectations along with the results from the prepayment model.

Item 4. Controls and Procedures

Our management, including our Chief Executive Officer (or CEO) and Chief Financial Officer (or CFO), reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the 1934 Act) as of the end of the period covered by this quarterly report. Based on that review and evaluation, the CEO and CFO concluded that our current disclosure controls and procedures, as designed and implemented, were effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will

35



detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31,June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings to which we are a party or any of our assets are subject.

Item 1a.1A. Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A — Risk Factors of our annual report on Form 10-K for the year ended December 31, 2006 (the “Form 10-K”). The materialization of any risks and uncertainties identified in our Forward Looking Statements contained in this report together with those previously disclosed in the Form 10-K or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward Looking Statements” in this quarterly report on Form 10-Q.

Item 4. Submission of Matters to a Vote of Security Holders

On May 22, 2007, we held our 2007 Annual Meeting of Stockholders (the “Meeting”) in New York, New York for the purpose of: (i) electing three Class III directors to serve on the Board until our 2010 Annual Meeting of Stockholders; and (ii) ratifying the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2007. The total number of shares of common stock entitled to vote at the Meeting was 80,750,993, of which 73,468,399 shares, or 90.98%, were present in person or by proxy.

The following presents the results of the election of directors:

Name of Class III Nominees
     For
   Withheld
   
Stewart Zimmerman             69,338,223         4,130,176                          
James A. Brodsky             72,558,988         909,411                          
Alan L. Gosule             69,969,151         3,499,248                          
 

There was no solicitation in opposition to the foregoing nominees by stockholders. The terms of office for Stephen R. Blank, Edison C. Buchanan, Michael L. Dahir and George H. Krauss, our Class I and Class II directors, continued after the Meeting.

The ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2007 was approved by stockholders with 73,243,456 votes “For,” 107,243 votes “Against” and 117,700 votes “Abstained.”

Further information regarding the proposals is contained in our Proxy Statement, dated April 9, 2007.

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Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

3.1    Amended and Restated Articles of Incorporation of the Registrant (incorporated herein by reference to Exhibit 3.1 of the Form 8-K, dated April 10, 1998, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).

3.2    Articles of Amendment to the Amended and Restated Articles of Incorporation of the Registrant, dated August 5, 2002 (incorporated herein by reference to Exhibit 3.1 of the Form 8-K, dated August 13, 2002, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).

3.3    Articles of Amendment to the Amended and Restated Articles of Incorporation of the Registrant, dated August 13, 2002 (incorporated herein by reference to Exhibit 3.3 of the Form 10-Q for the quarter ended September 30, 2002 filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).

3.4    Articles Supplementary of the Registrant, dated April 22, 2004, designating the Registrant’s 8.50% Series A Cumulative Redeemable Preferred Stock (incorporated herein by reference to Exhibit 3.4 of the Form 8-A, dated April 23, 2004, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).

3.5    Amended and Restated Bylaws of Registrant (incorporated herein by reference to Exhibit 3.2 of the Form 8-K, dated August 13, 2002, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).

4.1    Specimen of Common Stock Certificate of the Registrant (incorporated herein by reference to Exhibit 4.1 of the Registration Statement on Form S-4, dated February 12, 1998, filed by the Registrant pursuant to the 1933 Act (Commission File No. 333-46179)).

4.2    Specimen of Stock Certificate representing the 8.50% Series A Cumulative Redeemable Preferred Stock of the Registrant (incorporated herein by reference to Exhibit 4 of the Form 8-A, dated April 23, 2004, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).

10.1    Amended and Restated Employment Agreement of Stewart Zimmerman, dated as of April 16, 2006 (incorporated herein by reference to Exhibit 10.1 of the Form 8-K, dated April 25, 2006, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).

10.2    Amended and Restated Employment Agreement of William S. Gorin, dated as of April 16, 2006 (incorporated herein by reference to Exhibit 10.3 of the Form 8-K, dated April 25, 2006, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).

10.3    Amended and Restated Employment Agreement of Ronald A. Freydberg, dated as of April 16, 2006 (incorporated herein by reference to Exhibit 10.2 of the Form 8-K, dated April 25, 2006, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).

10.4    Amended and Restated Employment Agreement of Teresa D. Covello, dated as of January 1, 2006

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(incorporated (incorporated herein by reference to Exhibit 10.5 of the Form 8-K, dated April 25, 2006, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).

10.5    Amended and Restated Employment Agreement of Timothy W. Korth II, dated as of January 1, 2006 (incorporated herein by reference to Exhibit 10.4 of the Form 8-K, dated April 25, 2006, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).

10.6    2004 Equity Compensation Plan of the Registrant (incorporated herein by reference to Exhibit 10.1 of the Post-Effective Amendment No. 1 to the Registration Statement on Form S-3, dated July 21, 2004, filed by the Registrant pursuant to the 1933 Act (Commission File No. 333-106606)).

10.7    MFA Mortgage Investments, Inc. Senior Officers Deferred Compensation Plan, adopted December 19, 2002 (incorporated herein by reference to Exhibit 10.7 of the Form 10-K, dated December 31, 2002, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).

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10.8    MFA Mortgage Investments, Inc. 2003 Non-Employee Directors Deferred Compensation Plan, adopted December 19, 2002 (incorporated herein by reference to Exhibit 10.8 of the Form 10-K, dated December 31, 2002, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).

10.9    Form of Incentive Stock Option Award Agreement relating to the Registrant’s 2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.9 of the Form 10-Q, dated September 30, 2004, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).

10.10  Form of Non-Qualified Stock Option Award Agreement relating to the Registrant’s 2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.10 of the Form 10-Q, dated September 30, 2004, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).

10.11Form of Restricted Stock Award Agreement relating to the Registrant’s 2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.11 of the Form 10-Q, dated September 30, 2004, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).

31.1    Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2    Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1    Certification of the 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 the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

Date: May 1, 2007

MFA MORTGAGE INVESTMENTS, INC.

By: /s/  Date: July 31, 2007MFA MORTGAGE INVESTMENTS, INC.
By:/s/Stewart Zimmerman

Stewart Zimmerman
President and Chief Executive Officer

By: /s/
 
By:/s/William S. Gorin

William S. Gorin
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)

By: /s/
 
By:/s/Teresa D. Covello

Teresa D. Covello
Senior Vice President
Chief Accounting Officer and Treasurer
(Principal Accounting Officer)

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