1275477--3/10/2006--Opteum

related topics

{loan, real, estate}

{tax, income, asset}

{investment, property, distribution}

{loss, insurance, financial}

{personnel, key, retain}

{regulation, change, law}

{product, market, service}

{stock, price, share}

{interest, director, officer}

{operation, natural, condition}

Risks Related to the REIT Investment Portfolio Interest rate mismatches between Opteum s adjustable-rate securities and its borrowings used to fund purchases of the mortgage-related securities may reduce net income or result in a loss during periods of changing interest rates. A significant portion of Opteum s portfolio consists of fixed-rate MBS, which may cause Opteum to experience reduced net income or a loss during periods of rising interest rates. Increased levels of prepayments on the mortgages underlying Opteum s mortgage-related securities might decrease net interest income or result in a net loss. Opteum may incur increased borrowing costs related to repurchase agreements that would harm Opteum s results of operations. Interest rate caps on Opteum s adjustable-rate MBS may reduce its income or cause it to suffer a loss during periods of rising interest rates. Opteum may not be able to purchase interest rate caps at favorable prices, which could cause us to suffer a loss in the event of significant changes in interest rates. Opteum s leverage strategy increases the risks of Opteum s operations, which could reduce net income and the amount available for distributions to stockholders or cause Opteum to suffer a loss. An increase in interest rates may adversely affect the Company s book value, which may harm the value of its Class A Common Stock. Changes in yields may harm the value of the Company s Class A Common Stock. Opteum depends on borrowings to purchase mortgage-related securities and reach Opteum s desired amount of leverage. If Opteum fails to obtain or renew sufficient funding on favorable terms or at all, it will be limited in its ability to acquire mortgage-related securities, which will harm its results of operations. Possible market developments could cause Opteum s lenders to require it to pledge additional assets as collateral. If Opteum s assets were insufficient to meet the collateral requirements, it might be compelled to liquidate particular assets at inopportune times and at unfavorable prices. Opteum s use of repurchase agreements to borrow funds may give Opteum s lenders greater rights in the event that either Opteum or any of its lenders file for bankruptcy, which may make it difficult for it to recover is collateral in the event of a bankruptcy filing. Because the assets that Opteum acquires might experience periods of illiquidity, Opteum might be prevented from selling its mortgage-related securities at favorable times and prices, which could cause it to suffer a loss and/or reduce distributions to stockholders. The Company s board of directors may change its operating policies and strategies without prior notice or stockholder approval and such changes could harm its business and results of operations and the value of its Class A Common Stock. Competition might prevent Opteum from acquiring mortgage-related securities at favorable yields, which could harm its results of operations. Opteum s investment strategy involves risk of default and delays in payments, which could harm its results of o Decreases in the value of the property underlying Opteum s mortgage-related securities might decrease the value of its assets. If Opteum fails to maintain relationships with AVM, L.P. and its affiliate III Associates, or if it does not establish relationships with other repurchase agreement trading, clearing and administrative service providers, it may have to reduce or delay its operations and/or increase its expenditures. Hedging transactions may adversely affect the Company s earnings, which could adversely affect cash available for distribution to its stockholders. Terrorist attacks and other acts of violence or war may affect any market for the Company s Class A Common Stock, the industry in which the Company conducts its operations, and its profitability. Current loan performance data may not be indicative of future results. Risks Related to the Company s Officers The Company depends substantially on two individuals to operate its business, and the loss of such persons would severely and detrimentally affect its operations. The Company s officers own shares of its Class B Common Stock and may take undue risks in managing Opteum in order to cause a conversion of these shares. If Opteum fails to qualify as a REIT, it will be subject to federal income tax as a regular corporation and may face a substantial tax liability. Complying with REIT requirements may cause Opteum to forego otherwise attractive opportunities. Complying with REIT requirements may limit Opteum s ability to hedge effectively, which could in turn leave it more exposed to the effects of adverse changes in interest rates. Dividends paid by REITs generally do not qualify for reduced tax rates. To maintain Opteum s REIT qualification, Opteum may be forced to borrow funds on unfavorable terms or sell its securities at unfavorable prices to make distributions to stockholders. Reliance on legal opinions or statements by issuers of mortgage-related securities could result in a failure to comply with REIT gross income or asset tests. Possible legislative or other actions affecting REIT's could adversely affect the Company and its stockholders. Opteum may recognize excess inclusion income that would increase the tax liability of our stockholders. A portion of the Company s distributions may be deemed a return of capital for U.S. federal income tax purposes. The Company s reported GAAP financial results differ from the taxable income results that drive its dividend distributions, and its consolidated balance sheet, income statement, and statement of cash flows as reported for GAAP purposes may be difficult to interpret. Recent legislation related to corporate governance may increase the Company s costs of compliance and its liability. Failure to maintain an exemption from the Investment Company Act would harm the Company s results of operations. Risks Related to OFS s Origination Business If OFS does not obtain the necessary state licenses and approvals, OFS will not be allowed to acquire, fund or originate mortgage loans in some states, which would adversely affect OFS s operations. OFS s failure to comply with federal, state or local regulation of, or licensing requirements with respect to, mortgage lending, loan servicing, broker compensation programs, local branch operations or other aspects of OFS s business could harm OFS s operations and profitability. New legislation could restrict OFS s ability to originate mortgage loans, which could harm OFS s earnings. OFS relies on key personnel with long-standing business relationships, the loss of any of whom would impair OFS s ability to operate successfully. Failure to attract and retain qualified loan originators could harm OFS s business. To the extent OFS is unable to adapt to and implement technological changes involving the loan origination process, OFS may have difficulty remaining competitive and OFS s loan origination business may be adversely affected. If OFS does not manage its growth effectively, its financial performance could be harmed. OFS is subject to the risk that provisions of its loan agreements may be unenforceable. Risks Related to OFS s Profitability An increase in interest rates could reduce the value of OFS s loan inventory and commitments and OFS s hedging strategy may not protect it from interest rate risk and may lead to losses. OFS s mortgage origination business may be harmed by rising interest rates. OFS may be harmed by falling interest rates. Adverse economic conditions or declining real estate values would likely result in a reduction of OFS s mortgage origination activity, which would adversely affect its ability to grow its mortgage loan portfolio. Retaining subordinated interests exposes OFS to increased credit risk. The mortgage banking business is seasonal and OFS s operating results vary accordingly. OFS may be subject to losses due to misrepresented or falsified information or if OFS obtains less than full documentation with respect to its mortgage loans. Some of the loans that OFS originates are subprime, rather than prime, and generally have delinquency and default rates higher than prime loans, which could result in higher loan losses. OFS faces intense competition that could harm its market share and its revenues. Risks Related to OFS s Ability to Sell Loans it Originates or Purchases OFS s business would suffer if it was unable to sell the mortgage loans that it originates. OFS has credit exposure with respect to loans it sells to the whole loan market and loans it sells to securitization entities. Risks Related to OFS s Funding The terms of OFS s warehouse credit facilities contain restrictive financial and other covenants, which may restrict OFS s ability to pay dividends to the Company in situations where OFS is not in compliance with such covenants. Possible market developments could cause OFS s lenders to require OFS to pledge additional assets as collateral; if OFS s assets are insufficient to meet such collateral requirements, then OFS may be compelled to liquidate particular assets at an inopportune time, which may cause OFS to incur losses. Failure to renew or obtain adequate funding under warehouse repurchase agreements may harm OFS s lending operations. Risks Related to OFS s Securitization Activities An interruption or reduction in the securitization market or change in terms offered by this market would hurt OFS s financial position. Competition in the securitization market may negatively affect OFS s net income. Geographic concentration of mortgage loans that OFS originates and Opteum purchases increases the Company s exposure to risks in those areas, especially in California and Florida. To the extent that OFS has a large number of loans in an area affected by a natural disaster, OFS may suffer losses. Differences in OFS s actual experience compared to the assumptions that OFS uses to determine the value of its mortgage securities held as available-for-sale could adversely affect OFS s financial position. Changes in accounting standards might cause OFS to alter the way it structures or accounts for securitizations.

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1275477--3/10/2006--Opteum_Inc.