1300317--6/4/2007--ECC_Capital

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Risks Related to Our Business Activities We are limited in our future operations since we agreed not to compete in wholesale subprime lending until February 2009 in connection with selling our wholesale lending operations to Bear Stearns. The nonconforming mortgage loans we hold in our securitizations and in inventory generally have higher delinquency and default rates than prime mortgage loans, which could result in losses on loans that we retain or are required to repurchase. Our prior internal underwriting standards used to qualify loans which we hold for investment may not provide adequate protection against the risks inherent in nonconforming residential mortgage loans and as a result, our cash flows, results of operations, financial condition and liquidity, including any net interest income from securitizations, could be materially harmed. Our adjustable rate mortgage products expose us to greater credit risk. Our interest-only loans may have a higher risk of default than our fully-amortizing loans. Declining real estate values and tightening credit standards could harm our operations. Our business requires a significant amount of cash, and if it is not available, our business and financial performance will be significantly harmed. We may be required to repurchase mortgage loans or indemnify investors if we breach representations and warranties, which could adversely impact our earnings. If we do not maintain the appropriate state licenses we will not be allowed to originate, purchase and service mortgage loans in some states, which would adversely affect our operations. The use of securitizations with credit enhancement requirements may have a negative impact on our cash flow and could adversely impact our business. The limited specific loan performance data on the loans we have originated and sold previously makes it difficult to predict the performance of loans we retain and any revenues from future securitizations. In a period of rising interest rates, our earnings may decrease. A significant amount of the mortgage loans in our securitizations are secured by property in California, Florida, Illinois and New York, and our operations could be harmed by economic downturns or natural disasters in these states. New legislative restrictions impacting telemarketing activities may harm our ability to market our loan products. If many of our borrowers become subject to the Servicemembers Civil Relief Act of 2003, our cash flows and interest income may be adversely affected. Should we expand into other lending operations or diversify portfolio investments, we will need to manage our growth effectively, or our financial performance will be harmed. Loan prepayment rates may increase, adversely affecting yields on our current and planned investments. We may change our investment strategy without your consent, which may result in our investing in riskier investments than our currently planned investments. Our hedging strategies may not be successful in mitigating our risks associated with interest rates. New legislation and regulations directed at curbing predatory lending practices could cause a credit tightening that may eliminate refinance options and restrict our ability to originate, purchase or price nonconforming residential mortgage loans which could adversely impact our earnings. Our business could be harmed if courts in other jurisdictions take a course similar to that of the Appellate Court of Illinois by determining that certain federal laws do not preempt certain state statutes, which could expose us to litigation for fees charged in connection with loans we originated in their jurisdiction. The broad scope of our prior and current operations exposes us to risks of noncompliance with an increasing and inconsistent body of complex laws and regulations at the federal, state and local levels. If our servicers fail to adequately service the loans we originated and sold, this could negatively affect our business, financial condition, liquidity and results of operations. We are subject to losses due to fraudulent and negligent acts on the part of loan applicants, mortgage brokers, other vendors and our employees. We may be subject to fines or other penalties based upon the conduct of our independent brokers. Stockholder, director and officer refusal to comply with regulatory requirements may interfere with our ability to do business in certain states. We are subject to significant legal and reputational risks and expenses under federal and state laws concerning privacy, use and security of customer information. We are exposed to environmental liabilities with respect to properties to which we take title. Future financing facilities may contain covenants that restrict our operations and our ability to make distributions if we are not in compliance with certain financial and other covenants. If we make any acquisitions, we will incur a variety of costs and may never realize the anticipated benefits. We have identified numerous material weaknesses in our internal control over financial reporting and determined that our disclosure controls and procedures are not effective, which could adversely impact our ability to report our results of operations and financial condition accurately and in a timely manner. Our securitizations may require us to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of breaches of representations and warranties, borrower fraud, or certain borrower defaults, which could harm our liquidity, results of operations and financial condition. Our investments in mortgage securities and loans are subject to changes in credit spreads which could adversely affect our ability to realize gains on the sale of such investments and may subject us to margin calls or similar liquidity requirements. Differences in our actual experience compared to the assumptions that we use to determine the value of our residual mortgage securities could adversely affect our financial position. Risks Relating to Our Common Stock We are no longer listed on the New York Stock Exchange and the market in our common stock is highly speculative and may not continue. Our common stock is classified as a penny stock under SEC rules, which may make it more difficult for our stockholders to resell our common stock. We may face deregistration proceedings under Section 12(j) of the Exchange Act. Risks Related to Our Organization and Structure Our charter prohibits certain entities from owning our shares, which might reduce the demand for our shares by limiting the potential purchasers of our shares. Provisions of our charter and Maryland law may limit the ability of a third party to acquire control of our company. Our rights and the rights of our stockholders to take action against our directors and officers are limited. Maintenance of our Investment Company Act exemption imposes limits on our operations. Mr. Holder, together with his respective affiliate, own in the aggregate approximately 17.77% of our outstanding common stock and there may be circumstances under which the interests of Mr. Holder and the interests of the holders of the remainder of our common stock will not be aligned. Risks Related to Our Qualification and Operation as a REIT Our failure to qualify as a REIT would have significant adverse consequences to us and the value of our common stock. REIT distribution requirements could adversely affect our liquidity. Recognition of excess inclusion income by us could have adverse tax consequences to us or our stockholders. Complying with REIT requirements may force us to liquidate otherwise attractive investments. U.S. federal income tax treatment of REITs and investments in REITs may change, which may cause us to lose the tax benefits of operating as a REIT.

Full 10-K form ▸

1300317--6/4/2007--ECC_Capital_CORP