~~Table~~UNITED ofSTATES ~~Contents~~

~~UNITED~~SECURITIES ~~STATES~~AND EXCHANGE COMMISSION

~~SECURITIES~~Washington, ~~AND~~D.C. ~~EXCHANGE~~20549 ~~COMMISSION~~

~~Washington,~~FORM ~~D.C.~~10-Q ~~20549~~

~~FORM~~x ~~10-Q~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

xFor ~~QUARTERLY~~the ~~REPORT~~quarterly ~~PURSUANT~~period TOended ~~SECTION~~March 31, 132007 ~~OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For~~OR ~~the quarterly period ended June 30, 2006~~

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

¨For ~~TRANSITION~~the ~~REPORT~~transition ~~PURSUANT~~period ~~TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~from to

~~For~~Commission ~~the~~file ~~transition~~number ~~period from to~~001-32430

~~Commission~~ECC CAPITAL ~~file~~CORPORATION ~~number 001-32430~~

~~ECC~~(Exact ~~CAPITAL~~name ~~CORPORATION~~of registrant as specified in its charter)

(Exact name of registrant as specified in its charter)

Maryland

84-1642470

(State or other jurisdiction of

incorporation or organization)

(I. R. S. Employer

Identification Number)

Maryland		84-1642470
1733 Alton Parkway, Irvine, California		92606
(State or other jurisdiction of incorporation or organization)		(I. R. S. Employer Identification Number)
1833 Alton Parkway, Irvine, California		92606
(Address of principal executive offices)		(Zip Code)

(949) ~~856~~955-~~8300~~8700

Registrant’s telephone number, including area code

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

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

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

As of ~~August~~June 101, ~~2006~~2007, the Registrant had ~~100~~ 101,~~237~~026,~~247~~743 shares of common stock outstanding.

~~Table~~ECC ofCAPITAL ~~Contents~~CORPORATION

~~ECC~~QUARTERLY ~~CAPITAL~~REPORT ~~CORPORATION~~ON FORM 10-Q

~~QUARTERLY~~FOR ~~REPORT~~THE ONPERIOD ~~FORM~~ENDED ~~10-Q~~MARCH 31, 2007

~~FOR~~TABLE ~~THE~~OF ~~PERIOD~~CONTENTS ~~ENDED JUNE 30, 2006~~

TABLE OF C O N T E N T S


	PART I – FINANCIAL INFORMATION
		Page No.
Item 1.	Financial Statements.

	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	CONDENSED CONSOLIDATED BALANCE SHEETS	2
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	3
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	4
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	30

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Submission of Matters to a Vote of Security Holders	31
Item 5.	Other Information	32
Item 6.	Exhibits	32
Signature Page		33

~~PART~~1 ~~I – FINANCIAL INFORMATION~~

		Page No.
Item 1. Financial Statements.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS		2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS		3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS		4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3. Quantitative and Qualitative Disclosures About Market Risk		33
Item 4. Controls and Procedures		40
PART II – OTHER INFORMATION
Item 1. Legal Proceedings		41
Item 1A. Risk Factors		41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42
Item 3. Defaults Upon Senior Securities		42
Item 4. Submission of Matters to a Vote of Security Holders		42
Item 5. Other Information		43
Item 6. Exhibits		43
Signature Page		44

ECC CAPITAL CORPORATION AND SUBSIDIARIES

1CONDENSED CONSOLIDATED BALANCE SHEETS

~~Table~~(in ofthousands, ~~Contents~~except share data)

ECC CAPITAL CORPORATION AND SUBSIDIARIES


	March 31, 2007			December 31, 2006
	(unaudited)
ASSETS
Cash and cash equivalents	$	16,534		$	44,785
Restricted cash		4,449			3,500
Mortgage loans held for investment, net		2,097,669			2,403,090
Accrued mortgage loan interest		23,017			24,892
Residual interests in securitizations		10,126			45,920
Real estate owned		43,285			33,197
Prepaid expenses and other assets		18,625			20,747
Derivative instruments		26,102			35,523
Assets of discontinued operations		20,925			1,168,340

Total assets	$	2,260,732		$	3,779,994


LIABILITIES AND STOCKHOLDERS’ EQUITY
Long-term debt	$	2,095,921			2,384,025
Accounts payable and accrued expenses		31,401			45,861
Dividends payable		—			24,236
Liabilities of discontinued operations		20,461			1,197,901

Total liabilities		2,147,783			3,652,023

Commitments and contingencies

Stockholders’ equity
Common stock authorized, 200,000,000 shares of $0.001 par value at March 31, 2007 and December 31, 2006; issued and outstanding, 101,026,743 shares at March 31, 2007 and 100,982,684 at December 31, 2006		101			101
Additional paid in capital		374,822			374,280
Accumulated other comprehensive income		—			740
Accumulated deficit		(261,974	)		(247,150	)

Total stockholders’ equity		112,949			127,971

Total liabilities and stockholders’ equity	$	2,260,732		$	3,779,994

~~CONDENSED~~The ~~CONSOLIDATED~~accompanying ~~BALANCE~~notes ~~SHEETS~~are an integral part of these statements.

~~(in~~2 ~~thousands, except share data)~~

	June 30, 2006			December 31,2005
	(unaudited)
ASSETS
Cash and cash equivalents	$	51,790		$	46,904
Restricted cash		2,500			18,600
Other receivables		9,414			24,966
Mortgage loans held for sale, net		1,456,662			2,744,423
Mortgage loans held for investment, net		3,218,059			4,222,063
Accrued mortgage loan interest		40,801			46,840
Residual interests in securitization		33,243			14,753
Residual interests in securitization, pledged as collateral		31,232			—
Prepaid expenses and other assets		52,601			30,502
Derivative instruments		70,314			58,948
Equipment and leasehold improvements, net		10,437			14,422
Income taxes receivable		29,199			31,197
Total assets	$	5,006,252		$	7,253,618
LIABILITIES AND STOCKHOLDERS’ EQUITY
Warehouse and repurchase facilities	$	1,388,734		$	2,708,266
Advance on uncompleted loan sale		15,109			—
Long-term debt		3,184,103			4,166,127
Securities sold under agreements to repurchase		66,817			13,074
Accounts payable and accrued expenses		91,266			63,236
Dividends payable		—			18,044
Total liabilities		4,746,029			6,968,747
Commitments and contingencies		—			—
Stockholders’ equity
Common stock authorized, 200,000,000 shares of $0.001 par value at June 30, 2006 and December 31, 2005; issued and outstanding, 100,237,247 shares at June 30, 2006 and 100,242,336 shares at December 31, 2005		100			100
Additional paid in capital		372,241			371,623
Accumulated other comprehensive income		1,114			1,420
Retained earnings / (accumulated deficit)		(113,232	)		(88,272	)
Total stockholders’ equity		260,223			284,871
Total liabilities and stockholders’ equity	$	5,006,252		$	7,253,618

ECC CAPITAL CORPORATION AND SUBSIDIARIES

~~The~~CONDENSED ~~accompanying~~CONSOLIDATED ~~notes~~STATEMENTS ~~are~~OF anOPERATIONS ~~integral part of these statements.~~

2(in thousands, except per share data)


	March 31,
	2007			2006
	(unaudited)
Revenue
Interest income	$	44,095			68,596
Interest expense		(34,676	)		(51,158	)

Net interest income		9,419			17,438
Provision for loan losses—Loans held for investment		12,688			6,099

Net interest income, after provision for loan losses		(3,269	)		11,339
Change in market value of residuals		(1,990	)		629
(Loss) gain on derivative instruments, net		(1,680	)		15,858

Total revenue		(6,939	)		27,826

Expense
Operating expenses		9,689			14,254
Servicing fees		1,321			2,288

Total expenses		11,010			16,542

(Loss) income from continuing operations before income taxes		(17,949	)		11,284
Income tax provision from continuing operations		(32	)		—

(Loss) income from continuing operations		(17,981	)		11,284
Discontinued operations
Income (loss) from discontinued operations before income taxes		10,987			(17,662	)
Income tax (expense) benefit		(14	)		3

Income (loss) from discontinued operations		10,973			(17,659	)

NET LOSS	$	(7,008	)	$	(6,375	)


(Loss) income per share of common stock from continuing operations
Basic	$	(0.18	)	$	0.11
Diluted	$	(0.18	)	$	0.11

Income (loss) per share of common stock from discontinued operations
Basic	$	0.11		$	(0.17	)
Diluted	$	0.11		$	(0.17	)

Net loss per share of common stock
Basic	$	(0.07	)	$	(0.06	)
Diluted	$	(0.07	)	$	(0.06	)

~~ECC~~The ~~CAPITAL~~accompanying ~~CORPORATION~~notes ~~AND~~are ~~SUBSIDIARIES~~an integral part of these statements.

~~CONDENSED~~3 ~~CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~(in~~ ECC ~~thousands,~~CAPITAL ~~except~~CORPORATION ~~per~~AND ~~share~~SUBSIDIARIES ~~data)~~

	For the three months endedJune 30,						For the six months endedJune 30,
	2006			2005			2006			2005
	(unaudited)
Revenue
Interest income	$	101,349		$	62,547		$	217,180		$	88,086
Interest expense		(77,474	)		(33,633	)		(160,303	)		(46,935	)
Net interest income		23,875			28,914			56,877			41,151
Provision for loan losses - Loans held for investment		5,421			3,510			11,520			6,010
Net interest income, after provision for loan losses		18,454			25,404			45,357			35,141
Gain (loss) on sale of loans, net		(21,902	)		268			(29,001	)		6,724
Gain (loss) on trading securities and derivative instruments, net		15,521			(21,571	)		36,879			(15,081	)
Total revenue		12,073			4,101			53,235			26,784
Expense
Personnel		12,351			19,857			32,011			34,980
Production and marketing		3,691			4,714			6,226			8,450
Servicing fees		3,322			3,071			7,559			5,787
Occupancy expense		1,639			2,056			3,836			4,024
Severance and lease termination costs		1,226			—			9,128			—
General and administrative		8,425			11,899			19,428			20,068
Total expenses		30,654			41,597			78,188			73,309
Loss before income taxes		(18,581	)		(37,496	)		(24,953	)		(46,525	)
Provision (benefit) for income taxes		4			(3,531	)		7			(9,862	)
NET LOSS	$	(18,585	)	$	(33,965	)	$	(24,960	)	$	(36,663	)
Net loss per share of common stock
Basic	$	(0.19	)	$	(0.35	)	$	(0.25	)	$	(0.46	)
Diluted	$	(0.19	)	$	(0.35	)	$	(0.25	)	$	(0.46	)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

~~The~~(in ~~accompanying~~thousands, ~~notes~~except ~~are~~per anshare ~~integral~~date) ~~part of these statements.~~


	For the three months ended March 31,
	2007			2006
	(unaudited)
Cash flows from operating activities:
Net Loss	$	(7,008	)	$	(6,375	)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation and amortization		6,507			4,023
Provision for loan losses		12,688			6,099
Change in mortgage loans		1,126,643			324,985
Gain on sale of mortgage origination operations—held for sale		(21,461	)		—
Fair value adjustment of residual interest		1,991			(629	)
Accretion of residual interest		(3,355	)		(1,522	)
Compensation charge from stock options and warrants		542			310
Net increase in fair value of derivative instruments		10,493			(11,767	)
Loss on disposal/impairment of equipment		115			61
Net change in:
Other receivables		9,020			182
Accrued mortgage loan interest		6,581			4,887
Accrued bond interest payable		(296	)		(96	)
Prepaid expenses and other assets		(10,635	)		(4,110	)
Accounts payable and accrued expenses		(19,358	)		17,066

Net cash provided by operating activities		1,112,467			333,114


Cash flows from investing activities:
Purchases of property, equipment and leasehold improvements		(387	)		(588	)
Principal payments received on loans held for investment		288,649			466,005
Proceeds from sale of loan origination operations		26,061			—
Cash received from residual interest		36,418			25

Net cash provided by investing activities		350,741			465,442

Cash flows from financing activities:
Net decrease in warehouse lines of credit		(1,169,583	)		(503,337	)
Principal payments on long-term debt		(288,603	)		(474,580	)
Advance on uncompleted loan sale		—			153,921
Proceeds from repurchase agreement		—			29,796
Payments of capital lease obligations		(1,023	)		(287	)
Net (increase) decrease in restricted cash		(949	)		15,305
Dividends paid		(31,301	)		(18,043	)

Net cash used in financing activities		(1,491,459	)		(797,225	)

Net (decrease)/increase in cash and cash equivalents		(28,251	)		1,331

Cash at beginning of the period		44,785			46,904


Cash at end of the period	$	16,534		$	48,235


Supplemental cash flow information:
Cash used to pay interest	$	51,572		$	83,626
Cash used to pay income taxes	$	136		$	3

~~Table~~The accompanying notes are an integral part of ~~Contents~~these statements.

~~ECC~~4 ~~CAPITAL CORPORATION AND SUBSIDIARIES~~

~~CONDENSED~~ NOTE ~~CONSOLIDATED~~A—SUMMARY ~~STATEMENTS~~ OF ~~CASH~~SIGNIFICANT ~~FLOWS~~ORGANIZATIONAL AND ACCOUNTING POLICIES

(These unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in ~~thousands~~the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary to present fairly the consolidated financial position of ECC Capital Corporation (the “Company”) as of March 31, 2007 and December 31, 2006 and the consolidated results of operations and cash flows for the three months ended March 31, 2007 and 2006. These financial statements and notes thereto are unaudited and should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The results for the three months ended March 31, 2007 are not necessarily indicative of the expected results for the year ending December 31, 2007.

	For the six months endedJune 30,
	2006			2005
	(unaudited)
Cash flows from operating activities:
Net loss	$	(24,960	)	$	(36,663	)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation		3,399			2,225
Other amortization		19,513			—
Provision for loan losses		11,520			6,010
Change in mortgage loans held for sale		1,287,761			(4,225,078	)
Fair value adjustment of residual interest		1,489			5,051
Accretion of residual interest		(4,098	)		(1,514	)
Compensation charge from stock options and warrants		615			2,011
Net increase in fair value of derivative instruments		(11,366	)		(9,172	)
Loss on disposal/impairment of equipment		570			—
Other		—			(2	)
Net change in:
Other receivables		15,552			208
Accrued mortgage loan interest		6,039			(26,308	)
Accrued bond interest payable		(192	)		818
Prepaid expenses and other assets		(25,773	)		(10,747	)
Deferred and prepaid tax		1,998			(15,570	)
Accounts payable and accrued expenses		28,718			7,848
Income tax payable		—			(16,189	)
Net cash provided by / (used in) operating activities		1,310,785			(4,317,072	)
Cash flows from investing activities:
Purchases of property, equipment and leasehold improvements		(83	)		(6,296	)
Proceeds from sale of property and equipment		99
Principal payments received on loans held for investment		978,222			91,991
Residual interest in securitization		(50,185	)		—
Cash received from residual interest		2,766			1,788
Net cash provided by / (used in) investing activities		930,819			87,483
Cash flows from financing activities:
Net change in warehouse lines of credit		(1,319,532	)		978,379
Advance on uncompleted loan sale		15,109			—
Proceeds from issuance of long-term debt		23,276			3,000,465
Principal payments on long-term debt		(1,006,685	)		(91,991	)
Proceeds from repurchase agreement		53,743			—
Payments of repurchase agreement		—			(3,970	)
Payments of capital lease obligations		(689	)		(807	)
Restricted cash		16,100			—
Dividends paid		(18,043	)		(6,841	)
Proceeds from issuance of common stock		3			355,320
Net cash provided by / (used in) financing activities		(2,236,718	)		4,230,555
Net increase in cash and cash equivalents		4,886			966
Cash at beginning of the period		46,904			22,023
Cash at end of the period	$	51,790		$	22,989
Supplemental cash flow information:
Cash used to pay interest	$	162,180		$	41,654
Cash used to pay income taxes		7			19,466
Supplemental non-cash financing activity:
Fixed assets acquired through capital leases	$	—		$	495
Transfer of loans held for sale to held for investment		—			3,208,535

Organization and Summary of Significant Accounting Policies

The ~~accompanying~~Company ~~notes~~is ~~are~~a anmortgage ~~integral~~real ~~part~~estate ofinvestment ~~these~~trust ~~statements~~(REIT) that owns and manages interests in securitization trusts which issued securities collateralized by mortgages on residential real estate.

4The Company originated nonconforming mortgage loans through its taxable REIT subsidiary, Performance Credit Corporation (formerly known as Encore Credit Corp.), principally using its network of brokers throughout the United States. The Company either sold loans to third parties, through Performance Credit, or it transferred loans to a wholly-owned bankruptcy remote subsidiary which financed such loans through the issuance of asset-backed securities in securitization transactions accounted for as financings or sales. The Company’s loan origination operations comprised the majority of its business activities within its mortgage banking operations.

~~Table~~Sale of ~~Contents~~Mortgage Banking Operations

During the second quarter of 2006, ECC ~~CAPITAL~~Capital’s ~~CORPORATION~~board ~~AND~~of ~~SUBSIDIARIES~~directors began to review and evaluate potential strategic alternatives to enhance shareholder value. On October 10, 2006, the Company announced that it had entered into an agreement (the “Asset Purchase Agreement”) to sell certain operating assets used in its wholesale mortgage banking operation to Bear Stearns Residential Mortgage Corporation, for approximately $26 million in cash and the assumption of certain liabilities by Bear Stearns. Under the terms of the Asset Purchase Agreement, Bear Stearns agreed to acquire the assets of the Company’s wholesale mortgage banking operation, including property and equipment, customer lists, intellectual property and information technology systems used by the Company (the “Business”). Bear Stearns agreed to assume those liabilities that are necessary for it to continue to support the originations generated by the Business, including leases for the Company’s operating centers in Irvine, California, Downers Grove, Illinois and Glen Allen, Virginia. The Company also entered into certain agreements with Bear Stearns under which Bear Stearns agreed to fund and acquire the Company’s loan production on a monthly basis through the date of closing of the sale of the mortgage banking operations.

~~NOTES~~On TOFebruary 9, ~~CONDENSED~~2007, ~~CONSOLIDATED~~the ~~FINANCIAL~~Company ~~STATEMENTS~~closed the sale of its mortgage banking operations to Bear Stearns and settled the sale of approximately $1.2 billion in mortgage loans to Bear Stearns, subject to certain price adjustments and call rights. Upon completion of the transaction, the Company effectively exited the wholesale mortgage origination business. Accordingly, the disposition of the mortgage banking operations is being reported as a discontinued operation for the year ended December 31, 2006 and for the three months ended March 31, 2007. As Bear Stearns also acquired use of the Encore Credit name, the Company changed the name of Encore Credit Corp. to Performance Credit Corporation, which remains the Company’s wholly-owned subsidiary. The Company recorded a gain of approximately $21.5 million upon on the sale of its mortgage banking operations during the three months ended March 31, 2007.

~~NOTE~~Principles Aof -Consolidation ~~SUMMARY OF SIGNIFICANT ORGANIZATIONAL AND ACCOUNTING POLICIES~~

~~These~~The ~~unaudited~~consolidated ~~interim~~ financial statements ~~have~~of ~~been~~the ~~prepared~~Company oninclude the ~~same~~financial ~~basis~~position asand ~~the~~results ~~annual~~of ~~financial~~ECC ~~statements~~Capital Corporation and, inits ~~the~~wholly-owned ~~opinion~~subsidiaries. ofAll ~~management,~~material ~~reflect~~intercompany ~~all~~balances ~~adjustments,~~and ~~which~~transactions ~~include~~are ~~normal~~eliminated ~~recurring~~in consolidation. ~~adjustments,~~The ~~necessary~~Company ~~to present~~is ~~fairly~~ the ~~consolidated~~primary ~~financial~~beneficiary ~~position~~in ofa ~~ECC~~variable ~~Capital~~interest ~~Corporation~~entity (~~the “Company”~~VIE), as ofdefined ~~June 30,~~by ~~2006~~FASB ~~and~~Interpretation ~~December~~No. ~~31,~~46 ~~2005~~Revised ~~and~~(“FIN ~~the~~46R”), ~~consolidated~~Consolidation ~~results~~ of ~~operations~~Variable ~~and~~Interest ~~cash~~Entities ~~flows~~an ~~for~~Interpretation ~~the~~of ~~three and six months ended~~ARB ~~June~~No. 3051, ~~2006~~involved ~~and~~in ~~2005.~~a ~~These~~retail ~~financial~~lending ~~statements~~business. ~~and~~The ~~notes~~Company ~~thereto~~has ~~are~~consolidated ~~unaudited~~the ~~and~~financial ~~should~~statements beof ~~read~~this inVIE. ~~conjunction~~The ~~with~~financial ~~the~~statements ~~Company’s~~of ~~audited~~this ~~financial~~VIE ~~statements~~are ~~included~~not inmaterial to the Company’s ~~Annual~~operations ~~Report~~or onfinancial ~~Form 10-K for the year ended December 31, 2005~~position. The Company’s ~~results~~maximum ~~for~~exposure ~~three~~to ~~and~~loss ~~six~~with ~~months~~respect ~~ended~~to ~~June 30,~~this ~~2006~~VIE ~~are~~is ~~not~~approximately ~~necessarily~~$3.9 ~~indicative~~million as of ~~the expected results for the year ending December~~March 31, ~~2006~~2007.

~~Organization~~The Company securitized its loans held for investment by transferring loans to trusts that issued long term debt. The Company retained certain servicing rights and ~~Summary~~the excess interest spread between the rate paid by the borrowers and the rate paid to the noteholders. The structure of ~~Significant~~the trusts limits its activities to holding the transferred assets and transferring cash collected to the trusts’ beneficial interest holders. Certain trusts utilized by the Company do not meet the definition of a qualified special purpose entity as defined by Statement of Financial Accounting ~~Policies~~Standards No. 140 (“SFAS 140”),

~~The Company~~5 is a mortgage real estate investment trust (REIT) that originates nonconforming mortgage loans through its taxable REIT subsidiaries, primarily Encore Credit Corp., using its network of brokers throughout the United States. The Company either sells loans to third parties, primarily through Encore Credit, or transfers loans to a wholly-owned bankruptcy remote subsidiary, which finances such loans through the issuance of asset-backed securities in securitization transactions.

~~Principles~~ Accounting for Transfers and Servicing of ~~Consolidation~~Financial Assets and Extinguishments of Liabilities, as: (i) the Company retains certain discretionary rights as servicer of the mortgage loans transferred to the trust, (ii) the Company holds a right to repurchase any of the loans in the trust aggregating up to 1% of the initial principal balance of the transferred loans, and (iii) the trust may, with the approval of the beneficial interest holders, acquire derivative financial instruments. Such trusts are considered VIEs. The Company is considered the primary beneficiary of the trust because, as the recipient of the excess cash flows from the trust, the Company’s interests in the trust are exposed to the majority of the variability in the trust’s cash flows. As the primary beneficiary of the trust, the Company has consolidated the assets and liabilities of the trust in the accompanying financial statements.

~~The~~Use ~~consolidated financial statements~~ of ~~the~~Estimates Company include the financial position and results of ECC Capital Corporation and its majority and wholly-owned subsidiaries. All material intercompany balances and transactions are eliminated in consolidation.

The ~~Company~~preparation ~~securitizes~~of ~~its loans held for investment by transferring loans to a trust that issues long term debt (see Note F). The Company retains certain servicing rights and~~ the ~~excess~~consolidated ~~interest~~financial ~~spread~~statements ~~between~~in ~~the~~conformity ~~rate~~with ~~paid~~accounting byprinciples ~~the~~generally ~~borrowers~~accepted ~~and~~in the ~~rate~~United ~~paid~~States ~~to the noteholders. The structure~~ of aAmerica ~~trust~~requires ~~limits~~management ~~its activities~~ to ~~holding~~make ~~the~~certain ~~transferred~~estimates ~~assets~~ and ~~transferring~~assumptions ~~cash~~that ~~collected~~affect to the ~~entity’s~~reported ~~beneficial~~amounts ~~interest holders. Certain trusts utilized by the Company do not meet the definition~~ of ~~a qualified special purpose entity~~assets, ~~or QSPE~~liabilities, ~~as defined by Statement of Financial Accounting Standards No. 140 (“SFAS 140”), Accounting for Transfers~~ and ~~Servicing~~contingencies ofat ~~Financial Assets and Extinguishments of Liabilities, as: (i)~~ the ~~Company~~date ~~retains certain discretionary rights as servicer~~ of the ~~mortgage~~consolidated ~~loans~~financial ~~transferred~~statements toand the ~~trust, (ii) the~~reported ~~Company~~amounts ~~holds a right to repurchase any~~ of ~~the~~revenues ~~loans in the trust aggregating up to 1% of the initial principal balance of the transferred loans,~~ and ~~(iii) the~~expenses ~~trust~~during ~~may, with~~ the ~~approval~~reporting ofperiod. ~~the~~Actual ~~beneficial~~results ~~interest~~could ~~holders, acquire~~differ ~~derivative~~from ~~financial instruments~~those estimates. ~~Such~~Significant ~~trusts~~balance ~~are~~sheet ~~considered~~items ~~variable~~which ~~interest~~could ~~entities~~be asmaterially ~~defined~~affected by ~~FASB~~such ~~Interpretation~~estimates ~~No. 46~~include ~~Revised (“FIN 46R”), Consolidation of Variable Interest Entities an Interpretation of ARB No. 51. The Company is considered~~ the ~~primary~~residual ~~beneficiary~~interests ofin ~~the trusts because~~securitizations, asdeferred ~~the~~and ~~recipient~~prepaid oftaxes, ~~the~~repurchase ~~excess cash flows from the trusts~~allowance, the ~~Company’s~~carrying ~~interests~~value ~~in the trusts are exposed to the majority~~ of ~~the~~loans ~~variability~~held infor ~~the trusts’~~sale, ~~cash flows. As the primary beneficiary of the trusts~~deferred fees, ~~the~~deferred ~~Company~~bond ~~has~~issuance ~~consolidated~~costs ~~the assets~~ and ~~liabilities~~allowance offor ~~the~~loan ~~trusts~~losses inon ~~the~~loans ~~accompanying~~held ~~financial~~for ~~statements~~investment.

~~Use~~Management ofOperating ~~Estimates~~Plans

~~The~~During ~~preparation~~2005 of and 2006 the ~~consolidated~~Company ~~financial~~experienced ~~statements~~significant inoperating ~~conformity~~losses, ~~with~~largely ~~accounting~~as ~~principles~~a ~~generally~~result ~~accepted~~of losses in ~~the~~its ~~United~~mortgage ~~States~~banking ofoperations. ~~America~~As ~~requires~~noted, ~~management~~on toFebruary 9, 2007, ~~make~~the ~~certain~~Company ~~estimates~~closed ~~and~~the ~~assumptions~~sale ~~that~~of ~~affect~~its ~~the~~mortgage ~~reported~~banking ~~amounts~~operations ofto ~~assets,~~Bear ~~liabilities,~~ Stearns and ~~contingencies~~exited at the ~~date~~wholesale ofmortgage ~~the~~origination ~~consolidated~~business. ~~financial~~The ~~statements~~Company continues to own and ~~the~~manage ~~reported~~its ~~amounts~~interests in securitizations, which comprise its portfolio of loans ~~revenues~~held for investment and ~~expenses~~its ~~during~~residual ~~the~~interests ~~reporting~~in ~~period~~securitizations. ~~Actual~~As ~~results~~a ~~could~~result ~~differ~~of ~~from~~the ~~those~~sale ~~estimates.~~of ~~Significant~~the ~~balance~~wholesale ~~sheet~~mortgage ~~items~~origination ~~which~~business, ~~could~~management anticipates that operating expenses will be ~~materially~~ ~~affected~~significantly byreduced. ~~such~~Management ~~estimates~~also anticipates ~~include~~that ~~the~~cash ~~residual~~flow received from its interests in securitizations, ~~deferred~~should ~~and~~provide ~~prepaid~~sufficient ~~taxes,~~liquidity ~~repurchase~~to ~~allowance,~~meet the ~~carrying~~Company’s ~~value~~known obligations, including the distribution of ~~loans~~dividends ~~held~~necessary ~~for~~to ~~sale,~~meet ~~deferred~~the ~~fees,~~minimum ~~deferred~~distribution requirements ~~bond~~to ~~issuance~~retain ~~costs~~the ~~and~~Company’s ~~allowance~~status ~~for~~as ~~loan losses~~a onreal ~~loans~~estate ~~held~~investment trust for ~~investment~~the next few years, subject to the performance of our residual interests.

~~Management~~If ~~Operating~~loan ~~Plans~~delinquencies and losses increase within the Company’s securitizations or loan balances prepay faster than projected, the cash flows it receives from these securitizations may be reduced. Based on current market conditions, the Company’s ability to sell and/or satisfactorily finance certain assets may be adversely impacted. These market conditions as well as a possible decline in expected cash flows from its residual interests in securitizations may negatively impact its ability to meet its obligations, including its ability to make additional dividend distributions.

~~During~~While ~~2005~~management ~~the~~believes ~~Company~~future ~~experienced~~cash anflows ~~operating~~from ~~loss~~its securitizations ofwill ~~$64.1~~be ~~million,~~sufficient ~~largely~~to asmeet athe ~~result~~Company’s ofobligations anand ~~$80.9~~to ~~million~~make ~~loss~~minimum indistributions ~~its~~required ~~mortgage~~to ~~banking~~retain ~~segment.~~REIT ~~During~~status, ~~the~~there ~~six months~~can ~~ended~~be ~~June 30,~~no ~~2006,~~assurances ~~the~~that ~~Company~~this ~~incurred~~will anoccur. ~~operating~~Achievement ~~loss~~ of ~~$25.0~~these ~~million,~~results ~~primarily~~depends ason amany ~~result~~factors ofoutside management’s acontrol ~~$58.8~~including, ~~million~~but ~~loss~~not inlimited ~~its~~to, ~~mortgage~~the ~~banking~~general ~~segment.~~economic ~~The~~environment, ~~losses~~changes ofin ~~the~~interest ~~mortgage~~rates, ~~banking~~prepayment ~~segment~~speeds, ~~were~~loan ~~primarily~~delinquencies, ~~the~~demand ~~result~~for ofhousing, ~~a decline~~changes in ~~prices~~real atestate ~~which~~values ~~the~~and ~~Company~~availability ~~could~~of ~~sell~~credit. ~~loans~~If ~~that~~the ~~occurred~~Company is ~~throughout~~unable ~~2005~~to ~~and~~operate ~~the~~profitably ~~first~~and ~~half~~generate ofpositive ~~2006.~~cash ~~During~~flow, the ~~first~~recoverability ~~quarter~~or classification of ~~2006,~~recorded ~~the~~asset ~~majority~~amounts ofor ~~loan~~the ~~sales~~amounts ~~related~~or toclassification ~~loans~~of ~~originated~~liabilities ~~during~~may ~~2005~~be affected.

5Cash and Cash Equivalents

~~Table~~The Company considers all highly liquid instruments with an original maturity of ~~Contents~~three months or less to be cash equivalents. Cash equivalents include funds invested in interest bearing accounts such as money market funds and similar accounts.

~~ECC~~Restricted ~~CAPITAL~~Cash ~~CORPORATION AND SUBSIDIARIES~~

~~NOTES~~At TOMarch 31, ~~CONDENSED~~2007, ~~CONSOLIDATED~~restricted ~~FINANCIAL~~cash ~~STATEMENTS~~represented collateral for letters of credit provided in connection with surety bonding requirements.

~~The~~6 average sales price for all first quarter loan sales was 99.76% of par. During the second quarter of 2006, the Company sold most of the remaining 2005 loan originations and the average sales price for second quarter loan sales, excluding securitizations, was 100.37% of par. The Company has implemented plans to originate loans that are designed to improve gain on sale execution while managing the resulting production volume to maximize the efficiency of the Company’s operating infrastructure.

AsMortgage ~~discussed~~Loans ~~in Note I, on January 6, 2006~~ and ~~April 11,~~ ~~2006,~~Loan ~~the~~Origination ~~Company~~Fees ~~announced reorganizations designed to reduce costs~~ and ~~improve~~Costs efficiencies. The Company is continuing to review the level of operating costs and the cash requirements of operating the business. The Company will utilize available liquidity as necessary as it undertakes actions to ensure operations generate necessary operational cash flow. Recent sources of liquidity have included the borrowing of $66.8 million secured by the Company’s ownership interests in its securitizations and $9.8 million secured by assets in the Company’s executive deferred compensation plan. The Company also filed amended income tax returns to receive a refund of income taxes paid during 2003 though 2005 through carry back of operating losses and has received $27.0 million in tax refunds through July 2006. Other sources of liquidity include additional collateralized borrowing capacity utilizing ownership interests in securitizations and distributions of excess cash flow from the Company’s securitizations. Utilization of available liquidity for operations during 2006 may require the Company to defer or eliminate dividend payments in 2006; however, the Company believes these sources of liquidity will be sufficient to sustain the Company’s operations throughout 2006 and until operations generate positive cash flow.

AsMortgage ~~of June 30,~~loans ~~2006,~~held ~~the~~for ~~Company~~investment ~~financed~~are ~~substantially~~stated ~~all~~at ofamortized ~~its loan originations through warehouse facilities. Each of these facilities may be terminated by the lender upon an event of default~~cost, ~~subject~~including ~~in some cases to cure periods. As discussed in Note E,~~ the ~~Company~~outstanding ~~was~~principal ~~not in compliance with certain of its warehouse covenants (mainly related to profitability and liquidity) as of May 31 and June 30~~balance, ~~2006~~less ~~and received waivers of non-compliance from~~ the ~~warehouse~~allowance ~~lenders.~~for Asloan ~~of June 30, 2006, the aggregate balance outstanding under all warehouse facilities was approximately $1~~losses.4 ~~billion.~~Deferred ~~These~~origination ~~facilities~~fees ~~mature between July 2006~~ and May 2007. There is no guarantee the Company will meet the warehouse covenants in the future and although the Company received waivers for non-compliance with these covenants and has been able to extend and renew its warehouse facilitiescosts, ~~there~~net ~~is no guarantee these warehouse lenders will provide waivers or extend credit to the Company in the future if the Company is not profitable. If the Company is not able to renew all~~ of ~~these~~discounts ~~warehouse~~are ~~facilities~~amortized ~~or arrange for new financing on acceptable terms, or if the Company violates covenants in its loan agreements and is~~as ~~considered~~an toadjustment ~~be in default and is unable to access funds under any~~ of ~~these~~yield ~~facilities,~~over the ~~Company~~life ~~may not be able to originate new loans or continue to fund operations. In the event~~ of ~~default,~~ the ~~warehouse~~portfolio ~~lender~~using ~~could require~~ the ~~Company~~effective ~~to repay~~yield ~~the~~method ~~outstanding debt, which could result~~ in ~~the Company having to sell loans at unfavorable prices in order to repay the debt. If these events were to occur, they could have~~ a ~~material~~manner ~~adverse~~that ~~effect~~anticipates ~~on the Company’s business, financial condition, liquidity and results of operations~~prepayments.

~~While~~Repurchase ~~the Company believes the implementation of its corporate reorganization plans has resulted and will~~Obligations continue to result in improved cash flow, there can be no assurances that this will occur. Achievement of these results depends on factors outside the Company’s control including, but not limited to, the condition of the whole loan sale market and the Company’s ability to improve the value received in the whole loan market for its loan originations, the general economic environment, changes in interest rates, demand for housing and availability of credit. In addition, the Company operates in a competitive environment in which competitors may lower interest rates or relax underwriting standards. If this occurs and the Company does not make similar changes, the Company may experience lower production levels and ultimately less revenue, or, if the Company responds in a similar manner as its competitors, the Company may experience an increased risk of loss in loans originated. If the Company is unable to operate profitably and generate positive cash flow, the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities will be affected.

~~Cash~~As of March 31, 2007, we have unresolved claims from investors to repurchase approximately $6 million in loans. During the quarter ended March 31, 2007 we paid $200,000 to settle certain outstanding claims. As of March 31, 2007, we have reserved $2 million for potential losses that may be realized on the settlement of these and ~~Cash~~other ~~Equivalents~~incurred but unknown claims. Although management believes the amount reserved is adequate to provide for losses on the settlement of repurchase claims, the timing and amount of any remaining repurchase claims, is highly uncertain and it is reasonably possible that losses ultimately realized may be greater than amounts provided for.

~~The~~Allowance ~~Company~~for ~~considers~~Loan ~~all~~Losses ~~highly~~on ~~liquid~~Mortgage ~~instruments~~Loans ~~with~~Held anfor ~~original~~Investment ~~maturity of three months or less to be cash equivalents. Cash equivalents include funds invested in interest bearing accounts such as money market funds and similar accounts.~~

~~Other~~In ~~Receivables~~connection with its mortgage loans held for investment, the Company establishes an allowance for loan losses based on its estimate of losses inherent and probable as of the balance sheet date. The Company charges off uncollectible loans at the time of liquidation. The Company evaluates the adequacy of this allowance each quarter, giving consideration to factors such as the current performance of the loans, characteristics of the portfolio, the value of the underlying collateral and the general economic environment. The Company believes the allowance for loan losses is adequate for known and inherent losses in the portfolio of mortgage loans held for investment. Provision for losses is charged to the Company’s consolidated statement of operations and losses incurred are charged to the allowance.

~~Other~~Residual ~~receivables~~Interests ~~reflect~~in ~~amounts~~Securitization due, generally from warehouse lenders, from settled loan sales, net amounts due from the Company’s loan servicers for principal and interest, and amounts due from escrow or title companies related to cancelled loan fundings.

6Residual interests in securitizations represent interests retained from the sale of loans through securitizations that the Company structures as sales rather than financings, referred to as “off-balance sheet securitizations.” The Company may also sell residual interests in securitizations through what are sometimes referred to as net interest margin securities, or NIMS.

~~Table~~In an off-balance sheet securitization, the Company transfers mortgage loans to a Real Estate Mortgage Investment Conduit (the “REMIC” or “Trust”), which is a Qualified Special Purpose Entity (“QSPE”), as defined by SFAS 140 and accounts for the transfer as a sale of ~~Contents~~loans. The Trust, in turn, issues interest bearing asset-backed securities (the “Certificates”). The Certificates are sold without recourse except that the Company provides representations and warranties customary to the mortgage banking industry with respect to loans transferred to the Trust. The Trust uses the cash proceeds from the sale of the Certificates to pay the Company the purchase price for the mortgage loans. The Trust also issues certificates representing interests in the excess interest spread and other residuals. The excess interest spread represents the present value of estimated cash flows that the holder of such Certificates will receive as a result of the interest collected from borrowers exceeding the interest paid to security holders by the Trust. The Company retained the Certificates from securitizations in 2003, 2004, and 2006 representing the excess interest spread and other residuals, collectively referred to as residual interests.

~~ECC~~In ~~CAPITAL~~such ~~CORPORATION~~transactions, ~~AND~~the ~~SUBSIDIARIES~~Company allocates its basis in the mortgage loans and residual interests between the portion of the assets sold through the Certificates and the portion of retained interests based on the relative fair values of those portions on the date of sale. The Company recognizes gains or losses attributable to the changes in the fair value of the residual interests, which are recorded at estimated fair value and accounted for as either available-for-sale or trading securities. At March 31, 2007, the Company had $3,519,000 in residual interests classified as available-for-sale and $6,607,000 in residual interests classified as trading securities. The Company determines the estimated fair value of the residual interests by discounting the expected cash flows released from the Trust (the cash out method) using a discount rate commensurate with the risks involved. In accordance with Emerging Issues Task Force 99-20 (“EITF 99-20”), Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets, increases to the fair value of available-for-sale residual interests are recorded as unrealized gains, net of tax, as a component of other comprehensive income, with the yield being adjusted on a prospective basis. Decreases to the fair value, that are considered to be other than temporary, are recorded as a loss against earnings in the period of the change. Changes to the fair value of trading residual interests are recorded through earnings as a component of the gain or loss on trading securities and derivative instruments.

~~NOTES~~There TOis ~~CONDENSED~~no ~~CONSOLIDATED~~active ~~FINANCIAL~~market ~~STATEMENTS~~which would provide market quotes for the Company’s residual interests in securitizations. While management believes the estimated value of its residual interests in securitizations to be reasonable, these estimates are based upon various assumptions including, but not limited to, the performance of the loans within the securitizations, interest rates and changes in real estate values. The Company’s actual experience may be different than management’s assumptions and, as a result, the values ultimately realized may be different than the values recorded at March 31, 2007 and December 31, 2006 and the difference may be material.

~~Mortgage~~7 ~~Loans and Loan Origination Fees and Costs~~

~~Mortgage~~The ~~loans~~Certificate ~~held~~holders ~~for~~and ~~sale~~their ~~are~~securitization ~~carried~~trusts athave ~~the~~no ~~lower~~recourse ofto ~~cost~~the orCompany ~~market,~~for ~~which~~failure isof ~~computed~~mortgage onloan borrowers anto ~~individual~~pay ~~loan~~when ~~basis~~due. ~~Unrealized~~Purchasers ~~losses,~~of ifsecuritization ~~any,~~bonds ~~are~~and ~~recognized~~certificates byhave ~~a direct~~no ~~reduction~~recourse inagainst ~~loan~~the ~~value~~other ~~and~~assets aof ~~corresponding~~the ~~reduction~~Company, toother ~~income.~~than ~~Loan~~the ~~origination~~assets ~~fees,~~of asthe ~~well~~Trust. asThe ~~discount~~Company’s ~~points~~residual ~~and~~interests ~~certain~~are ~~direct~~subordinated ~~origination~~to ~~costs~~the ~~are~~Certificates until ~~initially~~the ~~capitalized,~~Certificate ~~recorded~~holders asare anfully ~~adjustment~~paid. ofThe ~~the~~value ~~cost basis~~ of the ~~loan,~~Company’s ~~and reflected~~residual ininterests ~~earnings when the loan~~ is ~~sold~~subject asto ~~part~~credit, ofprepayment ~~the~~and ~~gain~~interest orrate ~~loss~~risk on the ~~sale~~transferred offinancial ~~loans~~assets.

~~Mortgage~~Real ~~loans~~Estate ~~held~~Owned for investment are stated at amortized cost, including the outstanding principal balance, less the allowance for loan losses. Mortgage loans held for sale are transferred to mortgage loans held for investment when such loans have been included in or identified for inclusion in a securitization transaction. For financial reporting purposes, the transfer is recorded at the carrying amount of the loan at the date of transfer, which includes deferred origination fees and costs. Deferred origination fees and cost, net of discounts are amortized as an adjustment of yield over the life of the portfolio using the effective yield method in a manner that anticipates prepayments.

~~Allowance~~Real ~~for~~Estate ~~Loan~~Owned ~~Losses~~(“REO”) results from the Company foreclosing on ~~Mortgage~~delinquent ~~Loans~~borrowers. ~~Held~~These properties are held for ~~Investment~~sale and carried at the lesser of the carrying value or fair value less estimated selling costs. Individual properties are periodically evaluated and additional impairments are recorded, if necessary. At March 31, 2007 and December 31, 2006, the Company had REO properties valued at $43,285,000 and $33,197,000, respectively. At March 31, 2007 and December 31, 2006, there are additional REO properties valued at $6,323,000 and $6,220,000, respectively, included with assets of discontinued operations.

InDerivative connection with its mortgage loans held for investment, the Company establishes an allowance for loan losses based on its estimate of losses inherent and probable as of the balance sheet date. The Company chargesInstruments off uncollectible loans at the time of liquidation. The Company evaluates the adequacy of this allowance each quarter, giving consideration to factors such as the current performance of the loans, characteristics of the portfolio, the value of the underlying collateral and the general economic environment. The Company believes the allowance for loan losses is adequate for known and inherent losses in the portfolio of mortgage loans held for investment. Provision for losses is charged to the Company’s consolidated statement of operations and losses incurred are charged to the allowance.

~~Interest~~In ~~Income~~connection with the Company’s strategy to mitigate interest rate risk on its residual assets, mortgage loans held for sale and the repricing of ~~Recognition~~long-term debt issued in securitization transactions, the Company uses derivative financial instruments such as Eurodollar futures contracts, interest rate caps, and interest rate swaps. It is not the Company’s policy to use derivatives to speculate on interest rates. These derivative instruments are intended to provide income and cash flow to partially offset changes in interest income and cash flows as interest rates change. The derivative financial instruments and any related margin accounts are included in derivative instruments on the consolidated balance sheets and are carried at their fair value. Changes in the fair value of derivative instruments are reported as gain on derivative instruments within the consolidated statements of operations. The Company held the following positions in derivatives (in thousands) at:

Interest income is accrued as earned. Loans are placed on nonaccrual status when any portion of principal or interest is 90 days past due or earlier when any concern exists as to the ultimate collectibility of principal or interest and interest income recognized prior to loans becoming 90 days past due is reversed. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible. As of June 30, 2006 and December 31, 2005, there were loans with an unpaid principal balance of $167,049,000 and $82,628,000 on non-accrual status, respectively.


	March 31, 2007				December 31, 2006
Contract	Notional amount		Fair value		Notional amount		Fair value		Term
Interest rate swaps	$	1,163,307		11,163	$	1,255,854		15,282	Amortizing through February 2010
Interest rate cap	$	1,444,096		14,939	$	1,757,534		20,241	Amortizing through February 2008

Derivative instruments			$	26,102			$	35,523

~~Sale~~All Eurodollar futures contracts were settled in conjunction with the sale of ~~Loans~~the mortgage banking operations to Bear Stearns. These Eurodollar contracts resulted in a gain during the three months ended March 31, 2007 of $348,000 which is reflected in discontinued operations.

~~Loans~~During ~~may be sold in cash transactions or in securitization transactions accounted for as sales. Premiums or discounts resulting from sales or securitizations of mortgage loans are recognized at~~ the ~~date~~three ofmonths ~~settlement~~ended ~~and~~March 31, ~~are based on the difference between the selling price for sales and the carrying value of the related loans sold. At the time of sale~~2007, the Company ~~records~~recorded a ~~provision~~loss ~~for estimated losses resulting from the refund~~ of ~~premium~~$1,680,000 torelated ~~investors due~~ to the ~~early~~Company’s ~~prepayment~~interest ofrate ~~loans~~swaps and ~~the~~caps, ~~repurchase~~representing ~~of loans. The Company also records~~ a ~~provision~~loss ~~for losses anticipated on the disposition~~ of ~~loans~~$9,421,000 ~~expected~~in tofair bevalue ~~repurchased~~adjustments asand settlement ~~part~~receipts of ~~the provision for repurchases charged to gain or loss on sale of loans. As part of the sale of a mortgage loan to third parties~~$7,741,000 ~~the Company sells the servicing rights. The purchasing company pays the Company a service release premium for that right. This premium is included in “gain~~ on ~~sale of loans” in~~ the ~~accompanying~~swaps ~~consolidated~~and ~~statements of operations~~caps.

~~Loan~~Income ~~sales~~Taxes and securitizations are accounted for as sales when control of the loans is surrendered, to the extent that consideration other than beneficial interests in the loans transferred is received in the exchange. Retained interests in securitizations are measured by allocating the previous carrying value between the loans sold and the interests retained, if any, based on their relative fair values at the date of transfer.

~~Residual~~The ~~Interest~~Company inis ~~Securitization~~not subject to tax on the earnings of the REIT it distributes to its stockholders as long as it distributes at least 90% of its taxable REIT earnings to its stockholders each taxable year and satisfies other qualifying tests. The Company has elected to have its wholly-owned subsidiary, Performance Credit Corporation, treated as a taxable REIT subsidiary (“TRS”). As a TRS, Performance Credit is subject to federal and state taxes on its income. Accordingly, the Company reports a provision for taxes based upon the earnings of Performance Credit using the asset and liability method of accounting for income taxes.

~~Residual~~Under ~~interests~~the inasset ~~securitizations~~and ~~represent~~liability ~~interests~~method, ~~retained~~deferred ~~from~~tax assets and liabilities are recognized for the ~~sale~~future oftax ~~loans~~consequences ~~through~~attributable ~~securitizations~~to ~~that~~differences between the ~~Company~~consolidated ~~structures~~financial asstatement ~~sales~~carrying ~~rather~~amounts ~~than~~of ~~financings,~~existing ~~referred~~assets toand asliabilities ~~“off-balance~~and ~~sheet~~their ~~securitizations~~respective tax bases.” ~~The~~Deferred ~~Company~~tax ~~may~~assets ~~also~~and ~~sell~~liabilities ~~residual~~are ~~interests~~measured using enacted tax rates for the periods in ~~securitizations~~which ~~through~~the ~~what~~differences are ~~sometimes~~expected ~~referred~~ to asreverse. ~~net~~The ~~interest~~effect ~~margin~~on ~~securities,~~deferred ortax ~~NIMS~~assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

In8 an off-balance sheet securitization, the Company transfers mortgage loans to a Real Estate Mortgage Investment Conduit (the “REMIC” or “Trust”), which is a QSPE, as defined by SFAS 140 and accounts for the transfer as a sale of loans. The Trust, in

7The Company records a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized, as required by Statement of Financial Accounting Standards No. 109 (“SFAS 109”), Accounting for Income Taxes. In determining the possible realization of deferred tax assets, the Company considers future taxable income from the following sources: (i) the reversal of taxable temporary differences, (ii) taxable income from future operations and (iii) tax planning strategies that, if necessary, would be implemented to accelerate taxable income into periods in which net operating losses might otherwise expire.

~~Table~~The Company adopted FASB Interpretation 48, Accounting for Uncertainties (“FIN 48”) an interpretation of ~~Contents~~SFAS 109 on January 1, 2007. The Interpretation prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. The adoption of FIN 48 has resulted in a transition adjustment reducing beginning retained earnings by $751 thousand; $475 thousand in taxes; and $276 thousand in interest. If recognized, the tax portion of the adjustment would affect the effective tax rate. Interest costs and penalties related to income taxes are classified as interest expense and operating expenses from continuing operations in the Company’s financial statements. Open tax return years are subject to future examination by tax authorities. Federal tax returns are open for years 2003 and after and some material state tax returns are open for years 2002 and after.

~~ECC~~Stock-Based ~~CAPITAL~~Compensation ~~CORPORATION AND SUBSIDIARIES~~

~~NOTES~~On TOJanuary 1, ~~CONDENSED~~2006, ~~CONSOLIDATED~~the ~~FINANCIAL~~Company ~~STATEMENTS~~adopted the provisions of Statement of Financial Accounting Standards No. 123(R) (“SFAS 123(R)”), Share-Based Payment, and began recognizing stock option-based compensation expense in the consolidated statements of operations using the fair value based method applied on a modified prospective basis. Under this transition method, the Company has applied the provisions of SFAS 123(R) to awards granted after January 1, 2006. Additionally, the Company has eliminated its deferred compensation balance against additional paid in capital and will recognize compensation cost over the remaining service period for the portion of awards for which the requisite service period had not been rendered and remains outstanding as of January 1, 2006. The compensation cost for these awards is based on the grant date fair value, as calculated for the pro-forma disclosures previously required by Statement of Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation. See Note E for additional information on stock-based compensation.

~~turn,~~Income/Loss ~~issues~~Per ~~interest~~Share bearing asset-backed securities (the “Certificates”). The Certificates are sold without recourse except that the Company provides representations and warranties customary to the mortgage banking industry with respect to loans transferred to the Trust. The Trust uses the cash proceeds from the sale of the Certificates to pay the Company the purchase price for the mortgage loans. The Trust also issues certificates representing interests in the excess interest spread and other residuals. The excess interest spread represents the present value of estimated cash flows that the holder of such Certificates will receive as a result of the interest collected from borrowers exceeding the interest paid to security holders by the Trust. The Company retained the Certificates from securitizations in 2003, 2004, and 2006 representing the excess interest spread and other residuals, referred to as residual interests.

InBasic ~~such~~income/loss ~~transactions,~~per ~~the~~share ~~Company~~is ~~allocates~~computed ~~its basis in the mortgage loans and residual interests~~by ~~between~~dividing ~~the~~losses ~~portion~~available ofto ~~the~~stockholders ~~assets~~by ~~sold through~~ the ~~Certificates~~weighted ~~and~~average ~~the~~number ~~portion~~ of ~~retained~~common ~~interests~~shares ~~based~~outstanding onfor the ~~relative~~period. ~~fair~~The ~~values~~weighted average number of ~~those~~common ~~portions~~shares onincludes ~~the~~actual ~~date~~shares of ~~sale.~~common ~~The~~stock ~~Company~~outstanding ~~recognizes~~during ~~gains~~the orperiod ~~losses~~weighted ~~attributable~~from to the ~~changes in the~~ ~~fair~~date ~~value~~ of ~~the residual interests~~issuance, ~~which~~less ~~are~~unvested ~~recorded~~restricted atstock. ~~estimated~~Basic ~~fair value~~ and ~~accounted~~diluted ~~for~~earnings asper ~~either~~share ~~available-for-sale~~have orbeen ~~trading~~calculated ~~securities.~~based Aton ~~June 30,~~weighted ~~2006,~~average ~~the~~shares ~~Company~~outstanding ~~had~~of $1100,~~520~~836,000 ~~in residual interests classified as available-for-sale~~ and ~~$62~~99,~~955~~617,000 inshares ~~residual~~for ~~interests classified as trading securities. The Company determines~~ the ~~estimated~~three ~~fair~~months ~~value~~ended of the residual interests by discounting the expected cash flows released from the Trust (the cash out method) using a discount rate commensurate with the risks involved. In accordance with Emerging Issues Task Force 99-20 (“EITF 99-20”)March 31, ~~Recognition~~2007 ~~of Interest Income~~ and ~~Impairment on Purchased and Retained Beneficial Interests in Securitized~~2006, ~~Financial Assets~~respectively, ~~increases to the fair value of available-for-sale residual interests are recorded~~ as ~~unrealized~~using ~~gains, net of tax, as a component of other comprehensive income, with~~ the ~~yield~~diluted ~~being~~shares ~~adjusted~~outstanding onin ~~a prospective basis. Decreases to~~ the ~~fair~~calculation ~~value,~~would ~~that~~have ~~are~~had ~~considered~~an toanti-dilutive beeffect ~~other~~due ~~than temporary, are recorded as a loss against earnings in the period of the change. Changes~~ to the ~~fair~~Company ~~value~~incurring ~~of trading residual interests are recorded through earnings as~~ a ~~component of the gain or~~ loss onfor ~~trading~~both ~~securities and derivative instruments~~periods.

~~The~~9 Certificate holders and their securitization trusts have no recourse to the Company for failure of mortgage loan borrowers to pay when due. The Company’s residual interests are subordinated to the Certificates until the Certificate holders are fully paid.

~~Derivative~~Loss ~~Instruments~~per share was calculated as follows:

In connection with the Company’s strategy to mitigate interest rate risk on its residual assets, mortgage loans held for sale and the repricing of long-term debt issued in securitization transactions, the Company uses derivative financial instruments such as Eurodollar futures contracts, interest rate caps, and interest rate swaps. It is not the Company’s policy to use derivatives to speculate on interest rates. These derivative instruments are intended to provide income and cash flow to partially offset changes in interest income and cash flows as interest rates change. The derivative financial instruments and any related margin accounts are included in derivative instruments on the consolidated balance sheets and are carried at their fair value. Changes in the fair value of derivative instruments are reported as gain on trading securities and derivative instruments within the consolidated statements of operations. The Company held the following positions in derivatives (in thousands):


	For the three months ended March 31,
	2007			2006
	(in thousands, except per share data)
(Loss) income from continuing operations	$	(17,981	)	$	11,284

Income (loss) from discontinued operations	$	10,973		$	(17,659	)

Net loss	$	(7,008	)	$	(6,375	)

Weighted average number of shares outstanding		100,836			99,617
Weighted average number of unvested restricted stock		N/A			N/A
Net shares assumed issued using the treasury stock method for options outstanding during each period based on average market price		N/A			N/A

Diluted shares		100,836			99,617

Income / (loss) per share from continuing operations:
Basic	$	(0.18	)	$	0.11
Diluted	$	(0.18	)	$	0.11
Income / (loss) per share from discontinued operations:
Basic	$	0.11		$	(0.17	)
Diluted	$	0.11		$	(0.17	)
Loss per share:
Basic	$	(0.07	)	$	(0.06	)
Diluted	$	(0.07	)	$	(0.06	)

	June 30, 2006					December 31, 2005
Contract	Notionalamount		Fairvalue			Notionalamount		Fairvalue			Term
	(unaudited)
Eurodollar futures	$	6,045,000	$	7,565		$	7,430,000	$	(1,032	)	Various through March 2010
Eurodollar margin deposits		N/A		(4,950	)		N/A		6,497		N/A
Interest rate swaps		1,487,504		28,415			1,688,582		19,031		Amortizing through February 2010
Interest rate cap		2,583,083		39,284			2,816,892		34,452		Amortizing through February 2008
			$	70,314				$	58,948

Recent Accounting Pronouncements

~~The~~In ~~notional~~February ~~amount~~2006, ofthe ~~Eurodollar~~Financial ~~futures~~Accounting ~~contracts~~Standards isBoard ~~greater~~(“FASB”) ~~than~~issued ~~the~~Statement ~~outstanding~~of ~~balance~~Financial ofAccounting ~~items~~Standards ~~they~~No. 155 ~~hedge because~~(“SFAS ~~there~~155”), ~~are~~Accounting ~~multiple~~for ~~Eurodollar~~Certain ~~futures~~Hybrid ~~contracts~~Financial Instruments—an atamendment ~~various~~of ~~maturities~~FASB ~~covering~~Statements ~~the~~No. 133 ~~same~~and ~~hedged~~140. ~~items~~SFAS ~~for~~155 ~~different~~permits ~~periods.~~fair ~~During~~value ~~the~~measurement ~~six~~for ~~months~~certain ~~ended~~hybrid ~~June 30~~instruments, ~~2006,~~clarifies ~~the~~which ~~Company~~interest-only ~~recorded~~and aprincipal-only ~~gain~~strips ofare ~~$38,368,000~~subject ~~related~~ to ~~these~~Statement of Financial ~~derivatives,~~Accounting ~~representing~~Standards ~~$24~~No. 133 (“SFAS 133”),~~743,000~~ inAccounting ~~fair~~for ~~value~~Derivative ~~adjustments~~Instruments and ~~settlement~~Hedging ~~receipts of $13~~Activities,~~625,000~~ onclarifies ~~the swaps~~ and ~~caps.~~establishes ~~The~~requirements ~~Company~~related isto ~~required~~derivatives byembedded ain ~~counterparty~~beneficial tointerests ~~maintain~~issued ain ~~margin~~securitizations, and ~~deposit~~amends ~~against~~SFAS ~~the~~140 ~~Eurodollar~~to ~~futures.~~eliminate As the ~~counterparty and~~prohibition ~~the~~on ~~Company~~QSPEs ~~have~~holding acertain ~~right~~derivative offinancial ~~offset~~instruments. onSFAS ~~the~~155 ~~margin~~is ~~deposits~~effective ~~against~~for ~~the~~fiscal ~~Eurodollar~~years ~~futures~~beginning after September 15, ~~the~~2006. ~~net~~The ~~margin~~Company’s ~~deposit~~adoption of ~~$2,615,000~~SFAS is155 ~~included~~has ~~with~~not ~~the~~had ~~carrying~~a material ~~value~~effect ~~of derivative instruments~~ on ~~the~~its ~~consolidated~~financial ~~balance sheets~~statements.

8In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156 (“SFAS 156”), Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140. SFAS 156 requires companies to record a servicing asset or servicing liability each time they undertake an obligation to service a financial asset from (i) the transfer of financial assets that meet the requirements for sale accounting, (ii) a transfer of financial assets to a QSPE in a guaranteed mortgage securitization in which the transferor retains the securities and accounts for them as available-for-sale or trading, or (iii) an acquisition or assumption of an obligation to service financial assets that does not relate to financial assets of the servicer or its affiliates. In addition, SFAS 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. SFAS 156 is effective for fiscal years beginning after September 15, 2006. The Company’s adoption of SFAS 156 has not had a material effect on its financial statements.

~~Table~~In September 2006, the FASB issued Statement of ~~Contents~~Financial Accounting Standards No. 157 (“SFAS 157”), Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted

~~ECC~~10 ~~CAPITAL CORPORATION AND SUBSIDIARIES~~

~~NOTES~~ accounting TOprinciples ~~CONDENSED~~(GAAP), ~~CONSOLIDATED~~and ~~FINANCIAL~~expands ~~STATEMENTS~~disclosures about fair value measurements. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is presently evaluating the impact of the adoption of SFAS 157 on its financial statements.

~~Securities~~In ~~Sold~~February ~~Under~~2007, ~~Agreements~~the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS 159”), Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to ~~Repurchase~~choose to measure many financial instruments and certain other items at fair value. The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is presently evaluating the impact of the adoption of SFAS 159 on its financial statements.

~~Transactions~~Reclassifications involving sales of securities under agreements to repurchase are recorded at their contractual amounts plus accrued interest and are accounted for as collateralized financings. As of June 30, 2006 and December 31, 2005, the Company had pledged retained interests from both its on-balance sheet securitizations and off-balance sheet securitizations in order to secure borrowings of $66,817,000 and $13,074,000, respectively. The approximate value of residual interests pledged from off-balance sheet securitizations was $31,232,000 and $0 at June 30, 2006 and December 31, 2005, respectively. The retained interests from on-balance sheet securitizations are not separately identified in the Company’s consolidated financial statements, as the mortgage loans underlying the cash flows remain on the balance sheet. As of June 30, 2006 and December 31, 2005, these borrowings carry a weighted average interest rate of 7.62% and 4.84%, respectively. The Company has guaranteed repayment of these borrowings to the counterparties.

~~Income~~Certain ~~Taxes~~reclassifications have been made to prior years’ balances to conform to the March 31, 2007 presentation.

~~The~~NOTE ~~Company~~B—LOANS isHELD ~~not subject~~FOR toINVESTMENT tax on the earnings of the REIT it distributes to its stockholders as long as it distributes at least 90% of its taxable REIT earnings to its stockholders each taxable year and satisfies other qualifying tests. The Company has elected to have its wholly-owned subsidiary, Encore Credit Corp., treated as a taxable REIT subsidiary (“TRS”). As a TRS, Encore Credit Corp. is subject to federal and state taxes on its income. Accordingly, the Company reports a provision for taxes based upon the earnings of Encore Credit Corp. using the asset and liability method of accounting for income taxes.

~~Under~~The ~~the~~components ~~asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts~~ of ~~existing assets and liabilities and their respective tax bases. Deferred~~mortgage ~~tax~~loans ~~assets~~held ~~and liabilities are measured using enacted tax rates~~ for ~~the~~investment ~~periods~~at inMarch 31, ~~which~~2007 ~~the differences are expected to reverse. The effect on deferred tax assets~~ and ~~liabilities~~December 31, of2006 awere ~~change~~as infollows: ~~tax rates is recognized in income in the period that includes the enactment date.~~

The Company records a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized, as required by Statement of Financial Accounting Standards No. 109 (“SFAS 109”), Accounting for Income Taxes. In determining the possible realization of deferred tax assets, the Company considers future taxable income from the following sources: (i) the reversal of taxable temporary differences, (ii) taxable income from future operations and (iii) tax planning strategies that, if necessary, would be implemented to accelerate taxable income into periods in which net operating losses might otherwise expire.


	March 31, 2007			Weighted Average Coupon		December 31, 2006			Weighted Average Coupon
	(in thousands)
Unpaid principal balance of mortgage loans	$	2,123,221		7.52	%	$	2,422,217		7.22	%
Net deferred origination costs and discount		20,214					24,298
Allowance for loan losses		(45,766	)				(43,425	)

	$	2,097,669				$	2,403,090

~~Loan~~The ~~sales~~following ~~from~~table ~~Encore~~presents ~~Credit~~a tosummary ~~the REIT are recorded at estimated fair value as~~ of the ~~date~~activity offor ~~sale and~~ the ~~gain~~allowance orfor ~~loss~~losses on ~~sale~~mortgage isloans ~~included~~held ~~in the taxable income of Encore Credit and loan premium is recorded in ECC Capital’s separate accounts. The intercompany gain or loss and~~for ~~loan~~investment ~~premium are eliminated upon consolidation~~ for ~~financial~~the ~~reporting~~three ~~purposes.~~months ~~The~~ended ~~difference~~March 31, ~~between~~2007 ~~ECC Capital’s tax basis in the acquired loans~~ and ~~the~~2006: ~~basis in the loans for financial reporting purposes is not considered a temporary difference for which deferred taxes are provided.~~

Stock-Based Compensation


	For the three months ended March 31,
	2007			2006
	(in thousands)
Beginning balance	$	43,425		$	40,862
Additions		12,688			6,099
Charge-offs, net		(10,347	)		(1,195	)

Ending balance	$	45,766		$	45,766

OnNOTE ~~January 1,~~C—RESIDUAL ~~2006,~~INTERESTS ~~the~~IN ~~Company~~SECURITIZATIONS adopted the provisions of Statement of Financial Accounting Standards No. 123(R) (“SFAS 123(R)”), Share-Based Payment, and began recognizing stock option-based compensation expense in the consolidated statements of operations using the fair value based method applied on a modified prospective basis. Under this transition method, the Company has applied the provisions of SFAS 123(R) to awards granted after January 1, 2006. Additionally, the Company has eliminated its deferred compensation balance against additional paid in capital and will recognize compensation cost over the remaining service period for the portion of awards for which the requisite service period had not been rendered and remains outstanding as of January 1, 2006. The compensation cost for these awards is based on the grant date fair value, as calculated for the pro-forma disclosures previously required by Statement of Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation. See Note G for additional information on stock-based compensation.

~~Loss~~The ~~Per~~following ~~Share~~table summarizes activity in residual interests:

Basic loss per share is computed by dividing losses available to stockholders by the weighted average number of common shares outstanding for the period. The weighted average number of common shares includes actual shares of common stock outstanding during the period weighted from the date of issuance, less unvested restricted stock. Basic and diluted earnings per share have been calculated based on weighted average shares outstanding of 99,810,000 and 97,088,000 shares for the three


	For the three months ended March 31,
	2007			2006
	(in thousands)
Beginning balance	$	45,920		$	14,753
Residual interests		—			—
Mark-to-market adjustment		(2,731	)		80
Accretion of residual interests		3,355			1,523
Cash received from residual interests		(36,418	)		(25	)

Ending balance	$	10,126		$	16,331

9The Company uses certain assumptions and estimates to determine the fair value allocated to the residual interests at the time of initial sale and each subsequent reporting date in accordance with SFAS 140. These assumptions and estimates include projections concerning the various rate indices applicable to the Company’s loans and the pass-through rate paid to bondholders, credit loss experience, prepayments rates, and a discount rate commensurate with the risks involved. These assumptions are reviewed periodically by management. If these assumptions change, the related asset and income would be affected.

~~Table~~11 ~~of Contents~~

~~ECC~~The ~~CAPITAL~~Company ~~CORPORATION~~completed ~~AND~~a ~~SUBSIDIARIES~~securitization of approximately $1.1 billion in assets in May 2006. The fair value assigned to the residual interests at the date of securitization was $50,184,000. Key economic assumptions used to measure the residual interest at this date were as follows: prepayment curves that resulted in a weighted average life of 1.88 years; a weighted average static pool loss of 4.29%; a discount rate of 18.00%; and the actual LIBOR forward curve at the time of the securitization. At the date of the securitization, the Company recorded a $1.3 million loss on sale of loans in accordance with SFAS 140. In July 2006, the Company sold a portion of its residual interests in this securitization which reduced the fair value of the residual interests to approximately $33 million. In February 2007, the Company completed the sale of its remaining interests in this securitization for $20 million. As of December 31, 2006, residual interests were valued at $20 million and a mark-to-market loss of approximately $13 million was recorded on this asset.

~~NOTES~~Unpaid TOloan ~~CONDENSED~~principal ~~CONSOLIDATED~~balances ~~FINANCIAL~~underlying ~~STATEMENTS~~the Company’s residual interests in securitizations aggregate $199,155,000 as of March 31, 2007. A total of 14.4% of unpaid principal balances are delinquent 60 or more days, in bankruptcy or foreclosure or are real estate owned.

~~months~~As ~~ended~~of ~~June~~March 3031, ~~2006~~2007 and December 31, ~~2005 and 99~~2006,~~780,000~~ ~~and~~key ~~79,377,000~~economic ~~shares~~assumptions ~~for~~and the ~~six~~sensitivity ~~months~~of ~~ended~~the ~~June 30,~~current ~~2006~~fair ~~and~~value ~~2005,~~of ~~respectively,~~residual asinterests ~~using the~~in ~~diluted~~securitizations ~~shares~~to ~~outstanding~~immediate in10% ~~the~~and ~~calculation~~20% ~~would~~adverse ~~have~~changes ~~had~~in anthose ~~anti-dilutive~~assumptions ~~effect~~are ~~due~~illustrated toin the ~~Company~~following ~~incurring~~table: ~~a loss.~~

Losses per share were calculated as follows:


	March 31, 2007			December 31, 2006
	(in thousands)
Carrying value/fair value of residual interests	$	10,126		$	45,920

Assumed weighted average life in years		0.60			0.38
Decline in fair value with 10% adverse change	$	(146	)	$	(134	)
Decline in fair value with 20% adverse change	$	(295	)	$	(259	)

Assumed cumulative pool losses		1.19	%		1.71	%
Decline in fair value with 10% adverse change	$	146		$	303
Decline in fair value with 20% adverse change	$	371		$	647

Assumed discount rate		27.38	%		20.14	%
Decline in fair value with 10% adverse change	$	126		$	138
Decline in fair value with 20% adverse change	$	248		$	272

Interest rate assumptions					1-month LIBOR
Decline in fair value with 10% adverse change	$	127		$	164
Decline in fair value with 20% adverse change	$	365		$	113

	For the three months endedJune 30,						For the six months endedJune 30,
	2006			2005			2006			2005
	(in thousands, except per share data)
	(unaudited)
Basic and diluted loss	$	(18,585	)	$	(33,965	)	$	(24,960	)	$	(36,663	)
Weighted average number of shares issued		99,810			97,088			99,780			79,377
Weighted average number of unvested restricted stock		N/A			N/A			N/A			N/A
Net shares assumed issued using the treasury stock method for options outstanding during each period based on average market price		N/A			N/A			N/A			N/A
Net shares assumed issued using the treasury stock method for warrants outstanding during each period based on average market price		N/A			N/A			N/A			N/A
Dilutive effect on assumed conversion of preferred stock outstanding		N/A			N/A			N/A			N/A
Diluted shares		99,810			97,088			99,780			79,377
Loss per share:
Basic	$	(0.19	)	$	(0.35	)	$	(0.25	)	$	(0.46	)
Diluted	$	(0.19	)	$	(0.35	)	$	(0.25	)	$	(0.46	)

These sensitivities are hypothetical and should be used with caution as immediate adverse changes could exceed 20%. As the amounts indicate, changes in fair value based on a 10% and 20% variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a

~~Recent~~12 ~~Accounting Pronouncements~~

~~In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 155 (“SFAS 155”),~~ ~~Accounting~~variation ~~for~~in ~~Certain~~a ~~Hybrid~~particular ~~Financial~~assumption ~~Instruments—an~~on ~~amendment~~the ~~of FASB Statements No. 133 and 140. SFAS 155 permits~~ fair value ~~measurement~~of ~~for~~the ~~certain~~residual ~~hybrid instruments, clarifies which~~ interest~~-only~~ ~~and~~is ~~principal-only strips~~calculated ~~are~~without ~~subject~~changing toany ~~Statement~~other ofassumption ~~Financial Accounting Standards No. 133 (“SFAS 133”)~~when, ~~Accounting~~in ~~for Derivative Instruments and Hedging Activities~~reality, ~~clarifies~~changes in ~~and~~one ~~establishes~~factor ~~requirements~~may ~~related~~result ~~to derivatives embedded~~ in ~~beneficial~~ ~~interests~~changes ~~issued~~ in ~~securitizations,~~another ~~and amends SFAS 140 to eliminate the prohibition on QSPEs holding certain derivative financial instruments. SFAS 155 is effective~~ (for ~~fiscal years beginning after September 15~~example, ~~2006.~~increases ~~The~~in ~~Company does~~interest ~~not~~rates ~~presently~~may ~~believe~~result ~~that~~in ~~adoption~~lower ofprepayments ~~SFAS~~and ~~155~~higher ~~will~~credit ~~have~~losses) awhich ~~material~~may ~~effect~~magnify onor ~~its~~counteract ~~financial~~the ~~statements~~sensitivities.

InNOTE ~~March 2006, the FASB issued Statement of Financial Accounting Standards No. 156 (“SFAS 156”), Accounting for Servicing of Financial Assets~~D—an amendment of FASB Statement No. 140. SFAS 156 requires companies to record a servicing asset or servicing liability each time they undertake an obligation to service a financial asset from (i) the transfer of financial assets that meet the requirements for sale accounting, (ii) a transfer of financial assets to a QSPE in a guaranteed mortgage securitization in which the transferor retains the securities and accounts for them as availableLONG-~~for-sale~~TERM orDEBT trading, or (iii) an acquisition or assumption of an obligation to service financial assets that does not relate to financial assets of the servicer or its affiliates. In addition, SFAS 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. SFAS 156 is effective for fiscal years beginning after September 15, 2006. The Company does not presently believe that adoption of SFAS 156 will have a material effect on its financial statements.

InLong-term ~~June~~debt comprises mortgage-backed securities secured solely by mortgages transferred to the related securitization trust and are non-recourse to the Company. The principal and interest payments on the mortgages provide the funds to pay debt service on the securities. The interest rate on the securities resets monthly and is based upon one-month LIBOR. The weighted average interest rate payable on the Company’s long-term debt at March 31, 2007 and December 31, 2006 was 5.80% and 5.76%, respectively. As principal payments on the ~~FASB~~underlying mortgages are paid through to reduce principal on the bonds, the term of the bonds is ultimately a function of the rate at which principal is paid on the mortgages. Based upon anticipated prepayment speeds the ~~issued~~Company ~~FASB~~estimates ~~Interpretation~~that Nothe bonds will be fully repaid by 2015. 48 (However, the bonds have a “~~FIN~~clean-up 48call”), ~~Accounting~~provision ~~for~~which ~~Uncertainty~~allows inthe ~~Income~~Company ~~Taxes—an~~to ~~interpretation~~dissolve the trust and repay outstanding bonds when the remaining principal balance of ~~FASB~~the underlying ~~Statement~~loans Nois 10% or less of their original balance. ~~109.~~ ~~FIN~~If 48the ~~clarifies~~Company exercises this call provision, the ~~accounting~~Company ~~for~~estimates ~~uncertainty~~that inthe ~~income~~bonds ~~taxes~~could ~~recognized~~be infully arepaid as early as 2009. However, the timing of when the Company may be able to exercise the ~~company’s~~call ~~financial~~provision ~~statements~~may ~~and~~be ~~prescribes~~delayed abased ~~recognition~~upon ~~threshold~~the ~~and~~recent ~~measurement~~tightening ~~attribute~~of credit standards for subprime borrowers and the ~~financial~~continued ~~statement~~deterioration of the subprime lending industry.

10As of March 31, 2007 and December 31, 2006, the balance of long-term debt comprises the following:


	March 31, 2007			December 31, 2006
	(in thousands) (unaudited)
Securitized bonds	$	2,100,481		$	2,389,084
Discount on bonds		(6,177	)		(6,971	)
Accrued interest on securitized bonds		1,616			1,912

Total financing on mortgage loans held for investment	$	2,095,921		$	2,384,025

~~ECC~~Costs ~~CAPITAL~~associated ~~CORPORATION~~with ~~AND~~issuing ~~SUBSIDIARIES~~long-term debt were capitalized and are being amortized as a component of interest expense over the estimated term of the debt, expecting that the debt will be paid fully from the cash flows from the underlying collateral. Through March 31, 2007 total deferred bond issue costs of $16,168,000 were capitalized. The balance of deferred bond issue costs at March 31, 2007 and December 31, 2006, net of accumulated amortization, was $4,314,000 and $5,528,000, respectively, and is included in prepaid expenses and other assets.

~~NOTES~~The TOdiscount ~~CONDENSED~~on ~~CONSOLIDATED~~bonds ~~FINANCIAL~~reflects ~~STATEMENTS~~the difference between the proceeds received from the sale of the bonds and the face amount to be repaid over the life of the bonds. The discount is being amortized as an adjustment of interest expense over the estimated life of the bonds.

~~recognition~~NOTE ~~and measurement of a tax position taken or expected to be taken in a tax return. This evaluation is done through a two~~E—STOCK-~~step~~BASED ~~process, which~~COMPENSATION requires a company (1) to determine whether it is more likely than not that a tax position will be sustained upon examination by a taxing authority and (2) to determine the amount of benefit to recognize in the financial statements. The amount recognized should be the largest amount of benefit that has greater than fifty percent likelihood of being realized upon ultimate settlement. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the effect, if any, the adoption of FIN 48 may have on its financial statements.

~~Reclassifications~~Stock option activity during the three months ended March 31, 2007 was as follows:

~~Certain~~13 ~~reclassifications have been made to prior year’s balances to conform to the June 30, 2006 presentation.~~

NOTE B - LOANS HELD FOR SALE


	Number of shares underlying options		Weighted average exercise price
Balance at December 31, 2006	2,630,691		$	3.29
Granted	—
Exercised	(50,000	)	$	0.43
Forefeited or expired	(740,229	)	$	1.91

Balance at March 31, 2007	1,840,462		$	3.92

~~Mortgage~~No ~~loans~~options ~~held~~were ~~for~~granted ~~sale~~during atthe ~~June 30,~~three ~~2006~~months ~~and~~ended ~~December~~March 31, ~~2005~~2007. ~~consisted of the following:~~

	June 30,2006			WeightedAverageCoupon		December 31,2005			WeightedAverageCoupon
	(in thousands)
	(unaudited)
Mortgage loans held for sale	$	1,473,424		8.28	%	$	2,762,399		8.08	%
Net deferred origination costs		4,029					22,549
Lower of cost or market adjustment		(20,791	)				(40,525	)
Loans, net	$	1,456,662				$	2,744,423

In connection with the sale of the mortgage banking operations to Bear Stearns, the Company accelerated the vesting of 279,208 stock options with an exercise price less than $1.50 for those employees that were terminated in connection with the termination of their employment by Performance Credit. On May 9 and 10, 2007, approximately 1,000,000 options expired unexercised leaving approximately 789,000 options outstanding.

InCompensation ~~June~~related ~~2006,~~to ~~the~~restricted ~~Company~~stock ~~received~~for ~~approximately $15.1 million in connection with a whole loan sale, which did not meet~~ the ~~criteria~~first ~~for~~quarter ~~recording~~2007 ~~as a sale. Accordingly, this amount~~ is ~~recorded as an “Advance on uncompleted loan sale” on the consolidated balance sheets as of June 30~~$500, ~~2006~~602. The ~~transfer~~remaining ~~was~~unamortized ~~completed~~restricted instock ~~July~~expense ~~2006,~~ at ~~which time a~~ ~~sale~~March 31, ~~was~~2007 ~~recorded~~is $594,685.

~~Gain~~Under the provisions of SFAS 123(~~loss~~R), the Company calculates the expected term of option grants using the “simplified method”, as defined by Securities and Exchange Commission Staff Accounting Bulletin No. 107 (“SAB 107”). Under the “simplified method”, the expected term for “plain vanilla” options is calculated as the average of the vesting term and the contractual term. The risk free interest rate is based on ~~sale~~the U.S. Treasury rate at the date of ~~loans~~grant ~~was~~with ~~comprised~~the maturity date approximately equal to the expected life of the ~~following~~option. ~~components~~Volatility ~~for~~is calculated based on historical stock price volatility of the ~~three~~Company and ~~six~~similar ~~months~~entities ~~ended~~over ~~June 30,~~a ~~2006~~period that approximates the expected term. The dividend rate is based upon historical dividend distributions and ~~2005:~~is adjusted based on the dividend yield of similar entities to reduce volatility in calculating this assumption.

	For the three months ended June 30,						For the six months endedJune 30,
	2006			2005			2006			2005
	(in thousands)
	(unaudited)
Net premium (discount) from whole-loan sales	$	3,095		$	12,559		$	(1,281	)	$	27,094
Provision for repurchases		(8,753	)		(1,982	)		(16,214	)		(2,749	)
Non-refundable loan fees, net		(497	)		(286	)		(1,200	)		(265	)
Lower of cost or market adjustment for loans held for sale		(7,636	)		(1,300	)		14,256			(1,417	)
Deferred origination costs		(8,111	)		(8,723	)		(24,562	)		(15,939	)
Gain (loss) on sale of loans, net	$	(21,902	)	$	268		$	(29,001	)	$	6,724

During the three months ended March 31, 2007, the Company included $20,095 in stock based compensation expense in the consolidated statements of operations. The Company has no remaining unamortized option expense as of March 31, 2007.

11Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

~~Table~~The following discussion and analysis of ~~Contents~~our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes contained in this report and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2006. The following discussion and analysis discusses our financial condition and results of our operations on a consolidated basis, unless otherwise indicated. Except for the historical information contained herein, the following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements.

~~ECC~~Sale ~~CAPITAL~~of ~~CORPORATION~~mortgage ~~AND~~banking ~~SUBSIDIARIES~~business

~~NOTES~~On TOFebruary 9, ~~CONDENSED~~2007, ~~CONSOLIDATED~~we ~~FINANCIAL~~closed ~~STATEMENTS~~the sale of its mortgage banking operations to Bear Stearns and settled the sale of approximately $1.2 billion in mortgage loans to Bear Stearns, subject to certain price adjustments and call rights. Upon completion of the transaction, we effectively exited the wholesale mortgage origination business, agreeing not to compete in the subprime wholesale mortgage origination business for a period of two years. Accordingly, the disposition of the mortgage banking operations is being reported as a discontinued operation for the year ended December 31, 2006 and the three months ended March 31, 2007. As Bear Stearns also acquired use of the Encore Credit name, we changed the name of Encore Credit Corp. to Performance Credit Corporation, which remains our wholly-owned subsidiary.

~~NOTE~~14 ~~C - LOANS HELD FOR INVESTMENT~~

~~The~~Following ~~components~~the transaction, we continue to own and manage interests in securitization trusts which issued securities collateralized by mortgages on residential real estate. Our principal sources of ~~mortgage~~revenue are net interest income on our portfolio of loans held for investment atand ~~June 30,~~interest ~~2006~~accretion ~~and~~on ~~December 31~~our investments in residual interests in our securitizations. As part of managing our portfolio of loans held for investment, ~~2005~~we ~~were~~may also originate mortgage loans as ~~follows:~~a broker to generate additional revenue from borrowers wishing to prepay their mortgage loans or to facilitate the workout or modification of a loan to mitigate losses. We refer to this as portfolio protection. Revenue we generate from our portfolio protection activities is not material to our financial statements.

	June 30,2006			WeightedAverageCoupon		December 31,2005			WeightedAverageCoupon
	(in thousands)
	(unaudited)
Unpaid principal balance of mortgage loans	$	3,232,921		7.21	%	$	4,214,624		7.29	%
Net deferred origination costs and discount		34,039					48,301
Allowance for loan losses		(48,901	)				(40,862	)
	$	3,218,059				$	4,222,063

We are currently evaluating various operating alternatives which include, among other things, managing our existing investments in our securitizations, acquiring loan portfolios for securitization and making investments in other residual interests in securitizations. We intend to maintain our REIT status for the period of time during which we hold residual interests in our securitizations. As a REIT, earnings we distribute to our stockholders are not subject to income tax for federal or state purposes as long as we distribute at least 90% of our taxable earnings and satisfy certain other qualifying tests.

~~The~~General ~~following table presents a summary of the activity for the allowance for losses on mortgage loans held for investment for the six months ended June 30, 2006 and 2005:~~

	For the six months endedJune 30,
	2006			2005
	(in thousands)
	(unaudited)
Beginning balance	$	40,862		$	—
Additions		11,520			6,010
Charge-offs, net		(3,481	)		—
Ending balance	$	48,901		$	6,010

For the three months ended March 31, 2007, we reported a net loss of $7.0 million, compared to a net loss of $6.4 million for the three months ended March 31, 2006. The increase in losses in 2007 reflects a number of factors including the following:

~~NOTE~~• DNet –interest ~~RESIDUAL~~income ~~INTEREST~~from loans held for investment has declined reflecting (i) a significant decline in levels of interest earning assets as we have experienced prepayments through March 31, 2007 with no additions since the fourth quarter 2005, and (ii) higher borrowing costs, in particular with respect to the securitizations within the portfolio investment operations where borrowing costs adjust monthly and most of the adjustable rate mortgage loans have not reached scheduled interest rate reset dates;

~~The~~• ~~following~~We ~~table~~continued ~~summarizes~~to ~~activity~~experience inhigher ~~residual~~levels ~~interests:~~of delinquency and loss severity on mortgage loans held for investment. During the three months ended March 31, 2007, we accrued $12,688,000 allowance for loan loss; and

	For the six months endedJune 30,
	2006			2005
	(in thousands)
	(unaudited)
Beginning balance	$	14,753		$	20,167
Residual interest in securitization		50,185			—
Mark-to-market adjustment		(1,795	)		(5,059	)
Accretion of interest income		4,098			1,514
Cash received from residual interests		(2,766	)		(1,788	)
Ending balance	$	64,475		$	14,834

•

Net interest income from loans held for sale has declined as a result of the sale of the mortgage banking operations to Bear Stearns because Bear Stearns funded and acquired our loan production and the interest rate on the warehouse borrowings was equivalent to the weighted average coupon on the loans securing the borrowings.

~~Purchasers~~Critical ofAccounting ~~securitization~~Policies bonds and certificates have no recourse against the other assets of the Company, other than the assets of the trust. The value of the Company’s residual interests is subject to credit, prepayment and interest rate risk on the transferred financial assets.

~~The~~We ~~Company~~have ~~uses~~established ~~certain~~various ~~assumptions~~accounting ~~and~~policies ~~estimates~~that toapply ~~determine~~accounting ~~the~~principles generally ~~fair~~accepted ~~value~~in ~~allocated~~the toUnited ~~the~~States ~~residual~~of ~~interests~~America atin the ~~time~~preparation of ~~the~~our ~~initial~~historical ~~sale~~financial ~~and~~statements. ~~each~~Certain ~~subsequent~~accounting ~~reporting~~policies ~~date~~require inus ~~accordance~~to ~~with~~make ~~SFAS~~significant ~~140.~~estimates ~~These~~ and assumptions ~~and~~that ~~estimates~~may ~~include~~have ~~projections~~a ~~concerning~~material ~~the~~impact ~~various~~on ~~rate~~certain ~~indices~~assets ~~applicable~~and liabilities toor ~~the~~our ~~Company’s~~results ~~loans~~of operations, and ~~the~~we ~~pass-through~~consider ~~rate~~these ~~paid~~ to ~~bondholders,~~be ~~credit~~critical ~~loss~~accounting ~~experience,~~policies. ~~prepayments~~The ~~rates,~~estimates and aassumptions ~~discount~~used ~~rate~~are ~~commensurate~~based ~~with the~~on ~~risks~~historical ~~involved.~~experience ~~These~~and ~~assumptions~~other ~~are~~factors, ~~reviewed~~which ~~periodically~~we bybelieve ~~management~~to be reasonable under the circumstances. Actual Ifresults could differ materially from these ~~assumptions~~estimates ~~change~~and assumptions, ~~the~~which ~~related~~could ~~asset~~have ~~and~~a ~~income~~material ~~would~~impact beon ~~affected~~the carrying value of our assets and ~~the~~liabilities ~~change~~and ~~could~~our beresults ~~material~~of operations.

~~The~~We ~~Company~~believe ~~completed~~the afollowing ~~securitization~~are ofcritical ~~approximately~~accounting ~~$1.1~~policies ~~billion~~that inrequire ~~assets in May 2006. The fair value assigned to~~ the ~~residual~~most ~~interests~~significant atestimates ~~the~~and ~~date~~assumptions ~~of securitization~~that ~~was~~are ~~$50,185,000.~~subject ~~Key economic assumptions used~~ to ~~measure~~significant ~~the~~change ~~residual interest at this date were as follows: prepayment curves that resulted~~ in ~~a weighted average life of 1.88 years; a weighted average static pool loss of 4.29%; a~~the ~~discount~~preparation ~~rate~~ of ~~18.00%;~~our ~~and~~consolidated ~~the~~financial ~~actual~~statements: ~~LIBOR forward curve at the time of the securitization. At the date~~

12Mortgage Loans and Origination Costs and Fees

~~Table~~Our mortgage loans are classified as either held for sale or held for investment. Mortgage loans held for sale are carried at the lower of ~~Contents~~cost or market on an individual loan basis. Market value is determined by reference to prices obtained on recent sales of similar loans, planned loan sale transactions, or through loan pricing models. The provision to reduce held for sale loan inventory to the lower of cost or market is charged to gain on sale of loans.

~~ECC~~Mortgage ~~CAPITAL~~loans ~~CORPORATION~~that ~~AND~~we ~~SUBSIDIARIES~~securitize or expect to securitize through on balance sheet securitizations are classified as held for investment and carried at amortized cost. Mortgage loans transferred from held for sale to held for investment are transferred at the lower of cost or market at the date of the transfer.

~~NOTES~~We TOcapitalize ~~CONDENSED~~the ~~CONSOLIDATED~~fees ~~FINANCIAL~~received ~~STATEMENTS~~from borrowers at the time of loan origination, and various costs of originating loans, which consist of fees and premiums paid to brokers, as well as certain direct internal costs. Net capitalized origination costs and fees on loans held for sale are charged to expense at the time the related loans are sold and reduce the gain on sale recorded. Net capitalized origination costs and fees on loans held for investment are amortized as a component of interest income over the life of the portfolio using the effective yield method in a manner that anticipates prepayments. At each reporting period, if a difference arises between the prepayments anticipated and actual prepayments received, we will recalculate the effective yield to reflect actual prepayments to date and anticipated future prepayments. Accordingly, if actual prepayment speeds exceed anticipated prepayment speeds we will be required to record additional interest expense.

of15 ~~the securitization, the Company recorded a $1.3 million loss on sale of loans in accordance with SFAS 140.~~

AsAllowance offor ~~June 30,~~Losses ~~2006~~on ~~and~~Mortgage ~~December 31,~~Loans ~~2005,~~Held ~~key~~for ~~economic~~Investment ~~assumptions and the sensitivity of the current fair value of residual interests in securitizations to immediate 10% and 20% adverse changes in those assumptions are illustrated in the following table:~~

	June 30, 2006			December 31, 2005
	(in thousands)
Carrying value/fair value of residual interests	$	64,475		$	14,753
Assumed weighted average life in years		1.60			0.55
Decline in fair value with 10% adverse change	$	5,447		$	3,674
Decline in fair value with 20% adverse change	$	9,177		$	4,757
Assumed cumulative pool losses		3.51	%		1.40	%
Decline in fair value with 10% adverse change	$	12,627		$	1,584
Decline in fair value with 20% adverse change	$	16,930		$	2,791
Assumed discount rate		18.31	%		19.49	%
Decline in fair value with 10% adverse change	$	10,745		$	199
Decline in fair value with 20% adverse change	$	12,374		$	395
Interest rate assumptions		1-month LIBOR			1-month LIBOR
Decline in fair value with 10% adverse change	$	9,726		$	983
Decline in fair value with 20% adverse change	$	10,692		$	1,939

For our mortgage loans held for investment, we establish an allowance for loan losses based on our estimate of losses inherent and probable as of the balance sheet date. We periodically conduct reviews of all loans held in our portfolio in order to determine collectibility. We determine the amount of the loss allowance for these loans based on a review of static pools, gross defaults, recovery rate trends, current economic conditions and trends, and other relevant data. To date, we have had minimal losses; however, as our portfolio continues to mature and we experience more losses, we plan to compare actual loss performance to original loss assumptions and, if necessary, make adjustments to the allowance for losses. In order to increase allowances, a loan loss provision is charged to the statement of operations, resulting in a reduction to earnings. Loans that are deemed to be uncollectible will be charged off and deducted from the allowance. Recoveries on loans previously charged off will be added to the allowance. As our portfolio of loans held for investment increases and ages, we would expect a corresponding increase in our allowance for losses.

~~These~~Our ~~sensitivity~~estimate ~~analyses~~of ~~are~~expected ~~hypothetical~~losses ~~and~~could ~~should~~increase beif ~~used~~our ~~with~~actual ~~caution.~~loss Asexperience ~~the~~is ~~figures~~different ~~indicate,~~than ~~changes~~originally ~~in fair~~estimated, ~~value~~or ~~based~~if oneconomic afacts ~~10% and 20% variation in assumptions generally cannot be extrapolated because the relationship of the~~ change in the ~~assumption to the change in fair~~ value ~~may~~we ~~not~~could bereasonably ~~linear.~~expect ~~Also,~~to ~~the~~obtain ~~effect~~from of a ~~variation~~sale. inIn a particular ~~assumption~~, onif ~~the~~actual ~~fair~~losses ~~value~~increase, of the ~~residual~~allowance ~~interest~~for islosses ~~calculated~~would ~~without~~increase. ~~changing~~Any ~~any~~increase ~~other assumption when,~~ in ~~reality,~~the ~~changes~~allowance ~~in one factor may result in changes in another (~~for ~~example,~~losses ~~increases~~relating into ~~interest~~these ~~rates~~factors may ~~result~~adversely inaffect ~~lower prepayments~~our ~~and~~results ~~higher credit losses), which may magnify or counteract the sensitivities~~of operations.

13We cease accruing interest income on loans when any portion of principal or interest is 90 days past due, or earlier when any concern exists as to the ultimate collectibility of principal or interest. Interest income recognized prior to loans becoming 90 days past due is reversed.

~~Table~~Gain or Loss on Sale of ~~Contents~~Loans

~~ECC~~We ~~CAPITAL~~recognize ~~CORPORATION~~a ~~AND~~gain ~~SUBSIDIARIES~~or loss on the sale of our loans we sell through whole loan sales. Gains or losses resulting from these sales or securitizations of mortgage loans are recognized at the date of settlement and are based on the difference between the selling price for sales or securitizations and the carrying value of the related loans sold. As part of the sale of a mortgage loan, we sell the servicing rights. The purchasing company pays us a service release premium for that right. This premium is included in discontinued operations in the accompanying consolidated statements of operations.

~~NOTES~~Loan TOsales ~~CONDENSED~~and ~~CONSOLIDATED~~securitizations ~~FINANCIAL~~are ~~STATEMENTS~~accounted for as sales when control of the loans is surrendered, to the extent that consideration other than beneficial interests in the loans transferred is received in the exchange. Retained interests in securitizations accounted for as sales are measured by allocating the previous carrying value between the loans sold and the interests retained, if any, based on their relative fair values at the date of transfer.

~~NOTE~~Allowance Efor –Repurchase ~~WAREHOUSE~~Losses ~~AND REPURCHASE FACILITIES~~

The ~~Company~~terms of our loan sale agreements generally require us to repurchase loans where it has ~~entered~~been ~~into~~determined ~~warehouse~~that ~~line~~representations and warranties made by us at the time of ~~credit~~sale have been breached or loans for which the borrower has missed the first payment due to the purchaser of the loan. We will generally resell repurchased loans to other investors, ~~repurchase~~but at a discount to par or we will make a separate payment to investors to settle claims. We establish an allowance for such losses based upon our evaluation of historical experience with respect to the principal, premium, interest losses and ~~aggregation~~other ~~facilities~~costs, ~~for~~if any, expected to occur in the ~~funding~~fulfillment of our repurchase obligations. Losses incurred on mortgage loans asthat ~~follows:~~we have sold and subsequently repurchased are charged to the allowance for repurchase losses.

			Advanced amount
Maximumwarehouse,repurchase, andaggregation facilityamount	Wet fundingsub-limit		June 30,2006		December 31,2005		Maturity date
(in thousands)
(unaudited)
$300,000	$	90,000	$	—	$	365,511	May 11, 2007
N/A		N/A		82,308		252,918	July 19, 2006
N/A		N/A		—		56,034	November 14, 2005
1,000,000		100,000		530,820		400,048	December 13, 2006
700,000		210,000		614,271		735,378	August 15, 2006
N/A		N/A		—		429,761	April 13, 2006
200,000		70,000		149,054		413,081	May 14, 2007
500,000		—		12,039		55,535	November 27, 2006
N/A		N/A		242		—	July 27, 2006
$2,700,000	$	470,000	$	1,388,734	$	2,708,266

Fair Value of Residual Interests in Loan Securitizations

~~Certain~~In ofsecuritizations ~~our~~completed ~~current~~during ~~warehouse~~2003, 2004 and ~~repurchase facilities contain a sub-limit for “wet” funding~~2006, ~~which is~~we ~~the~~conveyed ~~funding of~~ loans ~~for~~that ~~which~~we ~~the~~originated ~~collateral~~to ~~custodian~~a ~~has~~special ~~not~~purpose ~~yet~~entity (such ~~received~~as ~~the related loan documentation. The Company is charged~~ a ~~margin over the London Interbank Offered Rate~~trust), or ~~LIBOR,~~to ~~which~~a ~~varies~~third ~~within~~party ~~warehouse~~that ~~lines~~subsequently ~~based~~sold onthe ~~tranches with dry funded~~ loans ~~carrying~~to ~~the~~a ~~lowest~~special ~~rate~~purpose ~~and~~entity, ~~non-performing~~in ~~loans~~exchange ~~carrying~~for ~~the~~cash ~~highest~~proceeds ~~rate~~and (a ~~low~~residual ~~percentage~~interest ofin ~~loans fall into~~ the ~~non-performing category)~~trust. The ~~majority~~cash ofproceeds ~~the~~were ~~Company’s~~raised ~~fundings~~through ~~are~~an ~~wet~~offering ~~loan~~of ~~fundings,~~the ~~which become dry~~pass-through ~~loan~~certificates ~~fundings~~or ~~once~~bonds ~~all~~evidencing the ~~documentation~~right ~~has been delivered~~ to ~~the~~receive ~~custodian.~~principal ~~The~~payments and interest ~~rate~~ on ~~wet~~the ~~loan~~certificate ~~fundings~~balance isor 0on tothe 12bonds.5 ~~basis~~Pursuant ~~points~~to ~~higher~~FASB ~~than~~Statement ~~that~~ of ~~dry~~Financial ~~loan~~Accounting ~~fundings,~~Standards ~~varying between warehouse lines~~No. 140, ~~The~~Accounting ~~weighted~~for ~~average~~Transfers ~~interest~~and ~~rate~~Servicing of onFinancial ~~these~~Assets ~~facilities was 6.08%~~ and ~~5.16%~~Extinguishments as of ~~June 30~~Liabilities, ~~2006~~or ~~and~~SFAS ~~December~~No. 31140, ~~2005,~~and ~~respectively.~~its Aspredecessor ~~security~~accounting ~~for the repayment of the warehousing line~~pronouncements, ~~the~~we ~~lenders~~recorded ~~have~~gain ~~taken~~or aloss ~~security~~on ~~interest~~sales inof ~~the underlying mortgage~~ loans~~. In addition~~, inequal ~~order~~ to ~~secure~~the ~~one~~difference ~~line,~~between the ~~Company~~portion issold ~~required~~and toany ~~maintain~~retained ~~certain minimum cash balances~~interests, herein ~~which~~referred ~~have~~to ~~been classified~~ as ~~restricted~~residual ~~cash.~~interests, ~~The~~based ~~cumulative~~on ~~amount~~their ofrelative ~~restricted~~fair ~~cash~~values ~~under~~at the ~~minimum~~date ~~balance~~of ~~requirements~~transfer ~~at June 30, 2006~~ and ~~December 31,~~our ~~2005~~basis ~~was~~in ~~$2,500,000~~the ~~and $18,600,000, respectively~~loans. AsThe ~~consideration~~residual ~~for~~interests ~~the warehouse lines~~represent, over the ~~Company~~estimated ~~expensed~~life ~~commitment fees~~ of ~~approximately $2,094,000 and $586,000 for~~ the ~~six months ended June 30~~loans, ~~2006 and 2005, respectively. Interest on~~ the ~~warehouse~~present ~~lines~~value ~~is calculated on a loan-by-loan basis and depends upon the loan type. Each~~ of the ~~warehouse~~estimated ~~lines requires that the Company meet certain financial covenants including minimum tangible net worth, leverage ratios, minimum liquid assets, minimum~~ cash ~~balances, and positive net income~~flows. These ~~warehouse~~cash ~~lines~~flows ~~may~~are ~~also~~determined ~~limit~~by the ~~Company’s~~excess ~~ability~~of tothe ~~pay~~projected ~~dividends~~interest ifearned iton iseach ~~not~~pool inof ~~compliance~~securitized ~~with~~loans ~~these~~over ~~covenants.~~the ~~The~~sum ~~Company was not in compliance with certain~~ of ~~these~~the ~~covenants~~interest ~~(related~~paid to ~~profitability~~investors, ~~and~~the ~~liquidity)~~contractual asservicing ~~of May 31 and June 30~~fee, ~~2006.~~an ~~The~~estimate ~~Company~~for ~~received~~credit ~~waivers~~losses ~~from~~and ~~the~~other ~~lenders~~ongoing ~~concerning~~costs of the ~~non-compliance~~securitization. ~~for~~Each ~~those~~agreement ~~periods.~~that we

~~The~~16 Company’s warehouse and repurchase facilities with UBS Real Estate Securities (“UBS”), Merrill Lynch, Residential Mortgage Solutions, and Countrywide Warehouse Lending have expired. All borrowings on these facilities have been repaid as of August 14, 2006. The Company continues to negotiate warehouse and repurchase facilities with lenders to enable the Company to meet its funding needs.

~~NOTE~~ have Fentered –into ~~LONG~~in connection with these securitizations requires the over-~~TERM~~collateralization ~~DEBT~~of the trust that may initially be funded by cash or an excess of loans deposited into the trust. The amount and timing of the cash flows expected to be released from the securitization trusts consider the impact of the applicable delinquency and credit loss limits specified in the securitization agreements.

AsWe ofdetermined ~~June 30, 2006,~~ the ~~Company~~present ~~had~~value ~~approximately~~of ~~$3.2~~the ~~billion~~cash inflows ~~outstanding~~at ~~securitization bonds remaining from~~ the ~~four~~time ~~securitizations~~each ofsecuritization ~~mortgage~~transaction ~~loans~~closed ~~completed~~using ~~during~~certain ~~2005.~~assumptions ~~The~~and ~~Company~~estimates ~~effected~~made ~~the transactions~~ by ~~transferring mortgage loans to a~~ ~~bankruptcy-remote~~management ~~entity,~~at ~~which,~~the intime ~~turn, transferred~~ the loans towere ~~an owner trust~~sold. ~~The~~These ~~trust~~assumptions ~~sold~~and ~~various~~estimates ~~classes~~included: of

14• estimates of future interest rates based upon the forward London Interbank Offered Rate, or LIBOR, curve;

~~Table~~• future rates of ~~Contents~~principal prepayment on the loans;

~~ECC~~• ~~CAPITAL~~timing ~~CORPORATION~~and ~~AND~~magnitude ~~SUBSIDIARIES~~of credit losses; and

~~NOTES~~• TOdiscount ~~CONDENSED~~rate ~~CONSOLIDATED~~used ~~FINANCIAL~~to ~~STATEMENTS~~calculate present value.

The ~~mortgage-backed~~future ~~securities,~~cash orflows ~~bonds,~~represent ~~with~~management’s anbest ~~original~~estimate. ~~face~~There ~~value~~can be no assurance of $5the accuracy of management’s estimates.0 ~~billion~~Most of our residual interests are recorded at estimated fair value and are marked to ~~third~~market ~~parties~~through a charge (or credit) to earnings. ~~Proceeds~~On ~~from~~a quarterly basis, we review the ~~sale~~fair value of ~~the~~our ~~securities~~residual ~~were~~interests ~~utilized~~by analyzing prepayment, credit loss, discount rate assumptions and other performance assumptions and estimates in relation to our actual experience and ~~acquire~~current ~~mortgages~~rates ~~from~~of prepayment and credit loss prevalent in the ~~Company~~industry. atWe ~~their~~may ~~unpaid~~adjust ~~principal~~the ~~balances~~value of ~~approximately~~our ~~$5.0~~residual ~~billion.~~interests ~~Proceeds~~or ~~from~~take a charge to earnings related to the ~~sale~~residual interests, as appropriate, to reflect a valuation or write-down of the residual ~~mortgage~~interests ~~securities~~based ~~were~~upon the actual performance of the residual interests as compared to our key assumptions and estimates used to ~~pay~~determine ~~transaction~~fair ~~expenses,~~value. ~~pay~~Although ~~off~~management ~~warehouse~~believes ~~advances~~that ~~and~~the ~~for~~assumptions ~~general~~used ~~corporate~~to estimate the fair value of the ~~purposes~~residual interests are reasonable, there can be no assurance as to the accuracy of the assumptions or estimates.

~~The~~Estimated ~~mortgage-backed~~future ~~securities~~cash ~~are~~flows ~~secured~~in ~~solely~~excess by of the ~~mortgages~~amortized ~~transferred~~cost toof ~~the~~our ~~trust~~investment ~~and~~in ~~are~~residual ~~non-recourse~~interests toare ~~the~~recognized ~~Company.~~as ~~The~~income ~~principal and~~at ~~interest~~a ~~payments~~constant onrate ~~the~~of ~~mortgages~~interest ~~provide~~(level-yield) over the ~~funds~~estimated toperiod ~~pay~~of ~~debt~~time ~~service~~that on the ~~securities.~~cash ~~The~~flows ~~interest~~will ~~rate~~be onreceived, ~~the~~in ~~securities~~accordance ~~resets~~with ~~monthly~~Emerging ~~and~~Issues isTask ~~based~~Force 99-20 ~~upon~~(“EITF ~~one~~99-~~month~~20”), ~~LIBOR.~~Recognition ~~The~~of ~~weighted~~Interest ~~average~~Income ~~interest~~and ~~rate~~Impairment ~~payable~~ on ~~the~~Purchased ~~Company’s long-term~~and ~~debt~~Retained atBeneficial ~~June 30,~~Interests ~~2006~~in ~~was~~Securitized 5Financial Assets.~~44%.~~ AsOn ~~principal~~a ~~payments~~quarterly onbasis, ~~the~~if ~~underlying~~estimated ~~mortgages~~cash ~~are~~flows ~~paid~~generated ~~through~~from tothe ~~reduce~~securitized asset’s ~~principal~~underlying oncollateral ~~the~~differ ~~bonds,~~from the ~~term~~cash offlows ~~the~~previously ~~bonds~~estimated isdue ~~ultimately~~to aactual ~~function~~prepayment ofor ~~the~~credit ~~rate~~loss atexperience, ~~which~~we ~~principal~~calculate isrevised ~~paid~~yields based on the ~~mortgages.~~ ~~Based~~current ~~upon~~amortized ~~anticipated~~cost ~~prepayment~~of ~~speeds~~ the ~~Company~~investment ~~estimates~~and ~~that~~ the ~~bonds~~revised ~~will~~cash ~~be fully repaid by 2009~~flows. The revised ~~security~~yields ~~classes~~are ~~have~~then ~~weighted~~applied ~~average~~prospectively ~~lives ranging from one~~ to ~~three~~recognize ~~years~~interest income.

AsDeferred ofBond ~~June 30,~~Issuance ~~2006~~Costs ~~and December 31, 2005, the balance of long-term debt comprised the following:~~

	June 30,2006			December 31,2005
	(in thousands)
	(unaudited)
Securitized bonds	$	3,190,868		$	4,164,727
Discount on bonds		(8,689	)		(717	)
Accrued interest on securitized bonds		1,924			2,117
Total financing on mortgage loans held for investment	$	3,184,103		$	4,166,127

Direct costs associated with the issuance of long-term collateralized debt are capitalized and amortized as a component of interest expense in a manner that produces a constant rate of interest over the estimated term of the debt, expecting that the debt will be paid fully from the cash flows from the underlying collateral. Changes in the estimated amount and timing in cash flows of the collateral that pass through to the debt may cause us to amortize deferred bond issuance costs faster or slower than we anticipated upon issuance of the bonds.

~~The~~Derivative ~~Company~~Financial ~~did~~Instruments ~~not complete any on-balance sheet securitization transactions during the six months ended June 30, 2006. The costs associated with issuing long-term debt are capitalized~~ and ~~amortized~~Hedging asActivities a component of interest expense over the estimated term of the debt, expecting that the debt will be paid fully from the cash flows from the underlying collateral. The balance of deferred bond issue costs at June 30, 2006, net of accumulated amortization, was $8,243,000 and is included in prepaid expenses and other assets.

~~The~~Hedging ~~Company~~is ~~issued~~a ~~subordinate~~critical ~~bonds~~aspect ~~from~~of ~~its~~our ~~November~~business ~~2005~~because ~~securitization,~~the ~~which~~value ~~had~~of ~~previously~~our ~~been~~assets is ~~retained.~~sensitive ~~These~~to ~~bonds~~the ~~had~~fluctuation aof ~~face~~interest ~~amount~~rates. ofFrom ~~$31.5~~time ~~million~~to time, we have used, and ~~were sold~~will ~~for~~continue ~~$23.3~~to ~~million~~use, invarious ~~June~~financial ~~2006.~~instruments ~~The~~to ~~discount~~economically onhedge ~~bonds~~our ~~reflects~~exposure ~~the~~to ~~difference~~changes ~~between~~in ~~the~~interest ~~proceeds~~rates. ~~received~~The ~~from~~following summarizes the ~~sale~~hedging instruments ofthat, ~~the~~subject ~~bonds~~to ~~and~~limitations imposed by the ~~face~~REIT ~~amount~~requirements, towe behave ~~repaid~~used ~~over~~to ~~the~~reduce ~~life~~interest ofrate ~~the~~risks ~~bonds.~~on ~~The~~our ~~discount~~residual isinterests, ~~being~~the ~~amortized~~loans asthat anwe ~~adjustment of~~hold ~~interest~~for ~~expense~~investment ~~over~~and the ~~estimated~~loans ~~life~~that ofwe ~~the~~hold ~~bonds~~for sale.

~~NOTE~~Interest GRate –Swap ~~STOCK~~Agreements and Eurodollar Futures. Interest rate swap agreements allow us to exchange floating rate obligations for fixed-~~BASED~~rate obligations ~~COMPENSATION~~effectively locking in our borrowing costs for a period of time. When we enter into a swap agreement we agree to pay a fixed-rate of interest and to receive a variable interest rate, generally based on LIBOR. We may also sell Eurodollar futures contracts in order to mitigate the projected impact of interest rate changes on our forecasted one-month LIBOR based liabilities. All Eurodollar futures contracts were settled in conjunction with the sale of the mortgage banking operations to Bear Stearns

~~Stock~~Interest ~~option~~Rate ~~activity~~Cap ~~during~~Agreements. Interest rate cap agreements allow us to receive cash payments if the ~~six~~interest ~~months~~rate index ~~ended~~specified ~~June 30~~in the cap agreement increases above contractually specified levels. Therefore, ~~2006~~the ~~was~~interest asrate ~~follows:~~cap agreements have the effect of capping the interest rate on a portion of our borrowings to the rate specified by the interest rate cap agreement.

	Number of shares		Weightedaverageexerciseprice
Balance at December 31, 2005	3,803,336		$	3.76
Granted	490,000			1.50
Exercised	(8,323	)		0.43
Canceled	(353,885	)		5.54
Balance at June 30, 2006	3,931,128		$	3.33

We also may use, from time to time, futures contracts and options on futures contracts on the Eurodollar, federal funds, treasury bills and treasury notes and similar financial instruments to mitigate risk from changing interest rates.

~~All~~17 options granted during 2006 were granted with an exercise price equal to the fair market value of the stock on the date of grant. The assumptions utilized in valuing the grants of options during the six months ended June 30, 2006 were: dividend yield of 11%; expected volatility of 46%; risk-free interest rate at the date of grant of 5.05%; and expected life of 6.5 years.

15We presently do not intend to enter into derivative instruments, except for hedging purposes. Further, it is unlikely that we can obtain hedging instruments that perfectly offset all of the risks of our assets and liabilities. No hedging strategy can completely insulate us from risk, and certain of the federal income tax requirements that we must satisfy to qualify as a REIT may limit our ability to hedge. We intend to monitor and may have to limit our hedging strategies to ensure that we do not realize excessive hedging income or hold hedging assets having excess value in relation to our total assets.

~~Table~~In ofaccordance ~~Contents~~with SFAS 133, all derivative instruments are recorded at fair value.

~~ECC~~While ~~CAPITAL~~we ~~CORPORATION~~may ~~AND~~change ~~SUBSIDIARIES~~the classification of our derivative financial instruments in the future, we presently account for all our derivative financial instruments as trading instruments and we do not apply hedge accounting treatment as defined by SFAS 133. Accordingly, realized and unrealized changes in fair value are recognized in income during the period in which the changes occur.

~~NOTES~~Income TOtaxes ~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~Under~~The ~~the~~Company ~~provisions~~is ofnot ~~SFAS~~subject ~~123(R),~~to tax on the ~~Company~~earnings ~~calculates~~of the ~~expected~~REIT ~~term~~it ofdistributes ~~option~~to ~~grants~~its ~~using the~~stockholders ~~“simplified~~as ~~method”,~~long as ~~defined~~it bydistributes ~~Securities~~at ~~and~~least ~~Exchange~~90% ~~Commission~~of ~~Staff~~its ~~Accounting~~taxable ~~Bulletin~~REIT ~~No. 107~~earnings ~~(“SAB~~to ~~107”).~~its ~~Under~~stockholders ~~the~~each ~~“simplified~~taxable ~~method”,~~year ~~the~~and ~~expected~~satisfies ~~term~~other ~~for~~qualifying ~~“plain~~tests. ~~vanilla”~~The ~~options~~Company ~~is calculated~~has aselected ~~the~~to ~~average~~have ofits ~~the~~wholly-owned ~~vesting~~subsidiary, ~~term~~Encore ~~and~~Credit ~~the~~Corp., ~~contractual~~now ~~term.~~known ~~The~~as Performance ~~risk~~Credit ~~free~~Corporation, ~~interest~~treated ~~rate~~as isa ~~based~~taxable onREIT ~~the~~subsidiary U(“TRS”).S. ~~Treasury~~As ~~rate~~a atTRS, ~~the~~Performance ~~date~~Credit ofis ~~grant~~subject ~~with the maturity date approximately equal~~ to ~~the~~federal ~~expected~~and ~~life~~state oftaxes ~~the option. Volatility is calculated based~~ on ~~historical~~its ~~stock~~income. ~~price~~Accordingly, ~~volatility of~~ the Company ~~and~~reports ~~similar entities over~~ a ~~period~~provision ~~that~~for ~~approximates~~taxes ~~the expected term. The dividend rate is~~ based upon ~~historical~~the ~~dividend~~earnings of ~~distributions~~Performance ~~and~~Credit isusing ~~adjusted~~the ~~based~~asset onand ~~the~~liability ~~dividend yield~~method of ~~similar~~accounting ~~entities~~for toincome ~~reduce volatility in calculating this assumption~~taxes.

~~During~~Under the ~~three~~asset and ~~six~~liability ~~months ended June 30~~method, ~~2006,~~deferred ~~the~~tax ~~Company included~~assets ~~$304,000~~ and liabilities ~~$615,000,~~are ~~respectively,~~recognized infor ~~stock based compensation expense in~~ the ~~consolidated~~future ~~statements~~tax ofconsequences ~~operations.~~attributable ~~Based on current stock options outstanding, the Company expects~~ to ~~incur~~differences ~~expenses~~between ~~of approximately $2.2 million over~~ the ~~next~~ ~~five~~consolidated ~~years.~~financial ~~Prior~~statement tocarrying ~~the~~amounts ~~adoption~~ of ~~SFAS~~existing ~~123(R),~~assets ~~the~~and ~~Company~~liabilities ~~accounted~~and ~~for~~their ~~stock-based~~respective ~~compensation~~tax ~~based on the provisions of Accounting Principles Board Opinion No~~bases. 25 ~~(“APB~~Deferred ~~25”),~~tax ~~Accounting~~assets ~~for Stock Issued to~~and ~~Employees.~~liabilities ~~Under~~are ~~APB~~measured ~~25,~~using ~~recognition~~enacted oftax ~~compensation~~rates ~~cost was not required~~ for ~~most of~~ the ~~Company’s~~periods ~~stock~~in ~~options.~~which ~~However, pro forma disclosures of~~ the ~~effects~~differences ofare ~~recognizing~~expected ~~compensation~~to ~~cost under the SFAS 123 fair value method was required~~reverse. AsThe ~~previously~~effect ~~reported~~on ~~for~~deferred ~~the~~tax ~~three~~assets and ~~six~~liabilities ~~months~~of ~~ended~~a ~~June 30,~~change ~~2005,~~in ~~stock~~tax ~~option~~rates ~~compensation~~is ~~expense~~recognized ~~and~~in ~~its effect on~~ income ~~and~~in ~~earnings~~the ~~per~~period ~~share~~that ifincludes the enactment ~~Company~~date. ~~had applied SFAS 123 is as follows:~~

	Three months endedJune 30, 2005			Six months endedJune 30, 2005
	(in thousands, except per share data)
	(unaudited)
Net loss:
As reported	$	(33,965	)	$	(36,663	)
Compensation expense		(173	)		(223	)
Pro forma	$	(34,138	)	$	(36,886	)
Loss per share:
Basic, as reported	$	(0.35	)	$	(0.46	)
Basic, pro forma	$	(0.35	)	$	(0.46	)
Diluted, as reported	$	(0.35	)	$	(0.46	)
Diluted, pro forma	$	(0.35	)	$	(0.46	)

The Company records a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized, as required by Statement of Financial Accounting Standards No. 109 (“SFAS 109”), Accounting for Income Taxes. In determining the possible realization of deferred tax assets, the Company considers future taxable income from the following sources: (i) the reversal of taxable temporary differences, (ii) taxable income from future operations and (iii) tax planning strategies that, if necessary, would be implemented to accelerate taxable income into periods in which net operating losses might otherwise expire.

The ~~assumptions~~Company ~~utilized~~adopted inFASB ~~valuing~~Interpretation 48, accounting for uncertainties (“FIN 48”) and interpretation SFAS 109 on January 1, 2007. FIN 48 prescribes a recognition threshold and a measurement attribute for the ~~grants~~financial statement recognition and measurement of ~~options~~tax ~~during~~positions taken ~~the~~or ~~six~~expected ~~months~~to ~~ended~~be ~~June 30~~taken in a tax return. For those benefits to be recognized, ~~2005~~a ~~were:~~tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of ~~dividend~~benefit ~~yield~~that has a greater than 50 percent likelihood of ~~10%;~~being ~~expected~~realized ~~volatility~~upon ultimate settlement. The adoption of ~~45%~~FIN 48 has resulted in a transition adjustment reducing beginning retained earnings by $751 thousand; ~~risk-free~~$475 thousand in taxes and $276 thousand in interest. ~~rate~~If atrecognized, the ~~date~~tax portion of ~~grant,~~the ~~which~~adjustment ~~ranged~~would ~~from~~affect 3the effective tax rate.~~85%~~ Interest costs and penalties related to ~~4.31%;~~income taxes are classified as interest expense and ~~expected~~operating ~~life~~expenses offrom 4continuing operations in the Company’s financial statements.5 Open tax return years are subject to future examination by tax authorities. Federal tax returns are open for years 2003 and after and some material state tax returns are open for years 2002 and after.

~~NOTE~~Stock-Based HCompensation ~~– SEGMENT REPORTING~~

~~The~~Effective January 1, ~~operating~~2006, ~~segments~~we ~~reported~~began ~~below~~to ~~are~~account for stock-based employee compensation arrangements in accordance with the ~~segments~~provisions ~~for~~of ~~which~~Statement ~~revenues~~of ~~and~~Financial ~~operating~~Accounting ~~income~~Standards ~~amounts~~No. 123(R), ~~are~~Share-Based Payment. Accordingly, stock ~~evaluated~~option-based ~~regularly~~compensation byexpense ~~management~~is recorded in ~~deciding~~the ~~how~~consolidated tostatement ~~allocate~~of ~~resources~~operations ~~and~~using inthe ~~assessing~~fair ~~performance~~value based method applied on a modified prospective basis. The ~~Company~~effect ~~operates~~of this change in ~~two~~accounting ~~segments:~~did not have a material effect on the financial statements.

~~Mortgage banking~~Results ~~segment~~of Operations

~~The~~Prior ~~mortgage~~to our ~~banking~~initial ~~segment~~public ~~originates~~offering ~~nonconforming~~in ~~residential~~February ~~mortgage~~2005, ~~loans~~our ~~through~~business ~~mortgage~~activities ~~companies~~consisted ~~and~~primarily ~~independent~~of wholesale mortgage ~~brokers,~~ ~~and~~origination ~~directly~~operations towhich ~~borrowers.~~we ~~This~~sold ~~segment~~to ~~sells~~Bear ~~loans~~Stearns toin ~~third~~February ~~parties~~2007. ~~and~~We toare ~~the~~reporting ~~portfolio~~our ~~segment~~wholesale ~~recording~~mortgage ~~premium~~origination onoperations ~~sale~~as discontinued ~~revenue~~operations. ~~This~~Our ~~segment~~continuing ~~also~~operations ~~records~~primarily ~~net~~comprise ~~interest~~what ~~income~~had ~~earned~~been asour ~~the~~portfolio ~~difference~~investment ~~between~~operations, ~~mortgage~~which ~~loan~~did ~~interest~~not ~~and interest~~exist ~~expense~~prior ~~paid~~to ~~on financing while the loan is pending sale~~2005.

~~Portfolio~~18 ~~investment segment~~

~~The~~Continuing ~~portfolio~~operations investment segment invests in nonconforming mortgage loans and finances the investment through the issuance of non-recourse securitized debt. Pending securitization, mortgage loans are financed through the Company’s warehouse

16Net Interest Income. The unpaid principal balances on the Company’s portfolio of loans held for investment declined from $2.4 billion at December 31, 2006 to $2.1 billion at March 31, 2007 as a result of normal principal payments and loan prepayments. Similarly, the outstanding bond balances secured by these mortgage loans declined from $2.4 billion at December 31, 2006 to $2.1 billion at March 31, 2007.

~~Table~~Interest income is earned on the Company’s portfolio of ~~Contents~~loans held for investment and investments in residual interests.

ECC CAPITAL CORPORATION AND SUBSIDIARIES


	Three months ended March 31,
	2007			2006
	(in thousands)
Loans held for investment
Coupon interest	$	42,034		$	66,738
Premium amortization		(4,084	)		(7,794	)
Prepayment penalties		2,600			8,130

Total		40,550			67,074
Residual accretion		3,355			1,522
Investment interest income		190			—

Total interest income	$	44,095		$	68,596

~~NOTES~~Residual TOaccretion ~~CONDENSED~~increased ~~CONSOLIDATED~~during ~~FINANCIAL~~the ~~STATEMENTS~~first quarter of 2007 reflecting higher than expected cash flows from off balance sheet securitizations completed in 2004 and 2003. As the loans underlying these securitizations have seasoned, projected cumulative losses have declined as compared to initial projections resulting in an increase in expected future cash flows and an increase in accretion income. Investment interest income increased primarily due to investing excess cash in higher yielding investments.

~~facilities~~Premium amortization and prepayment penalties decreased due to slowing of prepayments and normal seasoning of the portfolio. ~~The~~As ~~primary~~a ~~source~~result of ~~income~~aging ~~for~~of the portfolio ~~investment~~many ~~segment~~of isthe ~~net~~remaining ~~interest~~loans ~~income.~~are outside of the prepayment penalty period.

~~The~~Interest ~~accounting~~expense ~~policies~~primarily ofrelates to the ~~business~~Company’s ~~segments~~long-term ~~are~~debt ~~the~~which ~~same~~comprises asmortgage ~~those~~backed ~~described~~bonds issued in connection with our securitizations. In addition, the ~~summary~~Company ofincurred ~~significant~~interest ~~accounting~~expense ~~policies.~~on ~~Summary~~borrowings ~~financial~~during ~~data~~the year secured by ~~segment~~the ~~as of~~Company’s ~~June 30,~~retained ~~2006~~interests in securitizations and ~~the~~related ~~three~~commitment ~~months~~fees. ~~then~~Components ~~ended~~of interest expense are summarized as follows (amounts in thousands):

	Portfolio				MortgageBanking			IntercompanyEliminations*			Consolidated
	Three months ended March 31,
	(in thousands)
	2007			2006
	(unaudited)
Bond interest	$	32,942		$	48,319
Net interest income	$	9,206			$	10,529		$	4,140		$	23,875
Amortization of bond discount and deferred bond issuance costs		1,734			2,169
Gain (loss) on sale of loans, net		—				(20,922	)		(980	)		(21,902	)
		34,676			50,488
Provision for loan losses		5,421				—			—			5,421
Other interest expense
Gain on trading securities and derivative instruments		9,864				5,657			—			15,521
Securities sold under agreements to repurchase		—			471
Income before equity income (loss) of subsidiaries		8,496				(30,143	)		3,062			(18,585	)
Commitment fees		—			199
Equity in income (loss) of subsidiaries		(30,241	)			—			30,241			—
	$	34,676		$	51,158
Net income (loss)		(21,745	)			(30,143	)		33,303			(18,585	)
Total assets	$	3,557,660			$	1,536,154		$	(87,562	)	$	5,006,252

~~Summary~~During 2006, we borrowed approximately $60 million under a repurchase arrangement with a financial ~~data~~institution pledging byour ~~segment~~residual interests in securitizations and our ownership interests in securitization trusts consolidated for financial reporting purposes as ofcollateral. ~~June 30,~~In December 2006, we repaid all amounts outstanding under these borrowing arrangements. Other interest expense associated with securities sold under agreements to repurchase and the ~~six~~amortization ~~months~~of ~~then~~commitment ~~ended~~fees ~~follows:~~was related to this repurchase agreement.

	Portfolio			MortgageBanking			IntercompanyEliminations*			Consolidated
	(in thousands)
	(unaudited)
Net interest income	$	21,757		$	26,093		$	9,027		$	56,877
Gain (loss) on sale of loans, net		—			(26,812	)		(2,189	)		(29,001	)
Provision for loan losses		11,520			—			—			11,520
Gain on trading securities and derivative instruments		26,352			10,527			—			36,879
Income before equity income (loss) of subsidiaries		27,051			(58,781	)		6,770			(24,960	)
Equity in income (loss) of subsidiaries		(58,850	)		—			58,850			—
Net income (loss)		(31,799	)		(58,781	)		65,620			(24,960	)
Total assets	$	3,557,660		$	1,536,154		$	(87,562	)	$	5,006,252

~~Summary~~Net ~~financial~~interest ~~data~~income by(difference ~~segment~~between asinterest ofincome ~~June 30, 2005~~ and ~~the~~interest ~~three~~expense) ~~months~~is ~~then~~summarized ~~ended~~as follows (amounts in thousands):

	Portfolio				MortgageBanking			IntercompanyEliminations*			Consolidated
	Three months ended March 31,
	(in thousands)
	2007			2006
	(unaudited)
Interest income	$	44,095		$	68,596
Net interest income	$	20,513			$	5,204		$	3,197		$	28,914
Interest expense		34,676			51,158
Gain (loss) on sale of loans, net		—				15,866			(15,598	)		268
Net interest income	$	9,419		$	17,438
Provision for loan losses		3,510				—			—			3,510
Gain on trading securities and derivative instruments		(16,207	)			(5,364	)		—			(21,571	)
Income before equity income (loss) of subsidiaries		2,244				(16,272	)		(19,937	)		(33,965	)
Equity in income (loss) of subsidiaries		(16,272	)			—			16,272			—
Net income (loss)		(14,028	)			(16,272	)		(3,665	)		(33,965	)
Total assets	$	3,445,483			$	1,823,204		$	(72,274	)	$	5,196,413

17Provision for Loan Losses. Activity in the allowance for loan losses is summarized as follows (amounts in thousands):


	For the three months ended March 31,
	2007			2006
	(in thousands)
Beginning balance	$	43,425		$	40,862
Additions		12,688			6,099
Charge-offs, net		(10,347	)		(1,195	)

Ending balance	$	45,766		$	45,766

~~ECC~~As ~~CAPITAL~~the ~~CORPORATION~~Company’s ~~AND~~portfolio ~~SUBSIDIARIES~~for loans held for investment seasoned during 2006 and the first quarter of 2007, realized losses increased requiring the Company to record an additional provision for loan losses to maintain the allowance at a level management believes appropriate to provide for losses in its portfolio of loans held for investment that have been incurred as of March 31, 2007.

~~NOTES~~In TOassessing ~~CONDENSED~~the ~~CONSOLIDATED~~adequacy ~~FINANCIAL~~of ~~STATEMENTS~~the allowance for loan losses management considers, among other things, current delinquency trends. Loan delinquency information is summarized as follows (amounts in thousands):

Summary financial data by segment as of June 30, 2005 and the six months then ended follows:


	March 31, 2007				December 31, 2006
Aging	Loan balance		Percentage of total		Loan balance		Percentage of total
Current	$	1,864,500	87.8	%	$	2,133,450	88.2	%
30—59 days past due		71,908	3.4	%		88,274	3.6	%
60—89 days past due		34,820	1.6	%		41,562	1.7	%
90—119 days past due		25,059	1.2	%		27,840	1.1	%
120—149 days past due		19,402	0.9	%		23,884	1.0	%
150—179 days past due		18,697	0.9	%		22,222	0.9	%
180 + days past due		88,834	4.2	%		84,985	3.5	%

	$	2,123,221			$	2,422,217

Bankruptcy/foreclosure	$	140,194	6.6	%	$	159,239	6.6	%

	Portfolio			MortgageBanking			IntercompanyEliminations*			Consolidated
	(in thousands)
	(unaudited)
Net interest income	$	26,709		$	11,245		$	3,197		$	41,151
Gain (loss) on sale of loans, net		—			40,517			(33,793	)		6,724
Provision for loan losses		6,010			—			—			6,010
Gain on trading securities and derivative instruments		(13,038	)		(2,048	)		5			(15,081	)
Income before equity income (loss) of subsidiaries		8,501			(14,573	)		(30,591	)		(36,663	)
Equity in income (loss) of subsidiaries		(14,572	)		—			14,572			—
Net income (loss)		(6,071	)		(14,573	)		(16,019	)		(36,663	)
Total assets	$	3,445,483		$	1,823,204		$	(72,274	)	$	5,196,413

We believe delinquency levels as of March 31, 2007 have increased due to seasoning of the loan portfolio, increasing interest rates, expiration of the initial fixed interest rate periods and present market conditions. Although unpaid principal balances at March 31, 2007 have declined from the prior quarter by 12.4%, the allowance for loan losses has increased as a percentage of the outstanding portfolio balance from 1.8% as of December 31, 2006 to 2.2% as of March 31, 2007.

*As ~~The~~of March 31, ~~Company amortizes its deferred bond issuance costs~~2007, ~~including~~ the ~~intercompany~~allowance ~~premium~~for ~~paid~~loan tolosses ~~originate~~represents ~~the~~23% ~~loans,~~of asunpaid aprincipal ~~reduction~~balances to60 ~~interest~~days ~~income.~~or ~~The~~more ~~amortization of inter-company premium is eliminated during consolidation~~delinquent. InThrough ~~addition~~March 31, ~~Encore~~2007, ~~Credit~~average ~~records~~loss ~~the~~severity ~~intercompany~~on ~~transfer~~all ofliquidated loans ashas abeen ~~sale~~23.60%. ~~and~~For ~~these~~the ~~inter-company~~three ~~gains~~months ~~have~~ended ~~been~~March 31, ~~eliminated~~2007 ~~during~~and ~~consolidation.~~December 31, ~~Other~~2006, ~~eliminations~~average ~~relate~~loss toseverity ~~the~~on ~~elimination~~liquidated ofloans ~~the~~during ~~Company’s~~these ~~equity~~periods ~~interest~~was in32.6% ~~its majority~~ and ~~wholly owned subsidiaries~~20.7%, asrespectively. ~~the~~We ~~assets,~~believe ~~liabilities,~~average ~~and~~loss ~~income~~severity ofon ~~these~~liquidated ~~subsidiaries~~loans ~~are~~may ~~included~~continue into ~~the consolidated financial statements~~increase.

~~NOTE~~20 ~~I – CORPORATE REORGANIZATION~~

OnGain ~~January 6,~~(Loss) ~~2006,~~on ~~the Company~~Derivative ~~announced a reorganization designed to reduce costs and improve efficiency~~Instruments. The ~~reorganization~~net ~~involved~~gain ~~the~~on ~~consolidation~~derivative ofinstruments ~~seven~~comprises ~~wholesale~~the ~~loan~~following ~~processing~~(amounts ~~centers into three. These three centers are located regionally~~ in ~~Irvine,~~ ~~California;~~thousands): Downers Grove, Illinois; and Glen Allen, Virginia. Lending operations for ECC Capital’s retail subsidiary, Bravo Credit Corporation, were consolidated into two centers based in Irvine and Glen Allen. This reorganization has resulted in a reduction in force of approximately 440 employees, or 27% of the Company’s total workforce.

On April 11, 2006, the Company announced an additional reduction in workforce of 170 employees, or 17% of the Company’s remaining workforce. In addition, Bravo Credit Corporation’s office in Glen Allen was closed. In accordance with Statement of Financial Accounting Standards No. 146 (“SFAS 146”), Accounting for Costs Associated with Exit or Disposal Activities, the Company records lease termination costs as of the “cease-use date”, employee costs as of the date employees are notified of their termination (the “communication date”), and fixed asset write offs at which time they are considered impaired. Although estimates are subject to change as additional information becomes available, the Company recorded the follow restructuring activity during the six months ended June 30, 2006:


	For the three months ended March 31,
	2007			2006
Residual mark-to-market gain (loss)	$	(1,990	)	$	629
Derivative gains (losses):
Eurodollar futures		—			—
Interest rate agreements		(9,421	)		11,017
Net receipts (payments) under interest rate agreements		7,741			4,841

	$	(3,670	)	$	16,487

	RestructuringAccrual at December 31, 2005		Additions toRestructuringAccrual		Charges AgainstRestructuringAccrual			RestructuringAccrual at June 30, 2006
	(in thousands)
	(unaudited)
Employee costs	$	—	$	2,501	$	(2,501	)	$	—
Lease termination costs		—		6,561		(1,859	)		4,702
Fixed asset write offs		—		66		(66	)		—
	$	—	$	9,128	$	(4,426	)	$	4,702

We completed a securitization of approximately $1.1 billion in assets in May 2006. The fair value assigned to the residual interests at the date of securitization was $50,185,000. In July 2006, we sold a portion of our residual interests in this securitization which reduced the fair value of our residual interests to approximately $33 million. In February 2007 we completed the sale of our remaining interests in this securitization for $20 million. As of December 31, 2006, we valued these residual interests at $20 million and recorded a mark-to-market loss on this asset of approximately $13 million.

~~The~~A ~~Company~~summary ~~recorded an impairment charge~~ of ~~$66,000 during~~ the ~~six~~fair ~~months~~values ~~ended~~of ~~June 30,~~our ~~2006,~~residual asinterests ~~the Company does not expect to receive any future benefit from the assets previously utilized at Bravo Credit Corporation’s office~~ in ~~Glen~~securitizations ~~Allen,~~is ~~which was closed in March 2006. Lease termination costs of $6,561,000 were recorded during the six months ended June 30, 2006,~~ as ~~the~~follows ~~“cease-use~~(amounts ~~dates” associated with the related facilities occurred during this period. Employee termination costs of $2,501,000 were recorded during the six months ended June 30, 2006,~~ in ~~connection~~ ~~with~~thousands): ~~the January and April workforce reductions.~~


	Value as of
	March 31, 2007		December 31, 2006
SASCO ECC 2003-1	$	3,519	$	3,525
CWABS ECC 2004-1		2,861		9,407
CWABS ECC 2004-2		3,746		12,988
Bravo Mortgage Asset Trust 2006-1		—		20,000

Total	$	10,126	$	45,920

~~Table~~The values of ~~Contents~~the securitizations we completed in 2003 and 2004 decreased primarily as a result of the recording of cash flows on these residual interests during 2007. Loan principal balances in the 2003 securitization have paid down to the point that the servicer may exercise their clean up call rights, upon which the balance of the overcollateralization account within the securitization will be released to us. We are unable to determine when, or if, such a clean up call will occur.

~~Item~~Operating 2expenses. The ~~Management’s~~decline ~~Discussion~~in ~~and~~operating ~~Analysis~~expenses ofis ~~Financial~~consistent ~~Condition~~with ~~and~~the ~~Results~~sale of ~~Operations~~our mortgage banking operations to Bear Stearns that occurred on February 9, 2007.

~~MANAGEMENT’S~~Following ~~DISCUSSION~~the ~~AND~~initial ~~ANALYSIS~~public OFoffering in 2005, ECC Capital shared personnel and services with its subsidiaries, principally Performance Credit Corporation through the date of the sale of the mortgage origination business to Bear Stearns. Operating expenses for the three months ended March 31, 2007 and March 31, 2006 include the costs associated with these shared personnel and services despite the fact that many of the personnel providing such services became employees of Bear Stearns after February 9, 2007. Although the number of employees was significantly reduced following the completion of the sale of the mortgage origination business to Bear Stearns and while there can be no assurances as to the amount of operating expenses we incur in the future, we anticipate that our future operating expenses will be less than is being reported in continuing operations for the quarter ended March 31, 2007.

~~FINANCIAL~~Servicing ~~CONDITION~~fees. ~~AND~~Servicing ~~RESULTS OF~~fees ~~OPERATIONS~~are paid to third party loan servicers that service our portfolio of loans held for investment.

~~The~~Discontinued following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes contained in this report and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2005. The following discussion and analysis discusses our financial condition and results of our operations on a consolidated basis, unless otherwise indicated. Except for the historical information contained herein, the following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements.

~~General~~Summary operating information for our wholesale mortgage origination operations are as follows (amounts in thousands):

For the three months ended June 30, 2006, we reported a net loss of $18.6 million, bringing our net loss for the six months ended June 30, 2006 to $25.0 million. We incurred a net loss of $34.0 million and $36.7 million for the three and six months ended June 30, 2005, respectively, which also included an income tax benefit of $3.5 million and $9.9 million, respectively. On a pretax basis, the loss for the three and six months ended June 30, 2006 declined by $18.9 million and $21.6 ~~million, respectively, from the corresponding period in 2005.~~

Our net revenues increased to $12.1 million during the three months ended June 30, 2006 as compared to $4.1 million for the three months ended June 30, 2005. This was due principally to reporting a gain on our derivative instruments during the three months ended June 30, 2006 versus reporting a loss for the three months ended June 30, 2005. Net interest income for the three months ended June 30, 2006 declined as compared to the three months ended June 30, 2005 due primarily to increases in our cost of borrowing. Interest rates on our portfolio of loans held for investment have not reset, while our cost of financing the portfolio is LIBOR-based and has increased significantly over the past year.


	Balance at March 31, 2007			Balance at December 31, 2006
Assets of discontinued operations
Mortgage loans held for sale	$	10,499		$	1,137,142
Other assets		10,426			31,198

Total assets of discontinued operations	$	20,925		$	1,168,340

Liabilities of discontinued operations
Warehouse and repurchase facilities	$	4		$	1,169,587
Other liabilities		20,457			28,314

Total liabilities of discontinued operations	$	20,461		$	1,197,901


	For the three months ended March 31,
	2007			2006
Net interest income	$	(1,003	)	$	15,564
Gain (loss) on sale of loans		(1,305	)		(7,099	)
Gain on derivative instruments, net		348			4,871

Net revenues	$	(1,960	)	$	13,336

~~Our~~The ~~net~~interest ~~revenues~~rate ~~increased~~on our warehouse borrowings was generally tied to ~~$53.2~~ ~~million~~one-month ~~during~~LIBOR and as the ~~six~~general ~~months~~level ~~ended~~of interest ~~June 30~~rates began to increase in 2005, ~~2006~~the ascost ~~compared~~of towarehouse ~~$26~~financing increased.8 ~~million~~Increases in interest rates on our mortgage loans held for ~~the~~sale ~~six~~lagged ~~months~~the ~~ended~~rate ~~June 30,~~at ~~2005.~~which ~~This~~interest ~~increase~~costs ~~was~~on ~~mainly~~our ~~attributable~~warehouse toborrowings increased, reducing net interest income ~~and~~beginning ~~gains~~in on2005 ~~our~~and ~~derivative~~through ~~instruments~~2006. We ~~hedge~~ ~~the~~also ~~risk~~entered ofinto ~~changes~~certain inagreements ~~interest~~under ~~rates~~which Bear Stearns agreed to fund and acquire our loan production subsequent to October 10, 2006 and through the ~~use~~date of ~~derivatives~~the –close ~~Eurodollar~~of ~~futures~~the ~~and~~transaction. The interest rate ~~caps~~on ~~and~~the ~~swaps~~warehouse ~~contracts.~~borrowings Aswas aequivalent ~~result~~to ofthe ~~increases~~weighted inaverage ~~interest~~coupon ~~rates~~on ~~during~~ the ~~three~~loans ~~and~~securing ~~six~~the ~~months~~borrowings. ~~ended~~As ~~June 30~~a result, ~~2006~~ we ~~reported~~ areceived ~~gain~~no onnet ~~derivatives~~interest ofincome ~~$17.6~~during ~~million~~the ~~and~~first ~~$38.4~~quarter ~~million,~~of ~~respectively~~2007.

~~During~~We ~~the~~experienced ~~first~~negative ~~half~~trends ofin whole loan sale pricing throughout 2006, ~~our~~and ~~assets~~into ~~decreased~~2007. ~~slightly~~As ~~due~~we did not have warehouse financing available to ~~the~~retain our loan inventory following the close of the sale of our ~~loans~~wholesale ~~held~~mortgage ~~for~~origination ~~sale~~operations ~~and~~to ~~runoff~~Bear Stearns, in ~~our~~February ~~portfolio~~2007, ofwe ~~our~~sold ~~loans~~approximately ~~held~~$1.2 ~~for~~billion ~~investment,~~in ~~the~~mortgage ~~combination~~loans ofto ~~which~~Bear ~~exceeded~~Stearns ~~our~~at ~~loan~~a ~~originations~~weighted average price of $397.~~2 billion~~5%. ~~However~~Loan inventory as of December 31, ~~the~~2006 ~~growth~~that was sold to Bear Stearns in ~~our~~January ~~portfolio~~and February 2007 was marked to the lower of ~~loans~~cost ~~held~~or ~~for~~market ~~investment~~(LOCOM) ~~throughout~~based ~~2005 resulted~~upon these loan sale transactions, resulting in a ~~significant~~LOCOM ~~increase~~valuation inallowance ~~interest~~of ~~income~~approximately ~~during~~$51.4 ~~the~~million ~~three~~at that date and ~~six~~a ~~months~~net ~~ended~~LOCOM ~~June 30,~~provision ~~2006~~of ~~versus~~$16.3 ~~the~~million ~~three~~for ~~and~~the ~~six~~year ~~months~~ ended ~~June~~December 3031, ~~2005~~2006.

~~During~~In ~~the three and six months ended June 30~~addition, ~~2006,~~ we ~~reported~~experienced aan ~~loss~~increase onin ~~the~~repurchase claims ~~sale~~related ofto ~~loans~~early ofpayment ~~$21.9~~defaults ~~million~~(EPD) ~~and~~on ~~$29.0~~mortgage ~~million,~~loans ~~respectively.~~for ~~Although~~which wethe ~~improved~~borrower ~~our~~has ~~gain~~missed ~~on sale execution during~~ the ~~three months~~first ~~ended~~payment ~~June 30,~~due ~~2006, we continue~~ to ~~hold~~the ~~approximately~~purchaser ~~$90~~of ~~million~~the inloan ~~inventory~~or ~~originated~~investor. ~~prior~~This led to ~~2006~~the ~~for~~need ~~which we were required~~ to increase our ~~lower~~reserve offor ~~cost~~losses orthat ~~market~~are ~~valuation~~incurred ~~reserve.~~in connection Inwith ~~addition, through~~ the ~~first~~repurchase ~~six~~and ~~months~~disposition of ~~2006~~ ~~and,~~repurchased inloans ~~particular~~or ~~during~~ the ~~second~~costs ~~quarter,~~incurred wein ~~have~~directly ~~seen~~settling anany ~~increase~~repurchase inobligation ~~repurchase~~with ~~claims~~an investor. ~~These~~During ~~claims~~the ~~generally~~third ~~relate~~and tofourth ~~early~~quarters ~~payment~~of ~~defaults~~2006, onwe ~~mortgage~~entered ~~loans~~into ~~for~~settlement ~~which~~agreements ~~the~~with ~~borrower~~11 purchasers ~~has~~of ~~missed~~our ~~the~~loans ~~first~~paying ~~payment~~or ~~due~~accruing toa ~~the~~total ~~purchaser~~ of ~~the~~ ~~loan~~$35.4 ~~The~~million ~~terms~~to ofextinguish ~~our~~various ~~loan~~EPD ~~sale~~and ~~agreements~~representation ~~generally~~and ~~require~~warranty ~~us to~~ repurchase ~~such loans~~claims. WeLoans ~~have~~sold ~~generally~~to ~~resold~~ these ~~loans~~11 topurchasers ~~other~~during ~~investors,~~2006 ~~but~~represented atthe amajority ~~significant~~of ~~discount~~our tosales ~~par,~~volume orfor if the ~~loans~~year. Under ~~were~~the interms ~~inventory~~of atmost ~~June 30,~~of ~~2006, we marked~~ the ~~loans~~settlement toagreements, ~~the~~as ~~lower~~well ofas ~~cost~~our oragreement ~~market.~~with InBear ~~addition,~~Stearns for ~~repurchase~~the ~~transactions~~sale weof ~~expect~~loans tothrough ~~complete~~the ~~subsequent~~date toof ~~June 30,~~closing ~~2006,~~the wesale ~~accrued~~of the ~~loss~~mortgage banking operations, we ~~expect~~settled tomost ~~incur~~known ~~upon~~existing ~~final~~and ~~disposition~~future offorecasted claims, ~~such~~limiting ~~loans.~~the Asability aof ~~result~~purchasers of ~~these factors,~~our weloans ~~are~~to ~~reporting~~put athem ~~loss~~back onto ~~the~~us. ~~sale~~However, ofthere ~~loans~~could ofbe ~~$21.9~~additional ~~million~~unknown ~~for~~claims ~~the~~that ~~three~~may ~~months~~result ~~ended~~in ~~June 30,~~future ~~2006~~material liability.

~~Loans~~We weutilized doEurodollar ~~not~~futures ~~securitize are generally sold~~ to ~~third~~hedge ~~parties in whole loan sale transactions. We have experienced improved whole loan prices in~~ the ~~secondary~~risk ~~markets during the second quarter~~ of ~~2006.~~changes ~~The~~in ~~average sales price on loans during~~ the ~~second~~value ~~quarter~~ of ~~2006~~our ~~was 100.37%,~~loan ainventory 61and ~~basis~~anticipated ~~point~~originations ~~increase~~due ~~from~~to ~~the~~changes ~~average~~in ~~loan~~interest ~~sales price of 99~~rates.~~76%~~ ~~received~~We ~~during~~settled ~~the~~all ~~first~~outstanding ~~quarter~~Eurodollar ofcontracts ~~2006.~~in ~~There~~February 2007 ~~were similar increases~~ in ~~premium~~connection ~~loan sales~~ with ~~premium sales for~~ the ~~second~~sale ~~quarter~~ of ~~2006~~our ~~averaging~~loan ~~101.74%,~~inventory ato ~~108 basis~~Bear ~~point increase over first quarter sales of 100~~Stearns.~~66%.~~

19Operating expenses reflect those expenses that were directly related to the mortgage origination business. Following the initial public offering in 2005, the Company shared personnel and services with its subsidiaries, principally Performance Credit Corporation through the date of the sale of the mortgage origination business to Bear Stearns. Costs associated with these shared personnel and services have been allocated to continuing operations, despite the fact that many of the personnel providing such services became employees of Bear Stearns after February 9, 2007.

~~Table~~22 ~~of Contents~~

~~Our~~Off-Balance ~~expenses~~Sheet ~~for~~Arrangements the six months ended June 30, 2006 increased to $78.2 million from $73.3 million for the six months ended June 30, 2005. The increase in expenses is mainly due to $9.1 million in restructuring charges we recorded during the first half of 2006 related to terminating over 610 employees and consolidating our operations into three central processing centers located in Irvine, California, Downers Grove, Illinois, and Glen Allen, Virginia. The majority of the expenses related to severance payments and estimated lease termination fees. Our expenses decreased to $30.7 million during the three months ended June 30, 2006 as compared to $41.6 million for the three months ended June 30, 2005. The decrease is mainly due to cost savings from our reorganization, as discussed above, and a decline in commission expense due to lower production levels.

We ~~originated~~are ~~approximately~~party $3to transactions that have off-balance sheet components.2 ~~billion~~In ~~and~~connection with off-balance sheet securitization transactions, there were $~~5.4~~199 ~~billion~~million in loans ~~during~~remaining ~~the~~in ~~six~~off-balance ~~months~~sheet ~~ended~~trusts ~~June~~as of March 3031, ~~2006 and 2005, respectively~~2007. The ~~decrease~~trusts inhave ~~loan~~issued ~~originations~~securities isor ~~primarily~~bonds ~~attributable~~secured toby athese ~~rising~~loans. ~~interest~~We ~~rate~~have ~~environment~~no ~~and~~obligation ~~declines~~to inprovide ~~sales~~funding ofsupport ~~residential~~to ~~housing,~~either ~~which~~the wethird ~~have~~party ~~not~~investors ~~experienced~~or ~~since~~the weoff-balance ~~began~~sheet ~~operations~~trusts. inThe ~~2002~~third party investors, ~~and~~or ~~our~~the ~~efforts~~trusts, generally have no recourse to ~~originate~~ ~~higher~~our ~~quality~~assets ~~loans~~or us.

~~Critical~~We ~~Accounting~~have ~~Policies~~retained certain residual interests in the securitization trusts. The performance of the loans in the trusts will impact our ability to realize the current estimated fair value of these assets that are included on our balance sheet.

We have established various accounting policies that apply accounting principles generally accepted in the United States of America in the preparation of our historical financial statements. Certain accounting policies require us to makeContractual ~~significant~~Obligations ~~estimates~~ and ~~assumptions~~Commercial ~~that~~Commitments may have a material impact on certain assets and liabilities or our results of operations, and we consider these to be critical accounting policies. The estimates and assumptions used are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates and assumptions, which could have a material impact on the carrying value of our assets and liabilities and our results of operations.

WeThe ~~believe the~~ following ~~are~~table ~~critical~~summarizes ~~accounting~~our ~~policies~~material ~~that~~contractual ~~require~~obligations ~~the~~and ~~most~~commercial ~~significant~~commitments ~~estimates~~as ~~and~~of ~~assumptions~~March 31, ~~that~~2007, ~~are~~as ~~subject~~well toas ~~significant~~the ~~change~~consolidated inobligations of the ~~preparation~~securitization ofentities ~~our~~that we sponsored and are consolidated ~~financial~~on ~~statements~~our balance sheets (amounts in thousands):

Mortgage Loans and Origination Costs and Fees


	Payment due by period
	Total		Less than 1 year		1 to 3 years		4 to 5 years		More than 5 years
Operating leases	$	6,047	$	2,924	$	2,043	$	1,080
Repurchase obligations	$	2,000	$	2,000
Long-term debt(1)	$	2,100,481	$	1,308,611	$	555,270	$	141,100	$	95,501

~~Our~~(1) ~~mortgage~~The ~~loans~~long-term ~~are~~debt ~~classified~~had asa ~~either~~weighted ~~held~~average ~~for~~interest ~~sale~~rate orof ~~held for investment~~5.80% ~~Mortgage loans held for sale are carried~~ at ~~the~~March ~~lower of cost or market on an individual loan basis. Market value is determined by reference to prices obtained on recent sales of similar loans~~31, ~~planned loan sale transactions, or through loan pricing models~~2007. ~~The provision to reduce held for sale loan inventory to the lower of cost or market is charged to gain on sale of loans.~~

~~Mortgage~~Operating ~~loans~~leases that we securitize or expect to securitize through on balance sheet securitizations are classified as held for investment and carried at amortized cost. Mortgage loans transferred from held for sale to held for investment are transferred at the lower of cost or market at the date of the transfer.

WeThrough ~~capitalize~~June 8, ~~the~~2007, ~~fees~~we ~~received~~have ~~from~~entered ~~borrowers~~into atvarious ~~the~~agreements ~~time~~to ofterminate ~~loan~~or ~~origination,~~sublease ~~and~~all ~~various~~our material ~~costs~~operating ofleases ~~originating loans, which consist~~ of ~~fees~~office space and ~~premiums~~other ~~paid~~real ~~to brokers~~estate, aswith ~~well~~the asexception ~~certain~~of ~~direct~~three ~~internal costs~~leases. ~~Net~~One ~~capitalized~~lease ~~origination~~agreement ~~costs~~expires ~~and~~on ~~fees~~June 30, on2007. ~~loans~~That ~~held~~space ~~for~~was ~~sale~~used ~~are~~for ~~charged~~operations. toOn ~~expense~~June 6, at2007 ~~the~~we ~~time~~entered ~~the~~into ~~related~~a ~~loans~~new ~~are~~lease ~~sold~~that provides ~~and~~space ~~reduce~~for the ~~gain~~remaining onwork ~~sale~~force ~~recorded.~~through ~~Net~~December 31, ~~capitalized~~2008. ~~origination costs~~We ~~and~~hold ~~fees~~a onminority ~~loans~~ownership ~~held~~interest ~~for~~in ~~investment are amortized as~~ a ~~component~~small ofretail ~~interest~~lending ~~income~~business ~~over~~which ~~the~~is ~~life~~consolidated ofin ~~the~~our ~~portfolio~~financial ~~using~~statements. ~~the~~That ~~effective~~business ~~yield~~leases ~~method~~office inspace aunder ~~manner~~another lease arrangement that ~~anticipates~~has ~~prepayments.~~been Atguaranteed ~~each~~by ~~reporting~~the ~~period,~~Company ifand ais ~~difference~~reflected ~~arises between~~in the ~~prepayments~~contractual ~~anticipated~~obligations and ~~actual~~commercial ~~prepayments~~commitments ~~received,~~presented weabove. ~~will~~Our ~~recalculate~~lease ~~the~~reserves ~~effective~~may ~~yield~~prove to ~~reflect~~be ~~actual~~inadequate ~~prepayments~~as tothere ~~date~~is ~~and~~no ~~anticipated~~assurance ~~future~~that ~~prepayments.~~our ~~Accordingly,~~subtenants ~~if actual prepayment speeds exceed anticipated~~will ~~prepayment~~meet ~~speeds~~their weobligations ~~will~~under bethe ~~required~~sublease ~~to record additional interest expense~~agreements.

~~Allowance~~Warehouse ~~for~~and ~~Losses~~repurchase onfacilities ~~Mortgage Loans Held for Investment~~

~~For~~There ~~our~~were ~~mortgage~~no ~~loans~~amounts ~~held~~due ~~for~~under ~~investment,~~warehouse ~~we establish an allowance for loan losses based on our estimate of losses inherent~~ and ~~probable~~repurchase asfacilities ~~of the~~at ~~balance~~March 31, ~~sheet date~~2007. WeAll ~~periodically~~warehouse ~~conduct~~and ~~reviews~~repurchase offacilities ~~all~~were ~~loans~~repaid ~~held~~ in ~~our~~February ~~portfolio~~2007 in conjunction ~~order~~with ~~to determine collectibility. We determine~~ the ~~amount~~closing of the ~~loss~~sale ~~allowance for these loans based on a review~~ of ~~static pools, gross defaults, recovery rate trends, current economic conditions and trends, and other relevant data. To date, we have had minimal losses; however, as~~ our ~~portfolio~~wholesale ~~continues~~mortgage toorigination ~~mature~~business ~~and we experience more losses, we plan~~ to ~~compare~~Bear ~~actual loss performance to original loss assumptions and, if necessary, make adjustments to the allowance for losses~~Stearns. In order to increase allowances, a loan loss provision is charged to the statement of operations, resulting in a reduction to earnings. Loans that are deemed to be uncollectible will be charged off and deducted from the allowance. Recoveries on loans previously charged off will be added to the allowance. As our portfolio of loans held for investment increases and ages, we would expect a corresponding increase in our allowance for losses.

~~Our~~Repurchase ~~estimate~~obligations of expected losses could increase if our actual loss experience is different than originally estimated, or if economic facts change the value we could reasonably expect to obtain from a sale. In particular, if actual losses increase, the allowance for losses would increase. Any increase in the allowance for losses relating to these factors may adversely affect our results of operations.

20As of March 31, 2007, we have unresolved claims from investors to repurchase approximately $6 million in loans. During the quarter ended March 31, 2007 we paid $200,000 to settle certain outstanding claims. As of March 31, 2007, we have reserved $2 million for potential losses that may be realized on the settlement of these and other incurred but unknown claims. Although management believes the amount reserved is adequate to provide for losses on the settlement of repurchase claims, the timing and amount of any remaining repurchase claims is highly uncertain and it is reasonably possible that losses ultimately realized may be greater than amounts provided for.

~~Table~~Long-term ofdebt ~~Contents~~

WeLong-term ~~cease~~debt represents ~~accruing~~amounts ~~interest~~payable ~~income~~to onbondholders ~~loans~~in ~~when~~connection ~~any~~with ~~portion~~our ofsecuritizations ~~principal~~accounted orfor ~~interest~~as isfinancings. ~~90 days~~As ~~past~~principal ~~due,~~payments oron ~~earlier when~~the ~~any~~underlying ~~concern~~mortgages ~~exists~~are aspaid through to reduce principal on the ~~ultimate~~bonds, ~~collectibility~~the term of ~~principal~~the orbonds ~~interest.~~is ~~Interest~~ultimately ~~income~~a function ~~recognized~~of ~~prior~~the torate ~~loans~~at ~~becoming~~which 90principal ~~days~~is ~~past~~paid ~~due~~on isthe ~~reversed~~mortgages. Based upon anticipated

~~Gain~~23 ~~or Loss on Sale of Loans~~

We prepayment ~~recognize~~speeds athe ~~gain~~Company orestimates ~~loss~~that on the ~~sale~~bonds ofwill ~~our~~be ~~loans~~fully werepaid ~~sell~~by ~~through whole-loan sales~~2015. ~~Gains~~However, orthe ~~losses~~bonds ~~resulting~~have ~~from~~a ~~these~~“clean-up ~~sales~~call” orprovision ~~securitizations~~which allows ofthe ~~mortgage~~Company ~~loans~~to ~~are~~dissolve ~~recognized at~~ the ~~date~~trust ~~of settlement~~ and ~~are~~repay ~~based~~outstanding onbonds when the ~~difference~~remaining ~~between~~principal balance of the ~~selling~~underlying ~~price~~loans ~~for~~is ~~sales~~10% or ~~securitizations~~less ~~and~~of ~~the~~their ~~carrying~~original ~~value~~balance. ofIf the ~~related~~ ~~loans~~Company ~~sold.~~exercises Asthis ~~part~~call ofprovision, the ~~sale~~Company ofestimates athat ~~mortgage~~the bonds ~~loan,~~could webe ~~sell~~fully ~~the~~repaid ~~servicing~~by ~~rights~~2009. ~~The~~However, ~~purchasing~~the ~~company~~timing ~~pays~~of uswhen athe ~~service~~Company ~~release~~may ~~premium~~be ~~for~~able ~~that~~to ~~right.~~exercise ~~This~~the ~~premium~~call isprovision ~~included~~may inbe ~~“gain~~delayed ~~(loss)~~based onupon ~~sale~~the recent tightening of ~~loans”~~credit instandards for subprime borrowers and the ~~accompanying~~ ~~consolidated~~continued ~~statements~~deterioration of ~~operations~~the subprime lending industry.

~~Loan~~Liquidity ~~sales~~ and ~~securitizations~~Capital ~~are~~Resources accounted for as sales when control of the loans is surrendered, to the extent that consideration other than beneficial interests in the loans transferred is received in the exchange. Retained interests in securitizations accounted for as sales are measured by allocating the previous carrying value between the loans sold and the interests retained, if any, based on their relative fair values at the date of transfer.

~~Allowance~~Upon ~~for~~completion ~~Repurchase~~of ~~Losses~~our transactions with Bear Stearns in February 2007, we effectively exited the wholesale mortgage origination business. Following the transaction, our principal source of liquidity is the cash flow we receive from our securitizations. We created our securitizations through transfer of loans to a trust that issued long-term debt or bonds collateralized by the loans. The trust collects the principal and interest on the loans and passes through all principal collected to bondholders. Interest is paid to holders of the debt based upon the stated rate associated with the class of debt. The difference between the interest collected on the loans and interest paid to the bondholders and ongoing expenses of the trust is excess cash flow. The excess cash flow provides additional collateral to the bondholders as it is available to absorb losses realized on defaulted loans. To the extent excess cash flow exceeds losses on the loans, it is used to pay down principal on senior securities issued by the trust to create additional collateralization (over-collateralization or OC) until specified OC levels are maintained by the trust. Excess cash flow not required to cover losses or build OC will be distributed to us. In addition to excess cash flow from the securitizations, we also receive servicing fees to the extent that we have retained ownership in the servicing rights on the loans included in the trust. We receive cash flows from securitizations as described regardless of whether the securitization is accounted for as a sale or a financing.

~~Losses~~Through ~~incurred~~March 31, on2007, ~~mortgage loans that~~ we have ~~sold and subsequently repurchased due to breaches of representations and warranties contained in the~~ ~~purchase~~completed ~~and~~eight ~~sale agreements are charged to the allowance for repurchase losses~~securitizations. ~~The~~A ~~allowance~~summary ~~represents~~of our ~~estimate~~seven ~~based~~remaining ~~upon management~~securitizations’s ~~evaluation~~initial ofand ~~historical~~current ~~experience~~balances ~~with~~and ~~respect~~over tocollateralization ~~each~~requirements ~~investor~~as of ~~the principal~~March 31, ~~premium,~~2007 ~~interest losses and other costs, if any, expected to occur at the time of repurchase. The provision for expected repurchase losses~~ is ~~charged~~as tofollows ~~gain~~(amounts orin ~~loss~~thousands): ~~on sales of loans and credited to an allowance.~~

Fair Value of Residual Interests in Loan Securitizations


	As of March 31, 2007
	Date of securitization	Scheduled loan principal balances			Bond balances		NIM bond balances		Over collateralization
Securitization		Initial	Current						Currently required		Current balance		60+ days delinquencies (1)
		(in thousands)
		(unaudited)
*Retained interests*
SASCO ECC 2003-1	Apr-03	278,718		25,545		21,885		—		3,763		3,660	14.7	%
CWABS ECC 2004-1	Jul-04	530,000		86,067		82,108		—		3,959		3,959	13.9	%
CWABS ECC 2004-2	Sep-04	549,464		87,543		82,641		—		4,902		4,902	14.9	%

*Financing transactions*
ECR 2005-1	Mar-05	1,600,004		494,790		473,990		—		20,800		20,800	11.9	%
ECR 2005-2	May-05	1,400,000		596,918		580,118		—		16,800		16,800	10.7	%
ECR 2005-3	Aug-05	1,029,348		497,250		467,914		—		29,336		29,336	8.3	%
ECR 2005-4	Nov-05	1,000,002		586,459		578,459		—		8,000		8,000	10.4	%

Total			$	2,374,572	$	2,287,115	$	—	$	87,560	$	87,457

~~In securitizations completed during 2003, 2004, and 2006, we conveyed loans that we originated to a special purpose entity~~ (~~such as a trust~~1), or60+ todays adelinquencies ~~third~~also ~~party~~include ~~that subsequently sold the loans to a special purpose entity~~bankruptcies, inforeclosures ~~exchange for cash proceeds~~ and ~~a residual interest in the trust~~REO. The cash proceeds were raised through an offering of the pass-through certificates or bonds evidencing the right to receive principal payments and interest on the certificate balance or on the bonds. Pursuant to FASB Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, or SFAS No. 140, and its predecessor accounting pronouncements, we recorded gain or loss on sales of loans, equal to the difference between the portion sold and any retained interests, herein referred to as residual interests, based on their relative fair values at the date of transfer and our basis in the loans. The residual interests represent, over the estimated life of the loans, the present value of the estimated cash flows. These cash flows are determined by the excess of the projected interest earned on each pool of securitized loans over the sum of the interest paid to investors, the contractual servicing fee, an estimate for credit losses and other ongoing costs of the securitization. Each agreement that we have entered into in connection with these securitizations requires the over-collateralization of the trust that may initially be funded by cash or an excess of loans deposited into the trust. The amount and timing of the cash flows expected to be released from the securitization trusts consider the impact of the applicable delinquency and credit loss limits specified in the securitization agreements.

WeA ~~determined~~summary ~~the present value~~ of ~~the~~ cash flows atreceived ~~the~~by ~~time each~~us ~~securitization~~from ~~transaction~~our ~~closed~~retained ~~using~~interests ~~certain~~in ~~assumptions~~each ~~and~~securitization ~~estimates~~during ~~made~~the byquarter ~~management~~ended atMarch 31, ~~the~~2007 ~~time~~and ~~the~~year ~~loans~~ended ~~were~~December ~~sold.~~31, ~~These~~2006, ~~assumptions~~is ~~and~~as ~~estimates~~follows ~~included:~~(amounts in thousands):

•24 ~~estimates of future interest rates based upon the forward LIBOR curve;~~

• future rates of principal prepayment on the loans;


Securitization	Three months ended March 31, 2007		Year ended December 31, 2006
*Retained interests*
SASCO ECC 2003-1	$	—	$	55
CWABS ECC 2004-1		6,718		—
CWABS ECC 2004-2		9,700		—
Bravo Mortgage Asset Trust 2006-1		20,000		3,983

*Financing transactions*
ECR 2005-1		2,629		24,576
ECR 2005-2		2,327		25,116
ECR 2005-3		3,555		1,938
ECR 2005-4		888		—

Total	$	45,817	$	55,668

•As ~~timing~~of ~~and~~March 31, ~~magnitude~~2007, we are receiving distributions of ~~credit~~cash ~~losses;~~flow ~~and~~from all of our securitizations except SASCO ECC 2003-1. Loan principal balances in the 2003-1 securitization have paid down to the point that the servicer may exercise their clean up call rights, upon which the balance of the overcollateralization account within the securitization will be released to us. We are unable to determine when, or if, such a clean up call will occur.

•We ~~discount~~sold ~~rate~~our ~~used~~interest in Bravo Mortgage Asset Trust (BMAT) 2006-1 in February 2007 for $20 million. We are continuing to ~~calculate~~explore ~~present~~opportunities to maximize the value and liquidity of our remaining retained interests, including the sale or financing of all or part of our retained interests in securitizations.

~~The~~Management ~~future~~believes that cash flows ~~represent~~ ~~management’s~~from ~~best~~its ~~estimate.~~securitizations, ~~There~~including ~~can~~cash bemade noavailable ~~assurance~~from of the ~~accuracy~~sale or financing of ~~management’s~~all ~~estimates.~~or ~~Most~~part of ~~our~~the Company’s ~~residual~~retained interests ~~are~~in ~~recorded~~securitizations, atwill ~~estimated~~be ~~fair~~adequate ~~value~~to ~~and~~provide ~~are~~for ~~marked~~operating toneeds ~~market~~ through a2007. ~~charge~~However, ~~(or~~there ~~credit)~~has ~~to earnings.~~recently Onbeen asignificant ~~quarterly~~adverse ~~basis,~~publicity weregarding ~~review~~market ~~the~~conditions ~~fair~~in ~~value~~the ofsubprime ~~our~~mortgage ~~residual~~industry. ~~interests~~Several companies byhave ~~analyzing~~announced ~~prepayment,~~an ~~credit~~increase ~~loss,~~in ~~discount~~loan ~~rate~~defaults ~~assumptions~~ and ~~other~~losses ~~performance assumptions~~ and ~~estimates~~concerns inregarding ~~relation~~the togrowing ~~our~~impact ~~actual~~that ~~experience~~slowing appreciation and, ~~current~~in ~~rates of~~some ~~prepayment~~cases, ~~and~~declines ~~credit~~in ~~loss~~housing ~~prevalent~~prices inmay ~~the~~have ~~industry.~~on Weloss ~~may~~reserves ~~adjust~~and the ~~value~~values of ~~our~~their ~~residual~~mortgage loans and retained interests orin ~~take~~securitizations. aIf ~~charge~~loan todelinquencies ~~earnings~~and ~~related~~losses continue to ~~the~~increase ~~residual~~within ~~interests,~~our ~~as appropriate~~securitizations, tocash ~~reflect~~flows awe ~~valuation~~receive orfrom ~~write-down~~our ofsecuritizations ~~the~~may ~~residual~~be ~~interests based~~reduced. ~~upon~~Based ~~the~~on ~~actual~~current ~~performance~~market ofconditions, ~~the~~our ~~residual~~ability ~~interests as compared~~ to ~~our~~sell ~~key~~and ~~assumptions~~or satisfactorily ~~and~~finance ~~estimates~~certain ~~used~~assets tomay ~~determine~~be ~~fair~~adversely ~~value~~impacted. ~~Although~~These ~~management~~market ~~believes~~conditions ~~that~~as ~~the~~well ~~assumptions~~as ~~used~~a topossible ~~estimate~~decline ~~the~~in ~~fair~~expected ~~value~~cash offlows ~~the~~from its residual interests ~~are~~ ~~reasonable,~~in ~~there~~securitizations ~~can~~may benegatively noimpact ~~assurance as to~~ the ~~accuracy~~cash offlow ~~the~~generated ~~assumptions~~from ~~or estimates~~our securitizations.

21Other Borrowings

~~Table~~From time to time we may also enter into repurchase borrowing arrangements, pledging securities we own as collateral or may borrow against the cash surrender value of ~~Contents~~corporate owned life insurance (“COLI”). At March 31, 2007, we had $10.2 million in outstanding borrowings against our COLI. The total cash surrender value of the COLI, including amounts securing borrowings, was $14.3 million at March 31, 2007. We maintained COLI as a mechanism for funding liabilities to employees that contribute to a deferred compensation plan. Our liability to the plan at March 31, 2007 was $4.2 million. On June 7, 2007, we terminated our deferred compensation plan which will result in payments of our related liability through January 2008.

~~Estimated~~Cash ~~future~~Flow cash flows in excess of the amortized cost of our investment in residual interests are recognized as income at a constant rate of interest (level-yield) over the estimated period of time that the cash flows will be received, in accordance with Emerging Issues Task Force 99-20 (“EITF 99-20”), Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets. On a quarterly basis, if estimated cash flows generated from the securitized asset’s underlying collateral differ from the cash flows previously estimated due to actual prepayment or credit loss experience, we calculate revised yields based on the current amortized cost of the investment and the revised cash flows. The revised yields are then applied prospectively to recognize interest income.

~~Deferred~~Cash ~~Bond~~provided ~~Issuance~~by ~~Costs~~operating activities was $1.1 billion for the three months ended March 31, 2007 as compared to cash provided by operating activities of $333 million for the three months ended March 31, 2006. The majority of the cash provided by operations resulted from the reduction in loans held for sale. We sold the majority of our remaining loans in February 2007 as part of our plan to exit the loan origination business.

~~Direct costs~~Cash ~~associated~~provided ~~with~~by ~~the~~investing ~~issuance~~activities ofdecreased ~~long-term~~to ~~collateralized~~$351 ~~debt~~million ~~are~~for ~~capitalized and amortized as a component of interest expense in a manner that produces a constant rate of interest over~~ the ~~estimated~~three ~~term~~months ofended ~~the debt~~March 31, ~~expecting~~2007 ~~that~~from ~~the~~$465 ~~debt will~~million befor ~~paid fully from~~ the ~~cash~~three ~~flows~~months ~~from~~ended ~~the~~March 31, ~~underlying collateral~~2006. ~~Changes~~The indecrease ~~the~~was ~~estimated~~primarily ~~amount~~due ~~and timing in cash flows of the collateral that pass through~~ to ~~the~~a ~~debt~~reduction ~~may~~in ~~cause us to amortize deferred bond issuance costs faster or slower~~principal ~~than~~payments wereceived ~~anticipated~~on ~~upon~~our ~~issuance~~loans ofheld ~~the~~for ~~bonds~~investment.

~~Derivative~~25 ~~Financial Instruments and Hedging Activities~~

~~Hedging~~Cash isused aby ~~critical~~financing ~~aspect~~activities ofwas ~~our~~$1.5 ~~business~~billion ~~because~~for the ~~value~~three ofmonths ~~our~~ended ~~assets~~March 31, is2007 ~~sensitive~~as tocompared ~~the fluctuation of interest rates. From time~~ to ~~time, we have, and will~~cash ~~continue~~used toin ~~use,~~financing ~~various~~activities ~~financial~~of ~~instruments~~$797 tomillion ~~hedge~~for ~~our~~the ~~exposure~~three tomonths ~~changes~~ended inMarch 31, ~~interest rates~~2006. The ~~following~~increase ~~summarizes~~is ~~the~~mainly ~~hedging~~due ~~instruments that, subject~~ to ~~limitations~~repayments ~~imposed~~of bylong-term ~~the~~debt ~~REIT~~resulting ~~requirements,~~from wepayments ~~have~~received ~~used~~on toour ~~reduce~~loans ~~interest~~held ~~rate risks~~for oninvestment ~~our~~and ~~residual~~a ~~interests,~~reduction ~~the~~in ~~loans~~our warehouse ~~that~~liability wedue ~~hold~~to ~~for~~the ~~investment~~sale ~~and~~of ~~the~~our ~~loans~~mortgage ~~that~~origination weoperations ~~hold~~to ~~for~~Bear ~~sale~~Stearns.

~~Interest~~Item ~~Rate Swap Agreements and Eurodollar Futures~~3. ~~Interest~~Quantitative rate swap agreements allow us to exchange floating rate obligations for fixed-rate obligations effectively locking in our borrowing costs for a period of time. When we enter into a swap agreement we agree to pay a fixed-rate of interest and toQualitative ~~receive~~Disclosures aAbout ~~variable~~Market interest rate, generally based on LIBOR. We may also sell Eurodollar futures contracts in order to mitigate the projected impact of interest rate changes on our forecasted one-month LIBOR based liabilities. Risk

~~Interest~~Market ~~Rate~~risk ~~Cap~~is ~~Agreements~~the exposure to loss resulting from changes in interest rates, credit spreads, foreign currency exchange rates, commodity prices and equity prices. ~~Interest~~As ~~rate~~we ~~cap~~are ~~agreements~~invested ~~allow~~solely usin U.S. dollar denominated instruments, primarily residential mortgage instruments, and our borrowings are also domestic and U.S. dollar denominated, we are not subject to ~~receive~~foreign ~~cash~~currency ~~payments~~exchange, ifor commodity and equity price risk; the primary market risk that we are exposed to is interest rate ~~index~~risk ~~specified~~and inits ~~the~~related ~~cap~~ancillary ~~agreement~~risks. ~~increases~~Interest ~~above~~rate ~~contractually~~risk ~~specified~~is ~~levels.~~highly ~~Therefore~~sensitive to many factors, ~~the~~including ~~interest~~governmental ~~rate~~monetary ~~cap~~and ~~agreements~~tax ~~have~~policies, ~~the~~domestic ~~effect~~and ofinternational ~~capping~~economic ~~the~~and ~~interest~~political ~~rate~~considerations onand aother factors ~~portion~~beyond our control. None of our ~~borrowings~~market torisk ~~the~~sensitive ~~rate~~assets, ~~specified~~liabilities byand ~~the interest~~related ~~rate~~derivative ~~cap~~positions ~~agreement~~are held for speculative purposes.

WeRisk ~~also~~Management may use, from time to time, futures contracts and options on futures contracts on the Eurodollar, federal funds, treasury bills and treasury notes and similar financial instruments to mitigate risk from changing interest rates.

WeOur ~~presently~~risk domanagement ~~not~~focuses ~~intend~~on toprotecting ~~enter into~~against ~~derivative~~possible ~~instruments,~~“compression” ~~except~~in ~~for~~the ~~hedging~~net ~~purposes.~~interest ~~Further,~~margin itwith isrespect to ~~unlikely~~our ~~that~~portfolio weof ~~can~~loans ~~obtain~~held ~~hedging~~for ~~instruments~~investment. ~~that~~The ~~perfectly~~“yield ~~offset~~curve” ~~all~~creates ofthis ~~the~~risk ~~risks~~because of ~~our~~different ~~assets~~repricing ~~and~~durations ~~liabilities.~~for Noinstruments ~~hedging~~with ~~strategy~~different ~~can~~maturities. ~~completely~~In ~~insulate us from risk~~substance, ~~and~~ ~~certain of~~ the ~~federal~~hedging ~~income~~objective ~~tax~~is ~~requirements that we must satisfy~~ to ~~qualify~~protect asthe anet ~~REIT~~interest margin ~~may~~by ~~limit~~matching ~~our~~repricing ~~ability~~durations tofor ~~hedge.~~the Wehybrid/adjustable-rate ~~intend~~mortgage toloan ~~monitor~~portfolio and ~~may~~the ~~have~~corresponding tofunding ~~limit~~sources. ~~our~~For ~~hedging~~accounting ~~strategies~~purposes, tothese ~~ensure~~hedges ~~that~~are wecalled docash ~~not~~flow ~~realize~~hedges, ~~excessive~~and ~~hedging~~the ~~income or~~accounting ~~hold~~is ~~hedging~~different ~~assets~~than ~~having~~for ~~excess~~ fair value ~~in relation to our total assets~~hedges.

InHybrid/adjustable-rate ~~accordance~~mortgage ~~with~~loans ~~SFAS~~have ~~133,~~longer ~~all~~repricing ~~derivative~~durations ~~instruments~~and ~~are recorded at fair value. To qualify for hedge accounting under SFAS 133,~~ we ~~must~~may ~~demonstrate,~~not onbe anable ~~ongoing~~to ~~basis,~~obtain ~~that~~matched ~~our~~repricing ~~interest~~durations ~~rate~~for ~~risk~~the corresponding ~~management~~funding ~~activity~~sources issince ~~highly~~borrowings ~~effective.~~generally Wehave ~~must~~a ~~also~~shorter ~~formally~~repricing ~~assess,~~duration ~~both~~than atmost ~~inception~~hybrid/adjustable-rate ofmortgage ~~the~~loans ~~hedge~~where ~~and on an ongoing basis, whether~~ the ~~derivative~~initial ~~instruments~~rate ~~used~~is ~~are~~fixed ~~highly~~for ~~effective~~one into ~~offsetting~~five ~~changes in cash flows of hedged items~~years. IfWe wehedge ~~are~~these ~~unable~~loans towith ~~qualify certain of our~~ interest rate ~~risk~~swap ~~management activities for hedge accounting, then the change in~~agreements ~~fair~~and ~~value~~cap ofagreements ~~the associated derivative financial instruments would be reflected~~ in ~~current~~order ~~period~~to ~~earnings,~~match ~~but~~ the ~~change~~repricing indurations ~~fair value~~ of the ~~related~~loans ~~asset~~and orour ~~liability~~funding ~~may not, thus creating a possible earnings mismatch~~sources.

~~While~~Interest weRate ~~may~~Risk change the classification of our derivative financial instruments in the future, we presently account for all our derivative financial instruments as trading instruments and we do not apply hedge accounting treatment, as defined by SFAS 133. Accordingly, realized and unrealized changes in fair value are recognized in income during the period in which the changes occur.

~~Income~~We ~~taxes~~are subject to interest rate exposure relating to our portfolio of mortgage loans held for investment. Changes in interest rates impact our future earnings in various ways. While we originate and hold in our loan portfolio primarily hybrid/adjustable-rate mortgage loans, rising short-term interest rates may temporarily negatively affect our earnings, and, conversely, falling short-term interest rates may temporarily increase our earnings. This impact can occur for a number of reasons and may be mitigated by portfolio prepayment activity as discussed below. First, our borrowings may react to changes in interest rates sooner than our hybrid/adjustable-rate mortgage loans because the reset dates on our borrowings generally occur sooner than that of the hybrid/adjustable-rate mortgage loans. The interest expense on the mortgage-backed securities is typically adjusted monthly relative to market interest rates, generally the one-month LIBOR. The interest on the underlying mortgage loans is based on fixed rates payable on the underlying loans, generally for the first two or three years from origination, while the holders of the applicable securities are generally paid based on an adjustable LIBOR-based yield. Second, interest rates on hybrid/adjustable-rate mortgage loans may be capped for the first adjustment, per adjustment period and for the life of the loan (commonly referred to as the initial cap, the periodic cap and the lifetime cap, respectively), and our borrowings may not have similar limitations. Third, interest rates on hybrid/adjustable-rate mortgage loans typically change less frequently than the applicable interest rates on our liabilities.

WeThe ~~currently~~rate ~~intend~~of toprepayment ~~elect~~on tomortgage beloans ~~taxed~~may asincrease ~~a REIT~~if ~~for~~interest ~~federal~~rates ~~income~~decline ~~tax~~or ~~purposes~~if ~~for~~the ~~our~~difference between ~~taxable~~long-term ~~year~~and ~~ending~~short-term ~~December 31,~~interest ~~2005~~rates diminishes. InIncreased ~~order~~prepayments would cause us to ~~meet~~amortize the ~~requirements~~premiums paid for usour tomortgage ~~qualify~~loans ~~as a REIT~~faster, weresulting ~~continue~~in toa ~~conduct~~reduced ~~all~~yield ofon our ~~loan~~mortgage ~~originations~~loans. ~~and~~Increased ~~sales~~prepayments ~~through~~would ~~Encore~~also ~~Credit.~~reduce the Aslength ~~a result~~ of ~~our~~time ~~joint~~we ~~election,~~received ~~Encore~~excess ~~Credit~~cash isflow ~~treated~~from as our ~~taxable~~securitizations, ~~REIT~~reducing ~~subsidiary,~~the orvalue ~~TRS.~~of ~~The~~our ~~origination~~retained ~~and~~interests in securitizations.

22Conversely, the rate of prepayment on mortgage loans may decrease if interest rates rise or if the difference between long-term and short-term interest rates increases. Decreased prepayments would cause us to amortize the premiums paid for our hybrid/adjustable-rate mortgage loans over a longer time period, resulting in an increased yield on our mortgage loans. Decreased prepayments would also increase the length of time we receive excess cash flow from our securitizations, increasing the value of our retained interests in securitizations.

~~Table~~Interest ofrate ~~Contents~~changes may also impact our equity as our residual interests and derivative instruments are held at fair value. In general, we would expect that over time, decreases in income from our loan portfolio attributable to interest rate changes will be offset to some degree by increases in cash flow received from our derivative instruments and vice versa.

~~purchase~~26 of the loans we sell in whole-loan sales are funded by Encore Credit. The origination and purchase of the loans we retain for our portfolio are funded by Encore Credit and subsequently transferred to us (ECC Capital). To the extent that we purchase mortgage loans from Encore Credit in this manner, we are required to purchase those loans at fair market value.

~~Federal~~Changes ~~income~~in ~~tax~~market ~~law~~interest ~~requires~~rates ~~that~~affect aour ~~REIT~~estimates ~~distribute to its stockholders annually at least 90%~~ of ~~its net taxable income, excluding its net capital gains and excluding~~ the ~~retained~~fair ~~earnings~~value of ~~any TRS it owns. If we distribute all of~~ our ~~taxable~~mortgage ~~income~~loans toheld ~~our~~for ~~stockholders~~investment and ~~otherwise qualify as a REIT, we generally will not be required to pay federal income tax. Any taxable income generated by our taxable REIT~~ ~~subsidiaries,~~related ~~however, will be subject to regular corporate income tax~~derivatives. ~~Our~~The ~~TRSs~~changes ~~may~~in ~~retain~~fair ~~any~~value ~~income generated, net of any tax liability incurred on~~ that ~~income,~~are ~~without~~stated ~~affecting~~below ~~the~~are ~~REIT~~derived ~~distribution~~based ~~requirements,~~upon ~~subject~~hypothetical toimmediate ~~our~~and ~~compliance~~equal ~~with the~~changes ~~20% asset test applicable~~ to ~~our~~market ~~ownership~~interest rates of ~~securities~~various ~~in TRSs~~maturities. IfThe ~~Encore~~effects ~~Credit~~of ~~chooses~~the tohypothetical ~~make~~adjustment ~~distributions~~ to ~~us,~~ the ~~amount~~base ofor ~~such distribution that is taxable as a dividend will be included in our taxable income that is subject to the~~current ~~distribution~~interest ~~requirements.~~rate ~~Any~~curve ~~distributions~~are weadjusted ~~make~~by in the ~~future~~levels ~~will~~shown bebelow: ~~at the discretion of our board of directors and will depend upon, among other things, our actual results of operations.~~

As certain of our subsidiaries are taxable entities, we have reported a provision for income taxes within our financial statements. We use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates for the periods in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.


Hypothetical Change in Interest Rate (basis points)	100			50			-50			-100
	(in thousands)
As of March 31, 2007
Change in fair value of loans held for investment	$	(13,996	)	$	(6,913	)	$	6,638		$	13,114
Change in fair value of interest rate cap and swap contracts		19,744			9,937			(10,067	)		(20,271	)

Net change	$	5,748		$	3,024		$	(3,429	)	$	(7,158	)


Hypothetical Change in Interest Rate (basis points)	100			50			-50			-100
	(in thousands)
As of December 31, 2006
Change in fair value of loans held for investment	$	(28,670	)	$	(14,095	)	$	13,134		$	26,147
Change in fair value of interest rate cap and swap contracts		3,010			1,505			(1,505	)		(3,010	)

Net change	$	(25,660	)	$	(12,590	)	$	11,629		$	23,137

InResidual ~~determining~~Interests. ~~the~~We ~~possible~~had ~~realization~~residual ~~of deferred~~interests ~~tax~~in ~~assets,~~the weloans ~~consider~~held ~~future~~in ~~taxable~~the ~~income~~trust ~~from~~utilized ~~the~~in ~~following~~our ~~sources:~~off-balance sheet ~~(i) the~~securitization ~~reversal~~transactions of ~~taxable~~$10.1 ~~temporary~~million ~~differences,~~and ~~(ii) taxable~~$45.9 ~~income~~million ~~from~~outstanding ~~future~~at ~~operations and (iii)~~March ~~tax planning strategies that~~31, if2007 ~~necessary, would be implemented to accelerate taxable income into periods in which net operating losses might otherwise expire. During 2005~~ and ~~the~~December 31, ~~first half of~~ 2006, ~~our TRSs had operating losses~~respectively. WeResidual ~~can~~interests ~~utilize~~are ~~the~~recorded ~~net~~at ~~operating~~estimated ~~loss~~fair ~~of our TRSs to offset taxable income from prior years and carry forward the operating loss to offset future taxable income~~value. We ~~have recorded a valuation allowance against our deferred asset of approximately $45.0 million to reduce the carrying~~ value ofthese ~~this~~assets ~~asset~~based ~~to $29.2~~on ~~million, which we believe to be~~ the ~~realizable~~ present value of ~~this~~estimated ~~asset~~future ~~based~~cash onflows ~~our~~using ~~ability~~various toassumptions ~~carry~~regarding ~~back~~prepayments, ~~net~~defaults, ~~operating~~loss ~~losses~~severity toand ~~recover~~discount ~~taxes paid in prior years~~rate.

~~Loan~~Most ~~sales~~of ~~from Encore Credit,~~ our ~~TRS,~~residual interests ~~to us~~ are recorded at estimated fair value asand ofare ~~the~~marked ~~date~~to ofmarket ~~sale~~through ~~and~~a ~~the~~charge ~~gain~~ (or ~~loss~~credit) onto ~~sale~~earnings. isOn ~~included~~a inquarterly ~~the~~basis, ~~taxable~~we ~~income~~review ofthe ~~Encore~~fair ~~Credit~~value ~~and~~of ~~loan premium is recorded in~~ our ~~separate~~residual ~~accounts.~~interests ~~This~~by ~~intercompany~~analyzing ~~gain~~prepayment, orcredit loss and ~~loan~~discount ~~premium~~rate assumptions ~~are~~in ~~eliminated~~relation ~~upon~~to ~~consolidation~~actual ~~for~~experience ~~financial~~and ~~reporting~~current ~~purposes.~~rates ~~The~~of ~~difference~~prepayment ~~between~~and ~~our~~credit ~~tax~~loss ~~basis~~prevalent in the ~~acquired~~industry. ~~loans~~Although ~~and~~we ~~the~~believe ~~basis~~that in the ~~loans~~assumptions ~~for~~used ~~financial~~to ~~reporting purposes~~estimate isthe ~~not~~fair ~~considered~~values aof ~~temporary~~our ~~difference~~residual ~~for~~interests ~~which deferred taxes~~ are ~~provided.~~reasonable, ~~The~~there ~~amount~~can ~~of tax paid or to~~ be ~~paid by Encore Credit in its separate return related to this gain is recorded as prepaid taxes for financial reporting purposes~~ ~~and~~no ~~amortized~~assurance as ~~tax expense. To the extent Encore Credit does not expect~~ to ~~pay tax on this gain,~~ the ~~tax~~accuracy ~~effect~~ of ~~intercompany gains will reduce~~ the ~~tax~~assumptions ~~benefit~~or ~~that would otherwise have been recorded~~estimates.

~~Stock-Based~~The ~~Compensation~~residual interests are subject to actual prepayment or credit loss risk in excess of assumptions used in the valuation. Ultimate cash flows realized from these assets would be reduced should actual prepayments or credit losses exceed assumptions used in the valuation. Conversely, cash flows realized would be greater should actual prepayments or credit losses be below expectations.

~~Effective~~The ~~January 1,~~table ~~2006,~~below ~~we began~~illustrates tothe ~~account~~resulting ~~for~~hypothetical ~~stock-based~~fair ~~employee~~values ~~compensation arrangements in accordance with the provisions~~ of ~~Statement~~our ofresidual ~~Financial~~interests ~~Accounting Standards No.~~at March ~~123(R)~~31, ~~Share-Based~~2007 ~~Payment.~~and ~~Accordingly~~December 31, ~~stock~~2006 ~~option-based~~caused ~~compensation~~by ~~expense~~assumed ~~is recorded~~immediate inincreases to the ~~consolidated~~key ~~statement~~assumptions ofused ~~operations~~to ~~using~~determine ~~the~~ fair value: ~~based method applied on a modified prospective basis. The effect of this change in accounting did not have a material effect on the financial statements.~~

~~Results~~27 ~~of Operations~~

Three months ended June 30, 2006 compared to three months ended June 30, 2005 and six months ended June 30, 2006 compared to six months ended June 30, 2005


	March 31, 2007		December 31, 2006
	(in thousands)
Carrying value / fair value of residual interests	$	10,126	$	45,920

Prepayment speed assumption:
Fair value after:
Impact of a 10% increase	$	10,272	$	46,055
Impact of a 20% increase	$	10,421	$	46,179

Credit loss assumption:
Fair value after:
Impact of a 10% increase	$	9,980	$	45,618
Impact of a 20% increase	$	9,755	$	45,273

Residual interest cash flows discount rate:
Fair value after:
Impact of a 10% increase	$	10,000	$	45,782
Impact of a 20% increase	$	9,879	$	45,648

Interest rate on adjustable mortgage loans and bonds:
Fair value after:
Impact of a 10% increase	$	10,000	$	45,756
Impact of a 20% increase	$	9,761	$	45,807

~~Interest~~These ~~Income.~~sensitivities ~~Interest~~are ~~income~~hypothetical, ~~increased~~are ~~62.1%~~presented ~~to $101.3 million~~ for ~~the~~illustrative ~~three~~purposes ~~months~~only, ~~ended~~and ~~June 30,~~should ~~2006~~be ~~from~~used ~~$62~~with caution.5 ~~million~~The ~~for~~changes in the ~~three~~assumptions ~~months~~regarding ~~ended~~prepayments ~~June 30,~~and ~~2005.~~credit ~~Interest~~losses ~~income~~were ~~increased~~applied ~~146.5%~~ to ~~$217.2 million for~~ the ~~six~~cash ~~months~~flows ~~ended~~of ~~June 30,~~the ~~2006~~mortgage ~~from~~loans ~~$88.1~~underlying ~~million for~~ the ~~six~~retained ~~months~~interests. ~~ended~~Changes ~~June 30,~~in ~~2005.~~assumptions ~~The~~regarding ~~increase~~discount ~~was~~rate ~~primarily~~were ~~due~~applied to the ~~increase~~cash inflows ~~our loan portfolio as~~ of the ~~first~~securitization ~~half~~trusts. ofGenerally, ~~2006~~changes asin ~~compared~~fair tovalue ~~the~~based ~~first~~upon ~~half~~a ~~of 2005.~~change ~~The~~in ~~balance~~assumptions ofcannot ~~loans~~be ~~held~~extrapolated ~~for~~because ~~sale~~the ~~and~~relationship ~~held~~of ~~for~~the ~~investment~~change ~~actually~~in ~~decreased~~assumption ~~$0.3~~to ~~billion~~the tochange ~~$4.7~~in ~~billion~~fair atvalue ~~June 30,~~may ~~2006~~not ~~from~~be $5linear.0 ~~billion~~The atchange ~~June 30,~~in ~~2005.~~one ~~However,~~assumption was ascalculated wewithout ~~built~~changing ~~our~~any ~~loan~~other ~~portfolio~~assumptions. ~~during~~In ~~2005~~reality, wechanges ~~completed~~in aone ~~$1.6 billion~~assumption ~~on-balance~~may ~~sheet~~result ~~securitization~~ in ~~March~~changes ~~2005~~in ~~and~~others, awhich ~~$1.4~~may ~~billion~~magnify ~~on-balance~~or ~~sheet~~offset ~~securitization~~the insensitivities. ~~May~~For ~~2005~~example, ~~which~~changes ~~resulted~~ in ~~loan~~market ~~balances~~interest atrates ~~June 30,~~may ~~2005~~simultaneously ~~that~~impact ~~significantly exceeded~~ the prepayment, ~~average~~credit ~~balance~~loss ~~for~~and ~~the~~discount ~~period~~rate ~~of $3~~assumptions.~~0 billion.~~ ~~During~~In ~~2006~~addition, weit ~~have~~is ~~been~~possible ~~reducing~~that ~~held~~prepayment ~~for~~speeds, ~~sale~~credit ~~inventory~~losses and ~~loans~~changes in ~~our~~interest ~~held~~rates ~~for~~are ~~investment~~subject ~~portfolio~~to ~~have~~market ~~been~~conditions ~~prepaying~~and, ~~which~~as ~~resulted in the ending balances at June 30~~such, ~~2006~~may ~~being~~increase ~~lower~~by ~~than~~more ~~the~~20% ~~average~~causing ~~balance~~a ~~for the period~~further ofreduction ~~$5.8 billion. Additionally, the 62.1% increase~~ in ~~interest income for~~ the ~~three~~fair ~~months~~value ~~ended~~of ~~June 30,~~our ~~2006~~residual ~~compared~~interests ~~with~~in ~~the~~securitizations.

23Counterparty Risk

~~Table~~Our hedging strategy of ~~Contents~~using derivative instruments also involves certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. The counterparties to our derivative arrangements are major financial institutions and securities dealers that are well capitalized with high credit ratings and with which we may also have other financial relationships. While we do not anticipate nonperformance by any counterparty, we will be exposed to potential credit losses in the event the counterparty fails to perform. Our exposure to credit risk in the event of default by a counterparty will be the difference between the value of the contract and the current market price. There can be no assurance that we will be able to adequately protect against the foregoing risks and will ultimately realize an economic benefit that exceeds the related expenses incurred in connection with engaging in such hedging strategies.

~~corresponding~~Credit ~~period~~Risk in 2005, and the 146.5% increase for the six months ended June 30, 2006 compared with the corresponding period in 2005, was a result of the portfolio build up in 2005 in which there was minimal interest income in the beginning of 2005, causing substantial increases in interest income during the first quarter of 2006 compared to the first quarter of 2005. By the second quarter of 2005, the portfolio had grown, creating a smaller disparity in interest income for the corresponding period in 2006.

~~Interest Expense.~~For ~~Interest~~loans ~~expense~~we ~~increased~~carry ~~130.7%~~as ~~to $77.5 million~~ held-for ~~the three months ended June 30~~-investment, ~~2006~~we ~~from~~are ~~$33.6~~subject ~~million~~to ~~for~~ the ~~three~~risk ~~months~~that ~~ended~~a ~~June 30,~~borrower ~~2005.~~will ~~Interest~~default, ~~expense~~requiring ~~increased~~foreclosure ~~241.8% to $160.3 million for the six~~on ~~months~~and ~~ended~~disposition ~~June 30,~~of ~~2006 from $46.9 million for~~ the ~~six~~collateral ~~months~~at ~~ended~~an ~~June 30,~~amount ~~2005.~~less ~~The~~than ~~increase was due to~~ the ~~increased~~principal ~~borrowing costs associated with our portfolio of loans held for investment, increased warehouse balances associated with our loans held for sale,~~ and ~~increases~~accrued ~~in one-month LIBOR~~interest. ~~The~~Our ~~interest~~interests ~~rates~~in on our ~~borrowings~~securitizations are ~~calculated~~subordinate asto aother ~~margin~~interests ~~over one-month LIBOR. As of June 30, 2006~~ and ~~2005,~~absorb ~~one-month LIBOR was 5.33% and 3.34%, respectively. As with interest income, interest expense was minimal in~~ the ~~beginning~~losses ofincurred ~~2005~~on asthese ~~we built up the loan portfolio~~loans, ~~creating~~reducing ~~a disparity in~~ the ~~amounts~~cash ~~incurred~~flows ~~during~~ultimately distributed ~~the~~to ~~first quarter versus the second quarter of 2005~~us. ~~Accordingly~~However, ~~this~~we ~~resulted~~are innot aobligated ~~241.8% increase~~to ~~for~~fund ~~the~~losses ~~six~~beyond ~~month ended June 30, 2006 compared with~~ the ~~corresponding~~interests ~~period~~we hold in ~~2005,~~our ~~and a 130~~securitizations.7% ~~increase for the three months ended June 30, 2006 compared with the corresponding period in 2005.~~

~~Provision~~28 for Loan Losses. The provision for loan losses on loans held for investment increased 54.3% to $5.4 million for the three months ended June 30, 2006 from $3.5 million for the three months ended June 30, 2005. The provision for loan losses on loans held for investment increased 91.7% to $11.5 million for the six months ended June 30, 2006 from $6.0 million for the six months ended June 30, 2005. The increase was due to carrying a larger portfolio of loans held for investment during the first half of 2006 as compared to the first half of 2005 and due to seasoning of the portfolio. As of June 30, 2006 loan delinquency information was as follows (delinquencies as of June 30, 2005 were nominal):

~~(dollars~~A key factor affecting credit risk is the credit quality of the loans we make. Credit quality is impacted by, among other things, the credit history of the borrower, the borrower’s FICO score, the income documentation provided by the borrower and value of the collateral in ~~thousands~~relation to the amount borrowed (loan to value). We make residential mortgage loans to borrowers who generally do not satisfy the credit, collateral, documentation or other standards required by conventional mortgage lenders and loan buyers. As a result the credit risk associated with loans we make is higher than the credit risk associated with loans made by conventional mortgage lenders.

Aging	LoanBalance		Percentageof Total
Current	$	2,977,498	92.1	%
30 - 59 days past due		84,016	2.6	%
60 - 89 days past due		36,591	1.1	%
90 - 119 days past due		35,353	1.1	%
120 - 149 days past due		18,236	0.6	%
150 - 179 days past due		14,801	0.5	%
180 + days past due		66,426	2.0	%
	$	3,232,921

In recent years there have been a number of “non-traditional” mortgage loan products offered to borrowers such as hybrid loans (interest rate fixed for a period and then converts to adjustable), interest only loans, 80/20 loans (an 80% first mortgage “piggybacked” with a 20% second mortgage) and mortgages with terms in excess of the traditional 30 years (e.g., 40 years). These non-traditional mortgage loan products carry a higher credit risk principally due to the risk of “payment shock” (described below) and/or the limited equity a borrower may have in the collateral.

~~Gain or Loss on Sale of Loans, Net.~~ We ~~sold~~generally ~~approximately~~qualified ~~$3.4~~our ~~billion~~borrowers inbased ~~loans~~upon ~~through~~the ~~whole~~initial ~~loans transactions~~payment atfor athe ~~weighted~~mortgage ~~average price of 100~~loan.0% ~~during~~If the ~~six~~payment ~~months~~is ~~ended~~subject ~~June 30, 2006 as compared~~ to ~~$1.2 billion~~ adjustment at asome ~~weighted~~future ~~average~~point ~~price~~in oftime ~~102.3%~~and ~~for~~if ~~the~~interest ~~six~~rates ~~months ended June 30~~increase, ~~2005.~~the ~~The~~borrower’s ~~increase~~income inmay ~~the~~not ~~volume~~be ofable ~~loan~~to ~~sales during~~support the ~~first~~monthly ~~half~~payment ofon ~~2006~~the asloan ~~compared~~when to the ~~first~~formerly ~~half~~fixed ofpayment ~~2005~~adjusts isupward ~~mainly attributable~~ to ~~our~~reflect ~~conversion to REIT status in~~ the ~~beginning~~increased ofinterest ~~2005~~rate ~~and holding loans during that period to build our portfolio of loans held for investment~~(i. ~~We completed our last securitization of loans held for investment in November 2005 and~~e., ~~as a result, began selling a higher percentage of our loan production~~payment shock).

~~Throughout~~The ~~2005,~~equity weheld ~~experienced~~by a ~~decline~~borrower in ~~whole loan sales prices, in particular during~~ the ~~fourth~~collateral ~~quarter.~~for ~~During~~a ~~the~~mortgage ~~fourth~~loan ~~quarter~~provides ofincentive ~~2005,~~to ~~credit market conditions in~~ the ~~asset-backed~~borrower ~~securities~~to ~~market~~repay ~~required additional credit enhancements that negatively impacted~~ the ~~prices~~mortgage ~~investors were willing to pay for our loans~~loan. ~~The~~If ~~decline in sales prices we experienced during~~ the ~~fourth quarter also reflected normal seasonal trends, a rising interest rate environment, as well as~~borrower ahas ~~need~~limited toor ~~reduce~~no ~~higher~~equity ~~levels~~in ofthe ~~held~~collateral ~~for~~it ~~sale~~is ~~inventory~~less welikely ~~had~~that ~~retained while selecting mortgage loans for securitization. During~~ the ~~first~~borrower ~~quarter~~will ofrepay ~~2006, a significant portion of~~ the mortgage loan. ~~sales~~Loans that ~~settled~~provide ~~were traded in~~ the ~~fourth~~borrower ~~quarter~~essentially ~~of 2005.~~100% ~~Although~~financing ~~our~~for ~~weighted average sales price during~~ the ~~first~~purchase ~~quarter~~ of ~~2006~~a ~~was~~home ~~only 99~~(e.8%g., ~~many~~80/20 ofloan ~~these~~product) ~~loans~~leave ~~had been adjusted to~~ the ~~lower~~borrower ~~of cost~~ limited or ~~market~~no ~~value~~equity ~~during~~in the ~~fourth~~collateral. ~~quarter~~In ~~of 2005~~addition, ~~reducing~~a ~~recorded~~decline ~~losses~~ in the ~~first quarter~~value of ~~2006.~~the Incollateral ~~the~~will ~~second~~also ~~quarter~~reduce ofor ~~2006,~~eliminate the ~~weighted~~borrower’s ~~average sales price was 101~~equity.7% onWhile ~~our~~home ~~premium~~values ~~sales~~have ~~reflecting~~generally ~~improved~~increased ~~loan~~over ~~quality~~the ~~and~~past ~~improving~~several ~~secondary~~years ~~market~~in ~~conditions.~~the ~~Our~~areas ~~weighted~~where ~~average~~we ~~sales~~make ~~price on all whole loan sales,~~our ~~which excludes securitizations~~loans, ~~during~~there ~~the~~is ~~second~~no ~~quarter~~assurance ofthat ~~2006~~values ~~was~~will ~~100.4%,~~continue ~~which~~to ~~reflects~~increase ~~unfavorable~~or ~~pricing~~that onvalues ~~some~~will ofnot ~~our remaining aged and non-performing loans~~decline. WeThese ~~also~~factors ~~completed~~all acontribute ~~$1.1~~to ~~billion securitization during~~ the ~~second~~credit ~~quarter~~risk ~~of 2006,~~we ~~which~~assume ~~was accounted for as a sale~~ in ~~accordance~~originating ~~with~~and ~~SFAS~~investing ~~140. Our execution on this transaction resulted~~ in amortgage ~~price of 99~~loans.~~9%.~~

24A summary of loan products in our portfolio of loans held for investment at March 31, 2007 follows:


Product	Loan Count	Balance		Weighted Average Coupon		FICO Score	Loan to Value	Debt to income
		(loan balance in thousands)
2/28 ARM	5,161	$	925,620	8.09	%	601	80	40
30 YR Fixed	2,439		466,103	6.95	%	642	75	40
2 YR I/O 2/28 ARM	726		200,520	7.05	%	657	81	41
3/27 ARM	732		137,055	7.49	%	617	82	40
5 YR I/O 2/28 ARM	393		105,627	6.75	%	660	82	40
2/28 Dual	287		76,670	7.19	%	599	78	42
5 YR I/O 3/27 ARM	167		46,272	6.89	%	667	83	40
5 YR I/O 30 YR Fixed	145		40,910	6.63	%	681	76	39
3 YR I/O 3/27 ARM	121		31,847	6.66	%	669	81	41
5 YR 5/25 ARM	126		28,366	6.78	%	648	77	42
1 YR 1/29 ARM	117		23,435	9.96	%	616	81	40
15 YR Fixed	156		18,097	7.15	%	627	64	36
20 YR Fixed	107		15,523	6.87	%	648	71	40
6 Month LIBOR	14		3,415	11.03	%	647	83	41
25 YR Fixed	12		2,309	6.82	%	651	74	35
10 YR Fixed	17		1,452	7.51	%	611	57	38

Total/ Average	10,720		2,123,221	7.52	%

~~The~~29 ~~following table summarizes whole loan sales for the periods indicated:~~

	For the three months endedJune 30,						For the six months ended June 30,
	2006			2005			2006			2005
	(in thousands)
Whole-loan sales at a:
Premium	$	1,233,475		$	659,827		$	2,818,530		$	1,169,338
Discount		117,190			12,281			533,732			35,630
Total whole-loan sales	$	1,350,665		$	672,108		$	3,352,262		$	1,204,968
Weighted average price for premium sales		101.7	%		102.4	%		101.1	%		102.5	%
Weighted average price for discount sales		86.0	%		93.2	%		94.1	%		96.5	%

Item 4.

Controls and Procedures

~~Premium whole-loan sales are sales to investors at prices above par. Conversely, discount sales are sales of loans~~Disclosure atControls prices below par. Discounted sales are generally a result of incomplete documentation or the rejection of the whole-loans by a premium whole-loan buyer because of certain characteristics, or loans repurchased from investors and ~~subsequently resold.~~Procedures Our weighted average sales price decreased by 230 basis points to 100.0% for the six months ended June 30, 2006 from 102.3% for the six months ended June 30, 2005. We believe this decrease was a result of unfavorable pricing on our loans as a result of the factors noted above.

~~The~~We ~~following~~maintain ~~table~~disclosure ~~represents~~controls and procedures that are designed to ensure that information required to be disclosed in our reports under the ~~components~~Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of ~~gain~~achieving orthe ~~loss~~desired oncontrol ~~sales~~objectives, ~~recorded~~and ~~each~~management ~~period:~~is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

	For the three months endedJune 30,						For the six months endedJune 30,
	2006			2005			2006			2005
	(in thousands)
	(unaudited)
Net premium (discount) from whole-loan sales	$	3,095		$	12,559		$	(1,281	)	$	27,094
Provision for repurchases		(8,753	)		(1,982	)		(16,214	)		(2,749	)
Non-refundable loan fees, net		(497	)		(286	)		(1,200	)		(265	)
Lower of cost or market adjustment for loans held for sale		(7,636	)		(1,300	)		14,256			(1,417	)
Deferred origination costs		(8,111	)		(8,723	)		(24,562	)		(15,939	)
Gain (loss) on sale of loans, net	$	(21,902	)	$	268		$	(29,001	)	$	6,724

As of March 31, 2007, management, under the supervision of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e)). Based upon that evaluation and taking into account the deficiencies in internal control over financial reporting identified in our Form 10-K for the year ended December 31, 2006, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2007 and the date of this filing, our disclosure controls and procedures were not effective at a reasonable level.

~~Our~~Changes practice is to record, at the date of the sale, a provision for estimated repurchase losses attributable to principal, premium, interest and other costs of loans repurchased based upon our historical experience of the amount of sales that ultimately require repurchase. The obligations to repurchase loans and to reimburse the investor for any premiums paid on loans attributable to early payment are contractual obligations and require management to estimate such amounts at the time of sale. The provision for losses anticipated on the disposition of loans expected to be repurchased is recorded as part of the provision for repurchases and charged to gain or loss on sale of loans. The provisions can vary from year to year depending on the contractual obligations and loan performance. Our provision for repurchase losses increased to $8.8 million for the three months ended June 30, 2006 from $2.0 million for the three months ended June 30, 2005. Our provision for repurchase losses increased to $16.2 million for the six months ended June 30, 2006 from $2.7 million for the six months ended June 30, 2005. The increase in ~~the~~Internal ~~provision~~Control ~~for~~Over ~~repurchase~~Financial ~~losses~~Reporting ~~in 2006 is the result of higher repurchase claims from whole loan sale investors and increases in the amount of loan sales.~~

~~Loan~~Following ~~origination~~the ~~fees,~~close ~~as well as discount points and certain direct origination costs, are initially capitalized and recorded as an adjustment to our cost~~ of the ~~loan, which is reflected in the gain or loss on~~ sale weof ~~record when~~ the ~~loan~~Company’s ismortgage ~~sold.~~banking ~~Deferred~~operations ~~origination costs decreased 6.9%~~ to ~~$8.1~~Bear ~~million~~Stearns, ~~for~~ the ~~three~~Company ~~months~~has ~~ended~~been ~~June 30,~~operating ~~2006~~with ~~from~~significantly $8fewer employees.7 Management ~~million~~has ~~for~~been ~~the~~reviewing ~~three~~remaining ~~months~~processes ~~ended~~and ~~June 30,~~procedures ~~2005, primarily due~~ to ~~decreased~~ensure ~~yield~~that ~~spread~~there ~~premiums~~are ~~paid~~sufficient ~~to brokers~~ and anqualified ~~increase~~personnel inremaining ~~fees~~to ~~collected~~manage ~~from~~the ~~borrowers,~~financial ~~primarily~~reporting ~~through our retail channels~~process. ~~Deferred~~As ~~origination~~a ~~costs~~result ~~increased~~of ~~54.7%~~changes toin ~~$24.6~~the ~~million~~business ~~for~~and the ~~six~~significant ~~months~~reduction ~~ended~~in ~~June 30, 2006 from $15.9 million for~~ the ~~six~~number ~~months~~of ~~ended~~employees ~~June 30,~~there ~~2005,~~have ~~primarily~~necessarily ~~due~~been tonumerous ~~higher~~changes ~~whole-loan~~in ~~sales volume. Although we have been reducing~~ the ~~yield~~internal ~~spread~~control ~~premium~~process ~~and~~over ~~collecting~~financial ~~increased~~reporting ~~fees,~~through the ~~majority~~fourth quarter of ~~the~~2006 ~~loan~~and ~~sales in~~into the ~~beginning~~first quarter of ~~2006~~2007. ~~related~~Principal tochanges ~~loans~~have ~~originated~~included ~~prior~~changes ~~to 2006,~~ in ~~which~~processes within weour ~~had~~information ~~paid~~technology ~~higher~~environment ~~yield spread premiums~~ and ~~collected~~reassignment ~~less~~of inaccounting ~~fees.~~and ~~This~~financial ~~resulted~~reporting inresponsibilities ~~higher~~to ~~fees~~facilitate ~~being~~appropriate ~~expensed~~segregation ~~upon sale~~ of ~~the loans in the beginning of the year~~duties. ~~Along with~~We ~~increased~~would ~~sales,~~expect ~~these~~there ~~higher~~to ~~yield~~continue ~~spread~~to ~~premiums~~be ~~and~~significant ~~lower~~changes ~~fees~~to ~~resulted in~~ our ~~year~~internal controls ~~to date expenses increasing~~ over ~~the~~financial ~~corresponding~~reporting ~~period~~as ~~in 2005. However, in the second quarter~~ we ~~have~~implement ~~begun~~actions ~~seeing~~to remediate the ~~benefit~~various ~~from~~control ~~reduced~~deficiencies ~~yield~~noted ~~spread premiums and increased fees, resulting~~ in ~~decreased~~remaining ~~expenses for the three months ended June 30, 2006 as compared to June 30, 2005~~processes.

25PART II – OTHER INFORMATION

~~Table~~Item of1. ~~Contents~~Legal Proceedings

~~Gain~~On onApril 4, ~~Trading~~2007, ~~Securities~~Performance Credit Corporation (“Performance”), filed suit in the Central District of California, Southern Division, against EMC Mortgage Corporation (“EMC”), a subsidiary of Bear Stearns, seeking damages of more than $20 million for alleged breach of contract in connection with EMC’s purchases of Performance’s residential mortgage loan portfolio during the period from and ~~Derivative~~after ~~Instruments~~October 10, 2006 and related matters (as amended, the “Complaint”). The ~~net~~Complaint ~~gain~~alleges that onEMC ~~trading~~agreed ~~securities~~to purchase and ~~derivative~~securitize Performance’s entire loan production monthly and assume responsibility for any early payment defaults by mortgage loan borrowers. The Complaint also alleges that EMC breached the agreement by, among ~~instruments~~other ~~comprise~~things, delaying the ~~following:~~purchase of certain loans originated by Performance and failing to securitize monthly. As a result of these alleged breaches by EMC, the Complaint alleges that Performance suffered losses of more than $20 million when these mortgage loans declined in value from the date EMC agreed to purchase such loans until the date EMC ultimately did purchase them.

	For the three months endedJune 30,						For the six months endedJune 30,
	2006			2005			2006			2005
	(in thousands)
	(unaudited)
Unrealized gain (loss) on derivatives	$	5,911		$	(12,349	)	$	22,813		$	(2,336	)
Realized gain (loss) on derivatives		2,944			(5,268	)		1,930			(3,999	)
Net receipts (payments) under interest rate agreements		8,784			(3,360	)		13,625			(3,751	)
Change in fair value of residual interests		(2,118	)		(594	)		(1,489	)		(4,995	)
Gain (loss) on trading securities and derivative instruments, net	$	15,521		$	(21,571	)	$	36,879		$	(15,081	)

Performance has also commenced arbitration proceedings against EMC, seeking damages of more than $5 million for EMC’s breach of a Loan Servicing Agreement (“Servicing Agreement”). Performance alleges in its Demand for Arbitration that EMC breached the Servicing Agreement by failing to act diligently to collect all payments due under each of the mortgage loans required to be serviced and otherwise to perform its obligations under the Servicing Agreement.

~~The~~Although ~~net~~we ~~gain~~believe ~~increased~~that tothese ~~$15.5~~claims ~~million~~are ~~for the three months ended June 30~~well-founded, ~~2006~~as ~~from~~is atrue ~~loss~~ of ~~$21.6~~all ~~million for~~legal ~~the~~proceedings, ~~three~~it ~~months~~is ~~ended~~impossible ~~June 30,~~at ~~2005.~~an ~~The~~early ~~net~~stage ~~gain increased~~ to ~~$36.9~~predict ~~million~~with ~~for~~accuracy the ~~six~~likely outcome ~~months~~or ~~ended~~amount ~~June 30~~of recovery, ~~2006~~if ~~from~~any, athat ~~loss~~may ofbe ~~$15.1~~obtained ~~million~~from ~~for~~these ~~the~~actions. ~~six~~We ~~months~~expect ~~ended~~that ~~June 30,~~there ~~2005.~~will ~~The~~be ~~increases~~substantial ~~were~~costs ~~principally~~associated ~~due~~with tothe ~~rising interest~~prosecution ~~rates~~of ~~increasing~~these ~~the~~claims, ~~value~~which ofmay ~~our~~never ~~derivative~~be ~~instruments~~recouped and anwhich ~~increase~~may inhave ~~the~~a ~~notional~~material ~~balance~~effect ofon our results ~~caps and swaps~~ of $2operations.0 ~~billion~~In ~~at June 30~~addition, ~~2006~~Bear asStearns ~~compared~~has tosignificantly ~~June 30,~~more ~~2005.~~resources ~~The~~than ~~significant~~us, ~~increase~~which inmay ~~the~~lead ~~notional balance of derivatives was due~~ to ~~the~~prolonged ~~purchase~~litigation ~~of interest rate cap~~ and ~~swap~~increased ~~contracts~~expenses ~~purchased~~related into ~~connection~~the ~~with~~prosecution ~~our~~of ~~securitizations~~these claims.

We use Eurodollar futures contracts, interest rate caps, and interest rate swaps to economically hedge our residual interests in securitizations, loan pipeline, loans held for sale, and loans held for investment. Due to rising interest rates, these derivative instruments increased in value during the first half of 2006. In addition, we were required to make net swap payments during the first half of 2005 due to the fixed contract interest rate being higher than the floating market interest rate. Due to increases in LIBOR, we began receiving net swap payments during the three and six months ended June 30, ~~2006 and the payments we receive on our interest rate cap contracts have increased.~~

~~The~~We ~~residual~~are ~~interests~~not incurrently ~~securitizations~~a ~~represent~~party ~~the present value of the excess of estimated future cash flows received from borrowers on mortgage loans sold into securitization trusts over the cash flows passed through~~ to ~~the~~any ~~related~~other ~~asset-backed~~material ~~securities~~legal proceeding. We ~~acquired~~have ~~residual~~been ~~interests~~involved, infrom ~~off-balance~~time ~~sheet securitization transactions completed in 2003 and 2004. Due~~ to ~~increases~~time, in ~~LIBOR and the forward LIBOR curve, the interest spread, which is the~~a ~~difference~~variety ~~between~~of ~~the interest received from~~ mortgage ~~loan~~lending ~~borrowers~~related claims and ~~the~~other ~~interest~~matters ~~paid~~in ~~by us to~~ the ~~bondholders,~~ordinary ~~has~~course ~~been compressed, reducing the estimated future cash flows available to us and decreasing the value~~ of our ~~residual interests~~business. We ~~also~~In ~~acquired $50.2 million in residual interest from~~ our ~~off-balance sheet securitization~~opinion, ~~which~~the ~~closed~~resolution inof ~~May~~any ~~2006.~~of Asthese ~~this~~pending ~~securitization~~incidental ~~recently~~matters ~~closed,~~is ~~we have~~ not ~~changed~~expected ~~the~~to ~~assumptions~~have ina ~~valuing~~material ~~this~~adverse ~~residual~~effect ~~interest~~on ~~and~~our ~~accordingly,~~consolidated ~~there~~financial ~~have~~position ~~been~~and noresults ~~changes in the value~~ of ~~this residual interest~~operations.

~~Personnel.~~Item ~~Personnel expenses decreased 37~~1A.7% toRisk $12.4 million for the three months ended June 30, 2006 from $19.9 million for the three months ended June 30, 2005. Personnel expenses decreased 8.6% to $32.0 million for the six months ended June 30, 2006 from $35.0 million for the six months ended June 30, 2005. During 2005, we increased production and administrative staffing in order to accommodate the higher origination volume we experienced in 2005. During January and April 2006, we announced two workforce reductions which, along with natural attrition, have resulted in a reduction in workforce of over 800 employees. We began seeing the cost savings of these workforce reductions during the second quarter of 2006 and expect to see the full impact of these cost savings initiatives during the second half of 2006, as we were in the process of implementing these initiatives during the first half of the year. Total staffing was 1,667 employees at December 31, 2005, which has been reduced to 801 employees at June 30, 2006. Factors

~~Production~~In ~~and~~addition ~~Marketing.~~to ~~Production~~the ~~and~~other ~~marketing~~information ~~expenses~~set ~~decreased~~forth ~~21.3%~~in this toreport, ~~$3.7~~including ~~million for~~ the ~~three~~risk ~~months~~factors ~~ended~~set ~~June 30~~forth below, ~~2006~~ ~~from~~you ~~$4.7~~should ~~million~~carefully ~~for~~consider the ~~three~~factors ~~months~~discussed ~~ended~~under ~~June 30,~~the ~~2005.~~caption ~~Production~~“Risk ~~and~~Factors” ~~marketing~~included ~~expenses~~in ~~decreased~~Part ~~27.1%~~I, toItem 1A ~~$6.2~~of ~~million~~our Annual Report on Form 10-K for the ~~six~~year ~~months~~ ended ~~June~~ December 3031, 2006, ~~from~~including $8the cautionary statements included therein regarding any forward-looking statements.5 ~~million~~These ~~for~~risk ~~the~~factors ~~six~~could ~~months~~materially ~~ended~~affect ~~June 30~~our business, ~~2005~~financial condition or results of operations. ~~The~~Additional risks and ~~decrease~~uncertainties ~~was~~not ~~mainly~~presently ~~due~~known to ~~decreased~~us ~~purchases~~or ofthat ~~internet~~we ~~leads~~currently bybelieve ~~our~~to ~~retail~~be ~~operations~~immaterial ~~and~~also ~~decreased~~may ~~loan~~adversely ~~production~~impact ~~expenses~~our ~~associated~~business. ~~with~~Should ~~loans~~any ~~that~~risk ~~did~~or ~~not~~uncertainties ~~close.~~develop ~~These~~into ~~cost~~actual ~~savings~~events, ~~were~~these ~~partially~~developments ~~offset~~could byhave ~~expenses~~material ~~related~~adverse toeffects anon ~~incentive~~our ~~sales~~business, ~~trip~~financial incondition, ~~June~~or ~~2006~~results of operations.

~~Servicing~~Risks ~~Fees.~~Related ~~Servicing fees paid by us increased 6.5%~~ to ~~$3.3~~Our ~~million~~Business ~~for~~Activities the three months ended June 30, 2006 from $3.1 million for the three months ended June 30, 2005. Servicing fees increased 31.0% to $7.6 million for the six months ended June 30, 2006 from $5.8 million for the six months ended June 30, 2005. The increase in servicing fees was mainly due to an increase in average loan balances. The average balance on our loans held for sale and held for investment over the first half of 2006 was $5.8 billion versus $3.0 billion for the first half of 2005.

~~Occupancy~~Our ~~Expense.~~internal ~~Occupancy~~controls ~~expense~~over ~~decreased~~financial ~~23.8%~~reporting towere ~~$1.6~~not ~~million~~adequate ~~for~~and ~~the~~our ~~three~~independent ~~months~~auditors ~~ended~~did ~~June 30,~~not ~~2006~~certify ~~from~~their ~~$2.1 million for the three months ended June 30~~adequacy, ~~2005.~~which ~~Occupancy~~could ~~expense~~have ~~decreased~~a ~~5.0%~~significant toand adverse ~~$3.8~~effect ~~million~~on ~~for the six months ended June 30, 2006 from $4.0 million for the six months ended June 30, 2005. The decrease is primarily due to closing several of~~ our ~~branches~~business ~~as part~~and ~~of our reorganization announced during the first quarter of 2006~~reputation.

26Section 404 of the Sarbanes-Oxley Act of 2002 and rules and regulations of the SEC requires us, among other things, to evaluate the adequacy of the company’s internal controls over financial reporting annually. We evaluated our internal controls over financial reporting and based upon that evaluation and taking into account the deficiencies in internal control over financial reporting identified in our Form 10-K for the year ended December 31, 2006, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable level as of the end of the period covered by this report.

~~Table~~Because we were not able to implement the requirements of Section 404 ~~Contents~~in a timely manner or with adequate compliance, our independent auditors did not certify the effectiveness of our internal control over financial reporting, which might subject us to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could adversely affect our results. We cannot be certain as to the timing of completion of any remediation or the impact of the same on our operations and may not be able to ensure that the internal controls are or will be effective in a timely manner.

~~Severance~~Risks ~~and~~Related Lease Termination Costs. Severance and lease termination costs were $1.2 million and $9.1 million for the three and six months ended June 30, 2006. We incurred no similar costs during the three and six months ended June 30, 2005. These costs include $1.2 million and $2.5 million in severance costs recorded during the three and six months ended June 30, 2006, respectively, related to ~~our~~Our ~~April~~Common ~~and~~Stock January 2006 workforce reductions and $0 and $6.6 million in lease termination costs recorded during the three and six months ended June 30, 2006, respectively, related to our January and April reorganizations.

~~General~~Our ~~and~~Common ~~Administrative.~~Stock ~~General~~is ~~and~~traded ~~administrative~~on ~~expenses decreased 29.4% to $8.4 million for~~ the ~~three months ended June 30, 2006 from $11.9 million for~~ Over-the-Counter ~~three~~Bulletin ~~months~~Board ~~ended June 30, 2005. General~~ and ~~administrative~~therefore ~~expenses~~your ~~decreased~~ability ~~3.5%~~ to ~~$19.4 million~~sell ~~for~~your ~~the~~stock ~~six~~may ~~months~~be ~~ended~~negatively ~~June 30, 2006 from $20~~impacted.~~1 million~~ for the six months ended June 30, 2005. The decrease is due to decreases in all areas including office supplies, forms and printing, telephone, courier, temporary employees, and employment agency fees. The more significant decrease in general and administrative expenses of 29.4% for the three months ended June 30, 2006 over the corresponding period of 2005 as compared to 3.5% for the six months ended June 30, 2006 over the corresponding period of 2005 is mainly attributable to expenses increasing during the first quarter of 2006 and then decreasing in the second quarter after we implemented our cost savings initiatives. The net result was a slight decrease in expenses for the six months ended June 30, 2006 over the corresponding period of 2005, while the benefits from our cost savings initiatives were more evident in the second quarter.

~~Benefit~~Our /common ~~Provision~~stock ~~for~~was ~~Income~~delisted ~~Taxes.~~from Wethe ~~had~~New ~~income~~York ~~tax~~Stock ~~expense~~Exchange, ofor $4NYSE,~~000~~ ~~for~~on ~~the three months ended June~~April 3013, ~~2006~~2007. asThe ~~compared~~Company’s tocommon astock ~~benefit~~is ~~for~~currently ~~income~~traded ~~taxes~~on ~~of $3.5 million for~~ the Over-the-Counter ~~three~~Bulletin ~~months~~Board, ~~ended~~or ~~June 30~~OTC, ~~2005. We~~under ~~had~~the ~~income~~symbol ~~tax~~ECROE.OB. ~~expense~~Because ofthe ~~$7,000~~Company ~~for~~has ~~the~~only ~~six~~recently ~~months~~started ~~ended~~trading ~~June 30,~~on ~~2006~~the asOTC ~~compared~~and tothe aCompany ~~benefit~~did ~~for~~not ~~income~~timely ~~taxes~~file ofits ~~$9.9~~10-K ~~million~~ for the ~~six~~year ~~months~~ ended ~~June~~December 3031, ~~2005.~~2006 ~~The~~and ~~expense~~this ~~for~~Form 10-Q for the ~~three~~quarter ~~and six months~~ ended ~~June~~March 3031, ~~2006 relates~~2007, tothe ~~minimum~~Company’s ~~state~~common ~~tax~~stock ~~payments~~may webe ~~were~~removed ~~required~~from totrading ~~make.~~on ~~During~~the ~~2005~~OTC. ~~and~~Our ~~into~~removal ~~2006,~~from wethe ~~experienced~~OTC ~~consolidated~~could ~~losses~~reduce ~~due~~the toability ~~operating~~of ~~losses~~stockholders atto sell our ~~taxable~~common ~~REIT~~stock ~~subsidiaries.~~as ~~The~~quickly ~~operating~~and ~~losses~~inexpensively ofas ~~the~~they ~~taxable~~would ~~REIT subsidiaries during 2005~~ have been ~~carried~~able ~~back~~ to ~~recover~~do ~~approximately~~had ~~$29.2~~our ~~million~~common instock ~~taxes~~remained ~~paid~~quoted inon ~~prior~~the ~~years ($27~~OTC.0 ~~million~~This lack of ~~which~~liquidity ~~was~~also ~~received~~could inmake ~~July~~it ~~2006).~~more ~~The~~difficult ~~remaining~~for ~~net~~us ~~operating~~to ~~loss~~raise ~~from~~capital ~~2005~~in ~~and operating losses from~~ the ~~first~~future ~~half~~and ofcould ~~2006~~negatively ~~resulted~~impact inthe ~~a deferred~~value ~~tax asset~~ of ~~approximately~~your ~~$45 million, which has been fully reserved for at June 30, 2006~~stock.

WeItem ~~are required to record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized~~2. InUnregistered ~~assessing~~Sales ~~the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals~~ of ~~deferred~~Equity ~~tax liabilities,~~Securities ~~projected future taxable income, tax planning strategies~~ and ~~recent~~Use financial performance. The accounting guidance states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. While we project that our taxable REIT subsidiaries will become profitable, in view of ~~the recent losses, there is no assurance that there will be sufficient future taxable income to realize the benefit of the deferred tax asset~~Proceeds. If, after future assessments of the realizability of the deferred tax assets, we determine a lesser allowance is required, we would record a reduction to income tax expense and the valuation allowance in the period of such determination.

~~Off-Balance Sheet Arrangements~~ None

WeItem ~~are party to transactions that have off-balance sheet components~~3. InDefaults ~~connection~~Upon ~~with~~Senior ~~off-balance sheet securitization transactions, there were $1~~Securities.4 billion in loans remaining in off-balance sheet trusts as of June 30, 2006. The trusts have issued securities or bonds secured by these loans. We have no obligation to provide funding support to either the third party investors or the off-balance sheet trusts. The third party investors, or the trusts, generally have no recourse to our assets or us and have no ability to require us to repurchase their loans other than for breaches of standard representations and warranties.

WeNone have retained certain residual interests in the securitization trusts. The performance of the loans in the trusts will impact our ability to realize the current estimated fair value of these assets that are included on our balance sheet.

~~Contractual~~Item ~~Obligations~~4. ~~and~~Submission ~~Commercial~~of ~~Commitments~~Matters to a Vote of Security Holders.

~~The following~~None table summarizes our material contractual obligations and commercial commitments as of June 30, 2006, as well as the consolidated obligations of the securitization entities that we sponsored and are consolidated on our balance sheets:

	Total		Less than 1 year		1 to 3 years		3 to 5years		More than5 years
	(unaudited)
	(in thousands)
Operating leases	$	32,690	$	10,383	$	13,100	$	7,662	$	1,545
Warehouse and repurchase facilities (1)		1,388,734		1,388,734
Long-term debt (2)		3,190,868		1,506,806		1,309,616		288,022		86,424
Equipment leases		2,288		1,506		716		66

~~(1)~~Item ~~These warehouse and repurchase facilities had a weighted average interest rate of 6~~5.~~08%~~ atOther ~~June 30, 2006~~Information.

27None

~~Table~~Item of6. ~~Contents~~Exhibits.

(2a) ~~The~~Exhibits ~~long-term debt had a weighted average interest rate of 5.44% at June 30, 2006.~~

~~Liquidity~~Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index hereto and ~~Capital~~include ~~Resources~~the following:

We invest our cash in our loan portfolio in two principal ways. First, the percentage of the principal balance of an originated loan that is funded by our warehouse facilities differs from facility to facility. We generally fund less than 100% of a loan balance with warehouse debt, requiring us to invest cash to the extent the originated balance is not funded by the warehouse facility. This funding shortfall ranges from 0% to 2%. Newly originated loans are funded primarily by our warehouse facilities until we sell or securitize the loans. The longer loans remain funded by a warehouse facility the more our warehouse lenders require us to advance against the loans. In addition, our warehouse lenders may require us to have on deposit a cash margin against funded loans based upon the loan’s estimated market value.


3.1		Amended and Restated Bylaws ((incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed April 3, 2007).

10.1		Separation and General Release Agreement dated as of January 17, 2007, by and between Encore Credit Corp. and Troy Gotschall (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed January 23, 2007).

10.2		Amended and Restated Employment Agreement by and between Roque A. Santi and Registrant (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed April 9, 2007).

10.3		Commercial Lease, dated as of June 6, 2007, by and between Knobbe, Martens, Olsen & Bear, LLP and ECC Capital Corporation (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed June 13, 2007).

10.4		Employment Agreement by and between Registrant and Larry Moretti (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed June 18, 2007).

31.1		Certification of Chief Executive Officer required by Rule 13a-14(a), created by Section 302 of the Sarbanes-Oxley Act.

31.2		Certification of Chief Financial Officer required by Rule 13a-14(a), created by Section 302 of the Sarbanes-Oxley Act.

32.1		Certification of Chief Executive Officer required by Rule 13a-14(b) and 18 U.S.C. §1350, created by Section 906 of the Sarbanes-Oxley Act.

32.2		Certification of Chief Financial Officer required by Rule 13a-14(b) and 18 U.S.C. §1350, created by Section 906 of the Sarbanes-Oxley Act.

~~Second,~~32 when we securitize loans, the proceeds from the securitization are utilized to repay the warehouse debt on the securitized loans and to pay the costs of the securitization. Depending on the structure of the securitization, the proceeds from the securitization may not be sufficient to repay all warehouse debt and the costs of the securitization. A securitization’s over-collateralization requirements, transaction costs (e.g., attorneys’ fees, printing costs, underwriters’ fees, etc.) and the type of derivatives instruments invested in will all affect the amount of cash we are required to invest in our securitizations.

We SIGNATURES ~~generate cash through three principal operational sources:~~

~~(i)~~Pursuant ~~Net~~to ~~interest~~the ~~spread~~requirements onof ~~our~~the ~~loans~~Securities –and WeExchange ~~receive~~Act ~~interest~~of ~~income~~1934, onthe ~~loans~~Registrant wehas ~~hold~~duly caused ~~for~~this ~~sale~~report ~~and~~to ~~pay~~be ~~interest~~signed on ~~the~~its ~~warehouse~~behalf ~~facilities~~by ~~used to finance~~ the ~~funding~~undersigned, ofthereunto ~~these~~duly ~~loans.~~authorized, ~~Net~~on ~~interest~~June 21, ~~spread is the difference between these two amounts~~2007.

~~(ii)~~ECC ~~Cash~~CAPITAL ~~flows~~CORPORATION ~~from~~By: ~~our~~/s/ ~~securitizations~~Roque ~~– In a securitization we transfer loans to a trust that issues long term debt or bonds collateralized by the loans~~A. ~~The~~Santi ~~trust~~Roque ~~collects the principal and interest on the loans and passes through all principal collected to bondholders~~A. ~~Interest~~Santi isPresident ~~paid to holders of the debt based upon the stated rate associated with the class of debt. The difference between the interest collected on the loans~~ and ~~interest~~Chief ~~paid~~Financial toOfficer the bondholders and ongoing expenses of the trust is excess cash flow. The excess cash flow provides additional collateral to the bondholders as it is available to absorb losses realized on defaulted loans. To the extent excess cash flow exceeds losses on the loans, it is used to pay down principal on senior securities issued by the trust to create additional collateralization (~~over~~Principal ~~collateralization~~Accounting ~~or OC~~Officer) until specified OC levels are maintained by the trust. Excess cash flow not required to cover losses or build OC will be distributed to the Company, or in the event a Net Interest Margin trust, or NIM, was created in connection with the securitization, to the related NIM holders until the NIM securities are retired, and then to us. In addition to excess cash flow from the securitizations, we also receive servicing fees to the extent that we have retained ownership in the servicing rights on the loans included in the trust. We receive cash flows from securitizations as described regardless of whether the securitization is accounted for as a sale or a financing. Through June 30, 2006, we have completed eight securitizations. We currently receive excess cash flows from a securitization completed in 2003, three securitizations completed in 2005, and the securitization completed in 2006. While we are not currently receiving excess cash flows from the other three securitizations, as OC is accumulating in the trusts, we receive servicing fees from the four securitizations we completed in 2005. We expect to receive excess cash flows from all our securitizations within the next year. It is through the receipt of these cash flows that we expect to recover our investments in securitizations.

~~(iii)~~33 Sale of loans – We sell loans to third parties for cash. The proceeds from the sale are used to repay any warehouse financing. Any excess proceeds generate incremental cash flow to us. It is through the receipt of these cash flows that we expect to recover our investment in loans held for sale (to the extent that such loans are not transferred into securitizations).

Factors that could affect our future ability to complete securitizations include the experience and ability of our management team, conditions in the securities markets generally, conditions in the mortgage-backed securities market specifically, the performance of our portfolio of securitized loans and our ability to obtain credit enhancement.

Warehouse and Repurchase Facilities

Our current warehouse and repurchase facilities mature between July 2006 and May 2007 and are secured by the loans we originate or purchase with the funds. Although our warehouse and repurchase facilities mature between July 2006 and May 2007, we intend to renew and extend the maturity of certain of these facilities in the ordinary course of business. Our facilities with UBS Real Estate Securities (“UBS”), Merrill Lynch, Residential Mortgage Solutions, and Countrywide Warehouse Lending have expired and all amounts have been repaid as of August 14, 2006. We continue to negotiate warehouse and repurchase facilities with lenders to enable us to meet our funding

needs. The weighted average interest rates on the combined facilities, based on one-month LIBOR, were 6.08% and 4.39% at June 30, 2006 and 2005, respectively. Certain of our current warehouse and repurchase facilities contain a sub-limit for “wet” funding, which is the funding of loans for which the collateral custodian has not yet received the related loan documentation. Lenders generally limit our use of a warehouse facility to wet fund loans to a portion of our borrowing capacity under the warehouse line. If we have reached our sub-limit for wet funding on a warehouse line, we will not be able to wet fund under that line until borrowing capacity becomes available under the wet funding sub-limit. In addition, if we exceed a sub-limit, we will be in default under the warehouse line.

Our warehouse and repurchase facilities are subject to margin calls based on the lender’s opinion of the value of our loan collateral. Each facility provides the lender the right to reevaluate the loan collateral that secures our outstanding borrowings at any time. In the event the lender determines that the value of the loan collateral has decreased, it has the right to initiate a margin call. A margin call would require us to provide the lender with additional collateral or to repay a portion of the outstanding borrowings.

Our warehouse and repurchase facilities currently contain customary covenants, including restrictions on our ability to:

• conduct transactions with affiliates;

• engage in mergers, acquisitions and asset sales;

• alter the business we conduct;

• declare dividends or redeem or repurchase capital stock; and

• incur or guaranty additional indebtedness.

Our warehouse and repurchase facilities also contain financial covenants including:

• minimum tangible net worth;

• minimum amount of cash and cash equivalents;

• minimum liquidity ratios;

• maximum leverage ratios; and

• minimum net income.

Events of default under the warehouse and repurchase facilities include, but are not limited to:

• failure to pay obligations when due;

• material breach of any representation or warranty contained in the loan documents;

• covenant defaults;

• events of bankruptcy proceedings;

• cross-defaults to other indebtedness;

• the existence of certain environmental and ERISA claims or liabilities; and

• a change in control of our company.

ECC Capital and its subsidiaries, Bravo Credit Corporation and Encore Credit Corp., are jointly and severally liable for all of the obligations under the warehouse and repurchase facilities. ECC Capital, Bravo Credit, and Encore Credit all have the right to borrow the unused portion of the maximum facility amounts and the full amounts of any sub-limits. The assets of ECC Capital secure the borrowings of ECC Capital, Bravo Credit and Encore Credit and the assets of Encore Credit will only secure its own borrowings and a default by ECC Capital, Bravo Credit or Encore Credit would be deemed a default of the others.

During the first half of 2006 we renewed, extended, and modified facility amounts on our warehouse and repurchase facilities. The following table summarizes our current warehouse and repurchase facilities and outstanding balances as of June 30, 2006 and December 31, 2005:

Warehouse, Repurchase and Aggregation Lender

						Amount Outstanding
	ExpirationDate	Total FacilityAmount		WetFundingSub-Limit		June 30,2006		December 31,2005
	(unaudited)
	(in thousands)
IXIS Real Estate Capital	May 2007	$	300,000	$	90,000	$	—	$	365,511
Countrywide Warehouse Lending	July 2006		N/A		N/A		82,308		252,918
UBS Real Estate Securities	Nov. 2005		N/A		N/A		—		56,034
Wachovia Bank, N.A.	Dec 2006		1,000,000		100,000		530,820		400,048
Credit Suisse First Boston	Aug 2006		700,000		210,000		614,271		735,378
Merrill Lynch	April 2006		N/A		N/A		—		429,761
DB Structured Products	May 2007		200,000		70,000		149,054		413,081
Bear Stearns Mortgage Capital Corp.	Nov. 2006		500,000		—		12,039		55,535
Residential Mortgage Solutions	July 2006		N/A		N/A		242		—
Total		$	2,700,000	$	470,000	$	1,388,734	$	2,708,266

All amounts due UBS, Merrill Lynch, Residential Mortgage Solutions, and Countrywide Warehouse Lending have been repaid as of August 14, 2006.

Other Borrowings

We periodically enter into equipment lease arrangements from time to time that are treated as capital leases for financial statement purposes. As of June 30, 2006 and December 31, 2005, the amount outstanding under these borrowing arrangements was $2.0 million and $2.7 million, respectively.

From time to time we may also enter into repurchase borrowing arrangements, pledging securities we own as collateral. At June 30, 2006, we entered into repurchase arrangements with financial institutions pledging some of the securities retained in our securitizations as collateral. At June 30, 2006 and December 31, 2005, the amount outstanding under these borrowing arrangements was $66.8 million and $13.1 million, respectively.

From time to time we may borrow against the cash surrender value of corporate owned life insurance (“COLI”). At June 30, 2006, we had $9.8 million in outstanding borrowings under this arrangement. The total cash surrender value of the COLI, including amounts securing borrowings, was $13.0 million at June 30, 2006. We maintain COLI as a mechanism for funding liabilities to employees that contribute to a deferred compensation plan. Our liability to the plan at June 30, 2006 was $13.7 million.

Cash Flow

Cash provided by operating activities was $1.3 billion for the six months ended June 30, 2006 as compared to $4.3 billion used in operating activities for the six months ended June 30, 2005. The cash provided by operating activities for the six months ended June 30, 2006 was due principally to the sale of $4.4 billion in loans, including $1.1 billion from our off-balance sheet securitization, offset by $3.2 billion in originations, providing approximately $1.2 billion in positive cash flows. During the six months ended June 30, 2005, we originated $5.4 billion in loans and only sold $1.2 billion in loans, as we built our portfolio of loans held for investment, which resulted in $4.2 billion of cash being used in operations.

Cash provided by investing activities increased to $930.8 million for the six months ended June 30, 2006 as compared to $87.5 million provided by investing activities for the six months ended June 30, 2005. The cash provided by investing activities during the six months ended June 30, 2006 is principally due to the receipt of $978.2 million in principal payments on our portfolio of loans held for investment and $2.8 million in cash receipts from our residual interest in securitizations. During the six months ended June 30, 2005, we were in the process of building our portfolio of loans held for investment and had only received $92.0 million in principal payments. During the six months ended June 30, 2005, we also received $1.8 million for residual interests in securitizations. These cash flows were partially offset by $6.3 million in expenditures to acquire fixed assets.

Cash used in financing activities was $2.2 billion for the six months ended June 30, 2006 as compared to $4.2 billion provided by financing activities for the six months ended June 30, 2005. The cash used in financing activities for the six months ended June 30, 2006 was primarily the result of reduced warehouse facility borrowing of $1.3 billion and the payment of $1.0 billion on our long-term debt. During the six months ended June 30, 2005, we received approximately $355.3 million in connection with our initial public offering and stock option exercises, $3.0 billion from the issuance of long-term debt, and $978.4 million from additional borrowings under our warehouse lines of credit.

On January 6, 2006, we announced a reorganization designed to reduce costs and improve efficiency. The reorganization involved the consolidation of seven wholesale loan processing centers into three. These three centers are located regionally in Irvine, California; Downers Grove, Illinois; and Glen Allen, Virginia. Lending operations for ECC Capital’s retail subsidiary, Bravo Credit Corporation, were consolidated into two centers based in Irvine and Glen Allen. This reorganization resulted in a reduction in force of approximately 440 employees, or 27% of our total workforce.

On April 11, 2006, we announced an additional reduction in workforce of 170 employees, or 17% of our remaining workforce. In addition, Bravo Credit Corporation’s office in Glen Allen was closed. In accordance with Statement of Financial Accounting Standards No. 146 (“SFAS 146”), Accounting for Costs Associated with Exit or Disposal Activities, we record lease termination costs as of the “cease-use date”, employee costs as of the date employees are notified of their termination (the “communication date”), and fixed asset write offs at which time they were considered impaired. Although estimates are subject to change as additional information becomes available, we recorded the following restructuring activity during the six months ended June 30, 2006:

	RestructuringAccrual at December 31, 2005		Additions toRestructuringAccrual		Charges AgainstRestructuringAccrual			RestructuringAccrual at June 30, 2006
	(in thousands)
	(unaudited)
Employee costs	$	—	$	2,501	$	(2,501	)	$	—
Lease termination costs		—		6,561		(1,859	)		4,702
Fixed asset write offs		—		66		(66	)		—
	$	—	$	9,128	$	(4,426	)	$	4,702

We recorded an impairment charge of $66,000 during the six months ended June 30, 2006, as we do not expect to receive any future benefit from the assets previously utilized at Bravo Credit’s office in Glen Allen, which was closed in March of 2006. Lease termination costs of $6,561,000 were recorded during the six months ended June 30, 2006, as the “cease-use dates” associated with the related facilities occurred during this period. Employee termination costs of $2,501,000 were recorded during the six months ended June 30, 2006, in connection with the January and April workforce reductions.

We are focusing on originating loans that we believe will provide for improved gain on sale execution and will manage to the resulting production volume, enabling us to maximize the efficiency of our operating infrastructure. As we undertake actions to enable our operations to generate necessary operational cash flow, we will utilize available liquidity as necessary. Sources of liquidity include additional collateralized borrowing capacity utilizing our residual interest in our 2006 securitization and distributions of excess cash flow from our securitizations. We also filed amended income tax returns to receive refunds of income taxes paid during 2003 though 2005 through carry back of operating losses. We received $2.0 million in refunds in the three months ended June 30, 2006 and received an additional $27.0 million in July 2006. We believe these sources of liquidity will be sufficient to sustain our operations for the foreseeable future and until our operations generate sustainable cash flow.

Depending on the extent we are required to utilize these sources of liquidity our ability to pay a dividend may be negatively impacted. Accordingly, dividend payments have been suspended until such time that we are able to generate sustainable operating cash flows. To retain our REIT status, we must, among other things, distribute at least 90% of our REIT’s taxable income. If we utilize available liquidity for operations we may not have sufficient liquidity to pay the distributions required for us to maintain our REIT status. We are considering a variety of strategic and structural changes, which may affect our REIT status. These and other potential structural changes may require stockholder approval.

Effects of Inflation

Inflation generally increases the cost of funds and operating overhead, and, to the extent that mortgage loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of our assets and liabilities are, and will continue to be, monetary in nature. As a result, interest rates generally have a more significant effect on our performance than the effects of general levels of inflation have on industrial companies. Although interest rates do not necessarily move in the same direction, or to the same extent, as the prices of goods and services, low inflation or deflation generally has resulted in decreased interest rates. In 2001, the Federal Reserve reduced the targeted federal funds rate on 11 occasions for a total of 475 basis points. Inflation remained low in 2002 and 2003 and interest rates similarly remained fairly steady in 2002, dropping only 50 basis points in 2002 and 25 basis points in the first half of 2003. However, since 2004 the federal funds rate has been increased 17 times by a total of 425 basis points through June 2006.

In addition, inflation results in an increase in the cost of goods and services purchased, salaries and benefits, occupancy expense and similar items. Inflation and any related increases in interest rates generally decrease the market value of investments and mortgage loans held and may adversely affect our liquidity and earnings, as well as our shareholders’ equity. Increases in interest rates tend to slow mortgage loan prepayment rates, adversely affect mortgage loan refinancings, and to a lesser extent, slow purchase money mortgage originations, as increased rates tend to slow home sales. Increased interest rates may reduce our earnings from our sale of mortgage loans in the whole-loan market. Except to the extent offset by changes in the rates earned on our mortgage loans, the value of, and net interest earnings on, our retained mortgage loan portfolio may be affected by changes in interest rates, credit spreads and prepayment rates on the mortgage loans.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the exposure to loss resulting from changes in interest rates, credit spreads, foreign currency exchange rates, commodity prices and equity prices. As we are invested solely in U.S. dollar denominated instruments, primarily residential mortgage instruments, and our borrowings are also domestic and U.S. dollar denominated, we are not subject to foreign currency exchange, or commodity and equity price risk; the primary market risk that we are exposed to is interest rate risk and its related ancillary risks. Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. None of our market risk sensitive assets, liabilities and related derivative positions are held for speculative purposes.

Risk Management

Interest Rate Risk

The objective in managing interest rate risk is to monitor and assess the potential risk associated with changes in interest rates and their impact on our business. If necessary, we can attempt to mitigate such risk through effective interest rate management tools that are considered hedges, such as financial futures, forward-sale commitments and options and interest rate swaps and caps.

We may enter into forward loan sales for the purpose of minimizing the market risks associated with the value of originated loans, while maximizing gain on sale of such loans. A primary risk associated with the loan origination business is the risk of fluctuating interest rates. The interest rate risk is a direct result of timing delays between (1) the fixing of the mortgage loan interest rate with borrowers and the funding of the loan and (2) the funding of the loan and the setting of terms for sale of loans to whole-loan market investors. Pursuant to our forward sales commitments, in exchange for a fixed price, we commit to deliver loans with a set of characteristics, including a weighted average interest rate, which are locked for the term of the applicable commitment. Therefore, during this commitment period, any market movement in interest rates has no effect on the price we receive for loans delivered pursuant to the forward sale transaction, assuming the agreed upon set of characteristics is met. The contracts are often entered into and priced before the majority of the loans are originated. By committing to a forward sale prior to origination of the loans and through the price protection features embedded in the commitment, we effectively hedge our interest rate risk.

In addition to our interest rate risk described above, we are subject to interest rate exposure relating to the portfolio of mortgage loans we hold. Our risk management policy focuses on protecting against possible “compression” in the net interest margin with respect to the investment portfolio. The “yield curve” creates this risk because of different repricing durations for instruments with different maturities. In substance, the hedging objective is to protect the net interest margin by matching repricing durations for the hybrid/adjustable-rate mortgage loan portfolio and the corresponding funding sources. We hedge these loans with interest rate swap agreements, Eurodollar futures contracts, and cap agreements in order to match the repricing durations of the loans and our funding sources.

While we originate and hold in our loan portfolio primarily hybrid/adjustable-rate mortgage loans, rising short-term interest rates may temporarily negatively affect our earnings, and, conversely, falling short-term interest rates may temporarily increase our earnings. This impact can occur for a number of reasons and may be mitigated by portfolio prepayment activity as discussed below. First, our borrowings may react to changes in interest rates sooner than our hybrid/adjustable-rate mortgage loans because the reset dates on our borrowings generally occur more frequently than those of the hybrid/adjustable-rate mortgage loans. The interest expense on the mortgage-backed securities is typically adjusted monthly relative to market interest rates, generally the one-month LIBOR. The interest on the underlying mortgage loans is based on fixed rates payable on the underlying loans, generally for the first two or three years from origination, while the holders of the applicable securities are generally paid based on an adjustable LIBOR-based yield. Second, interest rates on hybrid/adjustable-rate mortgage loans may be capped for the first adjustment, per adjustment period and for the life of the loan (commonly referred to as the initial cap, the periodic cap and the lifetime cap, respectively), and our borrowings may not have similar limitations.

Interest rates can also affect our net return on hybrid/adjustable-rate mortgage loans. During a declining interest rate environment, the prepayment rates of hybrid/adjustable-rate mortgage loans may accelerate, causing the amount of fixed-rate financing to increase relative to the amount of hybrid/adjustable-rate mortgage loans, possibly resulting in a decline in our net return on hybrid/adjustable-rate mortgage loans, as replacement hybrid/adjustable-rate mortgage loans may have a lower yield than the hybrid/adjustable-rate mortgage loans being prepaid. In contrast, during an increasing interest rate environment, hybrid/adjustable-rate mortgage loans may

prepay slower than expected, requiring us to finance a higher amount of hybrid/adjustable-rate mortgage loans than originally anticipated at a time when interest rates may be higher, resulting in a decline in our net return on hybrid/adjustable-rate mortgage loans.

The rate of prepayment on mortgage loans may increase if interest rates decline or if the difference between long-term and short-term interest rates diminishes. Increased prepayments would cause us to amortize the premiums paid for our mortgage loans faster, resulting in a reduced yield on our mortgage loans. Additionally, to the extent proceeds of prepayments cannot be reinvested at a rate of interest at least equal to the rate previously earned on such mortgage loans, our earnings could be adversely affected.

Conversely, the rate of prepayment on mortgage loans may decrease if interest rates rise or if the difference between long-term and short-term interest rates increases. Decreased prepayments would cause us to amortize the premiums paid for our hybrid/adjustable-rate mortgage loans over a longer time period, resulting in an increased yield on our mortgage loans.

Interest rate changes may also impact our equity as our securities, mortgage loans and related derivative instruments are held at the lower of cost or market. We seek to hedge to some degree changes in value attributable to changes in interest rates by selling Eurodollar futures contracts. We are required to maintain minimum margin balances to cover possible losses on our Eurodollar futures contracts and in a decreasing interest rate environment this may require substantial cash payments as the value of our contracts decline. In general, we would expect that over time, decreases in income from our loan portfolio attributable to interest rate changes will be offset to some degree by increases in the value of our Eurodollar futures contracts, and vice versa. These changes in value will not completely offset each other and the relationship between spreads on securities may vary from time to time, resulting in a net aggregate book value increase or decline. However, unless there is a material impairment in value that would result in a payment not being received on a security or loan, changes in the book value of our loan portfolio will not directly affect our recurring earnings or our ability to make a distribution to our stockholders.

Changes in market interest rates affect our estimates of the fair value on mortgage loans held for sale, the fair value of our mortgage loans held for investment, and related derivatives. The changes in fair value that are stated below are derived based upon hypothetical immediate and equal changes to market interest rates of various maturities. The effects of the hypothetical adjustment to the base or current interest rate curve are adjusted by the levels shown below:

As of June 30, 2006

Hypothetical Change in Interest Rate (basis points)	+100			+50			-50			-100
	(in thousands)
Change in fair value of loans held for sale	$	(14,675	)	$	(7,338	)	$	7,085		$	13,903
Change in fair value of loans held for investment		(37,549	)		(18,774	)		18,183			36,199
Change in fair value of Eurodollar contracts		15,113			7,556			(7,556	)		(15,113	)
Change in fair value of interest rate cap and swap contracts		43,314			21,586			(21,740	)		(43,591	)
Net change	$	6,203		$	3,030		$	(4,028	)	$	(8,602	)

As of December 31, 2005

Hypothetical Change in Interest Rate (basis points)	+100			+50			-50			-100
	(in thousands)
Change in fair value of loans held for sale	$	(33,014	)	$	(16,507	)	$	16,507		$	32,172
Change in fair value of loans held for investment		(60,802	)		(29,996	)		29,563			59,126
Change in fair value of Eurodollar contracts		18,575			9,288			(9,288	)		(18,575	)
Change in fair value of interest rate cap and swap contracts		60,562			30,224			(29,649	)		(49,405	)
Net change	$	(14,679	)	$	(6,991	)	$	7,133		$	23,318

Residual Interests. We had residual interests in the loans held in the trusts utilized in our off-balance sheet securitization transactions of $64.5 million and $14.8 million outstanding at June 30, 2006 and December 31, 2005, respectively. Residual interests are recorded at estimated fair value. We value these assets based on the present value of estimated future cash flows using various assumptions. The discount rates used to calculate the present value of the residual interests were 33.00%, 18.00%, 18.00%, and 18.00% for the securitization transactions completed in April 2003, June 2004, July 2004, and May 2006, respectively. The weighted average life of the mortgage loans used for valuation was 0.33 years, 0.84 years, 0.85 years, and 1.88 years for the securitization transactions completed in April 2003, June 2004, July 2004, and May 2006, respectively.

Most of our residual interests are recorded at estimated fair value and are marked to market through a charge (or credit) to earnings. On a quarterly basis, we review the fair value of our residual interests by analyzing prepayment, credit loss and discount rate assumptions in relation to actual experience and current rates of prepayment and credit loss prevalent in the industry.

Although we believe that the assumptions used to estimate the fair values of our residual interests are reasonable, there can be no assurance as to the accuracy of the assumptions or estimates.

The residual interests are subject to actual prepayment or credit loss risk in excess of assumptions used in the valuation. Ultimate cash flows realized from these assets would be reduced should actual prepayments or credit losses exceed assumptions used in the valuation. Conversely, cash flows realized would be greater should actual prepayments or credit losses be below expectations.

The table below illustrates the resulting hypothetical fair values of our residual interests at June 30, 2006 and December 31, 2005 caused by assumed immediate increases to the key assumptions used to determine fair value:

	June 30, 2006		December 31,2005
	(in thousands)
Carrying value / fair value of residual interests	$	64,475	$	14,753
Prepayment speed assumption:
Fair value after:
Impact of a 10% increase	$	59,028	$	11,079
Impact of a 20% increase		55,298		9,996
Credit loss assumption:
Fair value after:
Impact of a 10% increase	$	51,848	$	13,169
Impact of a 20% increase		47,545		11,962
Residual interest cash flows discount rate:
Fair value after:
Impact of a 10% increase	$	53,730	$	14,554
Impact of a 20% increase		52,101		14,358
Interest rate on adjustable mortgage loans and bonds:
Fair value after:
Impact of a 10% increase	$	54,749	$	13,770
Impact of a 20% increase		53,783		12,814

These sensitivities are hypothetical, are presented for illustrative purposes only, and should be used with caution. The changes in the assumptions regarding prepayments and credit losses were applied to the cash flows of the mortgage loans underlying the retained interests. Changes in assumptions regarding discount rate were applied to the cash flows of the securitization trusts. Generally, changes in fair value based upon a change in assumptions cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. The change in one assumption was calculated without changing any other assumptions. In reality, changes in one assumption may result in changes in others, which may magnify or offset the sensitivities. For example, changes in market interest rates may simultaneously impact the prepayment, credit loss and discount rate assumptions.

Counterparty Risk

Our hedging strategy of using derivative instruments also involves certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. The counterparties to our derivative arrangements are typically major financial institutions and securities dealers that are well capitalized with high credit ratings and with some of which we may also have other financial relationships. While we do not anticipate nonperformance by any counterparty, we will be exposed to potential credit losses in the event the counterparty fails to perform. Our exposure to credit risk in the event of default by a counterparty will be the difference between the value of the contract and the current market price. There can be no assurance that we will be able to adequately protect against the foregoing risks and will ultimately realize an economic benefit that exceeds the related expenses incurred in connection with engaging in such hedging strategies.

Credit Spread Exposure

The mortgage-backed securities we own are also subject to spread risk. The majority of these securities will be adjustable-rate securities valued based on a market credit spread to U.S. Treasury security yields. Their value depends on the yield demanded on such securities by the market based on their credit relative to U.S. Treasury securities. Excessive supply of such securities combined with reduced demand will generally cause the market to require a higher yield on such securities, resulting in the use of a higher or wider spread over the benchmark rate (usually the applicable U.S. Treasury security yield) to value such securities. Under such conditions,

the funding costs for new issuances of our mortgage-backed securities would tend to increase, thus reducing our net interest margin. Conversely, if the spread used to value such securities were to decrease or tighten, our funding costs for new issuances of our mortgage-backed securities would tend to decrease. Such changes in future funding costs may affect our net equity, net income or cash flow directly or indirectly through their impact on our ability to borrow and access capital.

Furthermore, shifts in the U.S. Treasury yield curve, which represents the market’s expectations of future interest rates, would also affect the yield required on our securities and therefore our funding costs. This would have similar effects on our financial position and operations as would a change in spreads.

Credit Risk

We are subject to the risk of default or credit risk on the mortgage loans we originate and securitize. We are obligated under the terms of master loan purchase agreements to repurchase loans sold to investors in the event of a first or early payment default (FPD or EPD). An FPD or EPD exists when a borrower does not make a payment on a loan, generally during the first months following origination and sale to an investor. We usually will resell these repurchased loans.

For loans we securitize and carry as held for investment, we are subject to the risk that a borrower will default, requiring foreclosure on and disposition of the collateral at an amount less than the principal and accrued interest. Our interests in our securitizations are subordinate to other interests and absorb the losses incurred on these loans, reducing the cash flows ultimately distributed to us. However, we are not obligated to fund losses beyond the interests we hold in our securitizations.

A key factor affecting credit risk is the credit quality of the loans we make. Credit quality is impacted by, among other things, the credit history of the borrower, the borrower’s FICO score, the income documentation provided by the borrower and value of the collateral in relation to the amount borrowed (loan to value). We make residential mortgage loans to borrowers who generally do not satisfy the credit, collateral, documentation or other standards required by conventional mortgage lenders and loan buyers. As a result the credit risk associated with loans we make is higher than the credit risk associated with loans made by conventional mortgage lenders.

We generally qualify our borrowers based upon the initial payment for the mortgage loan. If the payment is subject to adjustment at some future point in time and if interest rates increase, the borrower’s income may not be able to support the monthly payment on the loan when the formerly fixed payment adjusts upward to reflect the increased interest rate, which we refer to as payment shock.

The equity held by a borrower in the collateral for a mortgage loan provides incentive to the borrower to repay the mortgage loan. If the borrower has limited or no equity in the collateral it is less likely that the borrower will repay the mortgage loan. Loans that provide the borrower essentially 100% financing for the purchase of a home (e.g., 80/20 loan product) leave the borrower limited or no equity in the collateral. In addition, a decline in the value of the collateral will also reduce or eliminate the borrower’s equity. While home values have generally increased over the past several years in the areas where we make our loans, there is no assurance that values will continue to increase or that values will not decline. These factors all contribute to the credit risk we assume in originating and investing in mortgage loans.

A summary of loan products originated by the Company during the three months ended June 30, 2006 follows:

(loan balances in thousands)

Product	LoanCount	Original Balance		WeightedAverage Coupon		FICOScore	Loan toValue		Debt toIncome
10 YR Fixed	4	$	322	9.56	%	653	85	%	32	%
15 YR Fixed	33		3,658	7.99	%	631	65	%	39	%
2 YR I/O 2/28 ARM	1		258	8.00	%	610	73	%	48	%
2/28 ARM	1,840		386,499	8.96	%	590	78	%	43	%
2/28 Dual	258		71,678	8.24	%	605	79	%	44	%
20 YR Fixed	74		7,127	9.24	%	631	82	%	43	%
25 YR Fixed	5		806	8.65	%	605	76	%	50	%
3/27 ARM	54		11,690	8.38	%	595	76	%	41	%
30 YR Fixed	1,456		263,591	7.85	%	627	76	%	42	%
30/15 Fixed	292		22,782	11.30	%	663	100	%	42	%
40/30 2/28 ARM	1,288		370,944	8.37	%	604	81	%	44	%
40/30 3/27 ARM	5		1,724	7.61	%	608	80	%	39	%
40/30 Fixed	321		90,794	7.48	%	633	77	%	43	%
5 YR 5/25 ARM	12		2,141	7.51	%	605	75	%	38	%
5 YR I/O 2/28 ARM	540		176,369	7.65	%	650	81	%	42	%
5 YR I/O 3/27 ARM	44		12,826	7.48	%	655	80	%	41	%
5 YR I/O 30 YR Fixed	111		35,351	7.23	%	655	76	%	41	%
50/30 2/28 ARM	136		41,392	7.91	%	612	82	%	45	%
50/30 3/27 ARM	16		5,632	7.59	%	614	78	%	45	%
50/30 5/25 ARM	3		595	7.69	%	739	71	%	44	%
50/30 Fixed	59		17,180	7.22	%	637	74	%	45	%
6 Month LIBOR	1		451	8.80	%	706	85	%	22	%
HELOC LR 10/10	9		666	10.90	%	643	79	%	44	%
Total	6,562	$	1,524,476	8.27	%	615	79	%	43	%

A summary of loan products originated by the Company during the six months ended June 30, 2006 follows:

(loan balances in thousands)

Product	LoanCount	Original Balance		WeightedAverage Coupon		FICOScore	Loan toValue		Debt toIncome
1 YR 1/29 ARM	17	$	4,840	8.80	%	633	83	%	44	%
10 YR Fixed	5		387	9.76	%	629	82	%	33	%
15 YR Fixed	93		10,554	7.93	%	620	68	%	39	%
2 YR I/O 2/28 ARM	9		2,115	7.71	%	631	78	%	39	%
2/28 ARM	4,842		1,007,682	8.82	%	590	78	%	43	%
2/28 Dual	2,110		595,557	8.14	%	603	79	%	44	%
20 YR Fixed	182		16,173	9.23	%	631	84	%	42	%
25 YR Fixed	6		998	8.39	%	615	78	%	49	%
3/27 ARM	155		35,116	8.38	%	594	77	%	42	%
30 YR Fixed	3,032		555,056	7.77	%	625	75	%	41	%
30/15 Fixed	682		50,361	11.21	%	667	100	%	43	%
40/30 2/28 ARM	1,330		381,905	8.36	%	605	81	%	44	%
40/30 3/27 ARM	5		1,724	7.61	%	608	80	%	39	%
40/30 Fixed	343		97,413	7.46	%	633	76	%	43	%
5 YR 5/25 ARM	32		7,494	7.92	%	617	78	%	40	%
5 YR I/O 2/28 ARM	1,020		330,633	7.65	%	654	81	%	42	%
5 YR I/O 3/27 ARM	87		25,351	7.45	%	650	80	%	41	%
5 YR I/O 30 YR Fixed	181		55,768	7.17	%	654	76	%	41	%
50/30 2/28 ARM	136		41,392	7.91	%	612	82	%	45	%
50/30 3/27 ARM	16		5,632	7.59	%	614	78	%	45	%
50/30 5/25 ARM	3		595	7.69	%	739	71	%	44	%
50/30 Fixed	59		17,180	7.22	%	637	74	%	45	%
6 Month LIBOR	8		2,722	8.48	%	646	84	%	42	%
HELOC LR 10/10	18		1,573	10.30	%	647	84	%	45	%
Total	14,371	$	3,248,221	8.27	%	612	79	%	43	%

A summary of loan products in our portfolio of loans held for investment at June 30, 2006 follows:

(loan balances in thousands)

Product	LoanCount	Balance		WeightedAverage Coupon		FICOScore	Loan toValue		Debt toIncome
1 YR 1/29 ARM	320	$	70,450	7.27	%	620	81	%	42	%
10 YR Fixed	19		1,761	7.40	%	614	60	%	40	%
15 YR Fixed	182		22,063	7.09	%	628	64	%	37	%
2 YR I/O 2/28 ARM	1,169		321,140	6.58	%	658	81	%	41	%
20 YR Fixed	142		21,772	6.77	%	649	71	%	40	%
25 YR Fixed	13		2,402	6.75	%	655	74	%	37	%
2/28 ARM	8,148		1,519,252	7.52	%	603	80	%	41	%
2/28 Dual	462		122,942	7.27	%	595	78	%	42	%
3 YR I/O 3/27 ARM	185		49,090	6.74	%	666	81	%	41	%
30 YR Fixed	3,009		581,153	6.93	%	647	76	%	41	%
3/27 ARM	1,055		203,271	7.52	%	619	81	%	41	%
5 YR 5/25 ARM	174		40,282	6.75	%	649	78	%	42	%
5 YR I/O 2/28 ARM	573		154,138	6.76	%	663	81	%	41	%
5 YR I/O 30 YR Fixed	184		50,922	6.63	%	683	76	%	40	%
5 YR I/O 3/27 ARM	223		60,816	6.87	%	670	82	%	40	%
6 Month LIBOR	42		11,467	6.84	%	648	80	%	41	%
Total:	15,900	$	3,232,921	7.21	%	625	79	%	41	%

A summary of loan products in our portfolio of loans held for sale at June 30, 2006 follows:

(loan balances in thousands)

Product	LoanCount	Balance		WeightedAverageCoupon		FICOScore	Loan toValue		Debt toIncome
1 YR 1/29 ARM	6	$	1,601	7.62	%	590	88	%	30	%
10 YR Fixed	3		221	10.15	%	652	80	%	25	%
15 YR Fixed	30		3,447	7.71	%	628	70	%	39	%
20 YR Fixed	118		9,185	9.71	%	634	87	%	42	%
25 YR Fixed	6		869	8.86	%	611	78	%	50	%
2/28 ARM	1,765		374,225	8.98	%	582	79	%	43	%
2/28 Dual	365		109,414	8.21	%	597	81	%	43	%
30 YR Fixed	1,377		253,035	7.74	%	630	77	%	42	%
30/15 Fixed	437		34,777	11.22	%	663	100	%	43	%
3/27 ARM	50		9,927	8.40	%	591	78	%	41	%
40/30 2/28 ARM	1,096		314,664	8.38	%	600	81	%	44	%
40/30 3/27 ARM	5		1,724	7.61	%	608	80	%	39	%
40/30 Fixed	292		82,467	7.42	%	636	77	%	43	%
5 YR 5/25 ARM	9		1,938	8.11	%	595	77	%	33	%
5 YR I/O 2/28 ARM	485		164,805	7.66	%	648	81	%	42	%
5 YR I/O 30 YR Fixed	104		34,514	7.15	%	655	77	%	41	%
5 YR I/O 3/27 ARM	39		11,730	7.47	%	652	81	%	42	%
50/30 2/28 ARM	134		40,783	7.89	%	612	82	%	44	%
50/30 3/27 ARM	16		5,632	7.59	%	614	78	%	45	%
50/30 5/25 ARM	3		595	7.69	%	739	71	%	44	%
50/30 Fixed	59		17,179	7.22	%	637	74	%	45	%
6 Month LIBOR	1		449	8.80	%	706	85	%	22	%
HELOC LR 10/10	3		243	10.54	%	653	82	%	45	%
Total:	6,403	$	1,473,424	8.28	%	612	80	%	43	%

Item 4. Controls and Procedures

Disclosure Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of June 30, 2006, we carried out an evaluation, under the supervision and with the participation of our management, including our Co-Chief Executive Officers and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e)). As part of that evaluation we considered deficiencies in our disclosure controls and procedures reported in Amendment No. 1 to our Quarterly Report on Form 10-Q for the period ended September 30, 2005 and our Annual Report on Form 10-K for the period ended December 31, 2005, and our reported efforts to remedy these deficiencies, including our ongoing efforts to ensure adequate levels and qualifications of staff in our accounting and finance functions. As a result of this evaluation, our Co-Chief Executive Officers and Chief Financial Officer have concluded that as of June 30, 2006, our disclosure controls and procedures are effective at a reasonable level in timely alerting them to material information relating to us that is required to be included in our periodic filings with the Securities and Exchange Commission.

Changes in Internal Control Over Financial Reporting.

Pursuant to the provisions of Section 404 of the Sarbanes-Oxley Act, beginning with our Annual Report on Form 10-K for the fiscal year ending December 31, 2006, we will be required to furnish a report by our management on our internal control over financial reporting. We commenced a significant effort to review the effectiveness of our internal control over financial reporting and are in the process of documenting and assessing the effectiveness of the design of our internal control over financial reporting. To date, we have identified and are in the process of implementing new procedures and changes to existing procedures in an effort to improve the effectiveness of our internal control over financial reporting. In general, these measures include enhancing documentation of policies and procedures, segregation of duties, and controls surrounding the processing of critical spreadsheet applications and information technology general controls (e.g. access, program change).

The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal control over financial reporting that is adequate to satisfy our reporting obligations as a public company. In our undertaking of this continuous effort, we may identify various control deficiencies, some of which may be significant deficiencies or material weaknesses as defined by the rules of the Public Company Accounting Oversight Board. We will assess the significance of identified control deficiencies that come to our attention and determine the extent to which such deficiencies may be mitigated or require remediation.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We have been involved, from time to time, in a variety of mortgage lending related claims and other matters in the ordinary course of our business. In our opinion, the resolution of any of these pending incidental matters is not expected to have a material adverse effect on our consolidated financial position and results of operations.

Item 1A. Risk Factors

In addition to the other information set forth in this report, including the risk factors set forth below, you should carefully consider the factors discussed under the caption “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005, including the cautionary statements included therein regarding any forward-looking statements. These risk factors could materially affect our business, financial condition or results of operations. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely impact our business. Should any risk or uncertainties develop into actual events, these developments could have material adverse effects on our business, financial condition, or results of operations.

Risks Related to Our Business Activities

The inability to attract and retain qualified employees could significantly harm our business.

We depend on our account executives to attract borrowers by, among other things, developing relationships with other financial institutions, mortgage companies, real estate agents and brokers, and others. These relationships lead to repeat and referral business. The market for skilled account executives and loan officers is highly competitive. During January and April 2006, we announced two workforce reductions, which along with natural attrition, have resulted in a reduction in workforce of over 800 employees. Competition for qualified account executives and loan officers may lead to increased hiring and retention costs. If we are unable to attract or retain a sufficient number of skilled account executives and loan officers at manageable costs, it could harm our business, financial condition, and results of operations. We must continue to motivate employees and keep them focused on our strategies and goals, which may be particularly difficult due to morale challenges posed by workforce reductions and general uncertainty.

We may not complete the requirements imposed upon us by Section 404 of the Sarbanes-Oxley Act by the time those requirements are applicable to us.

The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal control over financial reporting that is adequate to satisfy our reporting obligations as a public company. While we have expended significant resources in developing the necessary documentation and testing procedures required by Section 404, there is a risk that we will not comply with all of the requirements imposed by Section 404 in a timely manner. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations.

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.

We currently operate in a manner that is intended to enable us to qualify as a REIT for federal income tax purposes under the Code commencing with our taxable year ending December 31, 2005, although we have not made any distributions to our stockholders this

year, as further discussed below. We have not requested and do not plan to request a ruling from the Internal Revenue Service, or IRS, that we qualify as a REIT, and the statements in this quarterly report are not binding on the IRS or any court. If we were to lose our REIT status, we would face serious tax consequences that would substantially reduce the funds available for distribution to our stockholders for each of the years involved because:

• we would not be required to make, nor would we be entitled to a deduction for, any distributions to stockholders in computing our taxable income and would be required to pay federal income tax at regular corporate rates;

• we could be required to pay the federal alternative minimum tax and possibly increased state and local taxes; and

• unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.

In addition, if we fail to qualify as a REIT, we will not be required to make distributions to our stockholders. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and would adversely affect the value of our common stock.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the ownership of our shares, the composition of our assets and a requirement that at least 95% of our gross income in any year be derived from qualifying sources, such as interest on mortgage loans. Also, we must make distributions to stockholders aggregating annually at least 90% of our net taxable income, excluding capital gains. We did not pay a dividend in the first or second quarter of 2006 and have announced that we do not intend to pay a dividend for the third quarter of 2006. If we continue to utilize available liquidity for operations, we may not have sufficient liquidity to pay the distributions required to maintain our REIT status. In addition, we have announced that our board of directors and the special committee of our board of directors are considering a variety of strategic and structural changes, which may affect our REIT status.

Even if we qualify as a REIT for federal income tax purposes, we may be required to pay some federal, state and local taxes on our income or property and, in certain cases, a 100% penalty tax in the event we sell property, including mortgage loans, as a dealer or if a taxable REIT subsidiary of ours, including Encore Credit, Encore Credit Corporation of Minnesota or Bravo Credit, enters into an agreement with us on a basis that is determined to be other than arm’s-length. In addition, any taxable REIT subsidiary we own will be required to pay federal, state and local income taxes on its taxable income, as well as any other applicable taxes.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities.

None

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

On May 25, 2006, we held our annual meeting of stockholders. Six board nominees for director were elected as members of our board of directors until their successors are duly elected and qualified. In addition, the stockholders ratified the appointment of Grant Thornton LLP as our independent registered public accounting firm for fiscal year 2006. At our annual meeting of stockholders, there were present in person or by proxy 73,377,333 votes representing 73.20% of the total outstanding eligible votes. There were no stockholder proposals presented at the meeting.

Election of Directors.

The following directors were elected and received the number of votes set forth opposite their names. There were no broker non-votes.

Nominee	Votes for	Votes Againstor Withheld
Shabi S. Asghar	72,890,128	487,205
James R. Brazil	72,974,210	403,123
Steven G. Holder	71,503,328	1,874,005
Douglas S. Ingram	70,572,608	2,804,725
William Jacoby	70,571,633	2,805,700
James O. Rollans	70,567,343	2,809,990

Ratification of the Appointment of Grant Thornton LLP, Independent Registered Public Accounting Firm for fiscal year 2006

Votes For		Votes Against		Votes Abstained		Broker Non-Votes
70,448,382		2,870,262		58,689		0

Item 5. Other Information.

None

Item 6. Exhibits.

(a) Exhibits

Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index hereto and include the following:

31.1		Certification of Co-Chief Executive Officer required by Rule 13a-14(a), created by Section 302 of the Sarbanes-Oxley Act.
31.2		Certification of Co-Chief Executive Officer required by Rule 13a-14(a), created by Section 302 of the Sarbanes-Oxley Act.
31.3		Certification of Chief Financial Officer required by Rule 13a-14(a), created by Section 302 of the Sarbanes-Oxley Act.
32.1		Certification of Co-Chief Executive Officer required by Rule 13a-14(b) and 18 U.S.C. §1350, created by Section 906 of the Sarbanes-Oxley Act.
32.2		Certification of Co-Chief Executive Officer required by Rule 13a-14(b) and 18 U.S.C. §1350, created by Section 906 of the Sarbanes-Oxley Act.
32.3		Certification of Chief Financial Officer required by Rule 13a-14(b) and 18 U.S.C. §1350, created by Section 906 of the Sarbanes-Oxley Act.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 14, 2006.

ECC CAPITAL CORPORATION By: /s/ Greg Lubushkin Greg Lubushkin Chief Accounting Officer (Principal Accounting Officer)

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Filing Compare · ECC Capital CORP