View:
[Letterhead
of Opteum Inc.]
VIA
EDGAR ELECTRONIC TRANSMISSION
AND
BY FAX TO 202-772-9209
September
19, 2006
Securities
and Exchange Commission
Division
of Corporation Finance
450
Fifth
Street, N.W.
Washington,
DC 20549
Attention: Daniel
L. Gordon, Branch Chief
|
Re:
|
Opteum
Inc.
|
| Form 10-K/A for the year ended December 31, 2005 |
| Filed 3/10/06 |
| File No. 1-32171 |
Dear
Mr.
Gordon:
Set
forth
below are our responses to the comments of the Staff of the Division of
Corporation Finance of the Securities and Exchange Commission (the “Commission”)
in
respect of our Form 10-K/A for the year ended December 31, 2005, as set forth
in
the Staff’s comment letter dated September 7, 2006 (the “Comment
Letter”).
The
numbered paragraphs below correspond to the numbered paragraphs in the Comment
Letter. For convenience of reference, we first set forth the Staffs comment
in
full, followed by our response.
Report
of Independent Registered Public Accounting Firm,
page 70
|
1.
|
We
note that you have referred to another auditor within your report.
Please
revise to include the audit report of the other auditors that you
have
relied upon.
|
In
response to the Staff’s comment, we will amend our Form 10-K/A to include the
audit report of Deloitte & Touche LLP.
Consolidated
Statements of Operations, page 72
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2.
|
We
note that you have recorded the gains on sales of loans and
mortgage-backed securities as revenue on your consolidated statements
of
income. It does not appear that these gains meet the definition of
revenue
pursuant to paragraph 78 of CON 6. Please revise to present
investment income below operating expenses in future filings. Refer
to
Rule 5-03 of
Regulation S-X.
|
In
response to the Staff’s comment, we have reviewed paragraph 78 of Statement of
Financial Accounting Concepts No. 6 (“CON 6”). Based on such review, we believe
that gains on sales of loans and mortgage-backed securities meet the definition
of revenue pursuant to paragraph 78 of CON 6.
We
refer
the Staff to paragraphs 78-89 of CON 6. Paragraph 78 of CON 6 describes
“revenues” as follows:
“Revenues
are inflows or other enhancements of assets of an entity or settlements of
its
liabilities (or a combination of both) from delivering or producing goods,
rendering services, or
other activities that constitute the entity’s ongoing major or central
operations.”
(emphasis added)
In
contrast, paragraph 79 of CON 6 describes “gains” as follows:
“Gains
are increases in equity (net assets) from
peripheral or incidental transactions
of an
entity and from all other transactions and other events and circumstances
affecting the entity except those that result from revenues or investments
by
owners.” (emphasis added)
Thus,
whether a transaction resulting in an increase in an entity’s net assets is
properly classified as “revenue,” on the one hand, or “gain,” on the other hand,
is based upon the subjective determination as to whether the transaction giving
rise to such increase is an activity constituting part of the entity’s ongoing
major or central operations or, in the alternative, is peripheral or incidental
in nature.
Recognizing
the subjective and imprecise nature of this determination, paragraph 88 of
CON 6
reads, in relevant part, as follows:
“The
definitions and discussion of revenues, expenses, gains, and losses in this
Statement give broad guidance but do not distinguish precisely between revenues
and gains or between expenses and losses. Distinctions between revenues and
gains and between expenses and losses in a particular entity depend to a
significant extent on the nature of the entity, its operations, and its other
activities. Items that are revenues for one kind of entity may be gains for
another, and items that are expenses for one kind of entity may be losses for
another.”
Finally,
paragraph 89 of CON 6 describes the primary purpose of distinguishing gains
and
losses from revenues and expenses as follows and recognizes that these
distinctions are principally matters of display:
“Since
a
primary purpose of distinguishing gains and losses from revenues and expenses
is
to make displays of information about an enterprise’s sources of comprehensive
income as useful as possible, fine distinctions between revenues and gains
and
between expenses and losses are principally matters of display or
reporting….”
Because
of the nature of our business, as discussed below, we believe that gains on
sales of loans and mortgage-backed securities are inflows from activities that
constitute our ongoing major or central operations, as opposed to being
peripheral or incidental in nature, and, therefore, are properly presented
as
revenues in our consolidated statements of operations.
Opteum
Inc. and its consolidated subsidiaries are engaged in two primary business
activities. First, we own and manage a portfolio of mortgage-backed securities
that are held as available-for-sale in accordance with Statement of Financial
Accounting Standard No. 115 (as opposed to held for trading or held to
maturity). We seek to earn a net interest spread on our portfolio of
mortgage-backed securities by investing in mortgage-backed securities that
we
believe will pay interest in excess of the interest paid by us on our
liabilities. In managing our investment portfolio, we from time to time sell
certain mortgage-backed securities in light of changing market conditions in
an
effort to maximize our portfolio’s net interest spread or to minimize erosion of
our portfolio’s net interest spread. Upon the sale of mortgage-backed securities
for a profit, we recognize income. However, because these transactions are
a
natural consequence of the value-added management of our investment portfolio,
and because management of our investment portfolio comprises part of our ongoing
major or central operations, we believe that the treatment of such income as
“revenue” in our consolidated statements of operations is consistent with CON 6
and results is a fairer presentation of our results of operations.
Second,
Opteum Inc.’s wholly-owned subsidiary, Opteum Financial Services, LLC (“OFS”),
is engaged in the business of originating and purchasing, and then promptly
selling, residential mortgage loans. Accordingly, the sale of residential
mortgage loans is clearly part of our ongoing major or central operations,
as
opposed to being peripheral or incidental in nature. Thus, we present the income
derived from such sales as “revenue.” Lastly, it should be noted that because
OFS’ results of operations are material to our consolidated results of
operations, we separately identify the revenue derived from sales of mortgage
loans in our consolidated statements of operations.
In
summary, we have thoughtfully reconsidered the presentation of our revenues
in
light of CON 6 and, in the interest of presenting our consolidated results
of
operations and sources of comprehensive income in as useful a fashion as
possible for the readers of our financial statements, we intend to continue
to
report gains on sales of mortgage loans and mortgage-backed securities as
revenue.
Notes
to Consolidated Financial Statements
Note 3.
Mortgage Loans Held for Sale, Net, page 85
|
3.
|
Please
disclose the information required by Schedule IV: Mortgage Loans on
Real Estate in future filings. Refer to Rule 5-04 of
Regulation S-X.
|
We
note
that Rule 5-04 of Regulation S-X requires that Schedule IV: Mortgage Loans
on
Real Estate be filed “by persons specified under Schedule XI…” We understand,
however, that it is the Staff’s position that the reference to Schedule XI is
intended to reference Schedule III. Schedule III is required to be filed “for
real estate (and the related accumulated depreciation) held by persons a
substantial portion of whose business is that of acquiring
and holding for investment real
estate or interests in real estate,
or
interests in other persons a substantial portion of whose business is that
of
acquiring
and holding real estate or interests in real estate for
investment.”
(emphasis added)
As
noted
above in our response to Comment 2, Opteum Inc. and its consolidated
subsidiaries are engaged in two primary business activities. First, we own
and
manage a portfolio of mortgage-backed securities. Our mortgage-backed securities
consist of either pass-through certificates or collateralized mortgage
obligations (collateralized mortgage obligations represent the right to receive
certain cash flows generated by a pool of collateralized mortgage loans that
are
held in an unaffiliated trust). Since such securities do not entail a direct
exposure to the borrower connected with the mortgage loans, but rather exposure
to Fannie Mae, Freddie Mac or GNMA (who guarantee the payment of principal
and
interest associated with these mortgage loans), we do not believe that these
mortgage-backed securities represent interests in real estate within the meaning
of Schedule III. Second, our wholly-owned subsidiary, OFS, is engaged in the
business of originating and purchasing, and then promptly selling, residential
mortgage loans. OFS does not hold these loans for investment. Accordingly,
we
believe that neither Opteum Inc. nor OFS is engaged in the business of acquiring
and holding for investment real estate or interests in real estate.
Further,
we note that the holding period of loans originated or purchased by OFS is
typically one to three months. In contrast, other originators of residential
and
other mortgage loans may opt to hold such loans as investments for extended
periods of time. In such instances, Schedule IV may be appropriate to enhance
the disclosure to the readers of such entities’ financial statements.
However,
since OFS seeks to promptly sell its residential mortgage loans as opposed
to
holding these loans as investments, we believe that presenting the information
called for by Schedule IV may result in confusion in the minds of our investors
by implying that we intend to hold such loans for investment. Accordingly,
in
the interest of presenting our financial statements in as clear a manner as
possible, we do not believe that the inclusion of Schedule IV: Mortgage Loans
on
Real Estate in our filings with the Commission would improve our disclosure.
In
closing, we acknowledge that:
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•
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we
are responsible for the adequacy and accuracy of the disclosure in
our
filings with the Commission;
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•
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Staff
comments or changes to disclosure in response to Staff comments do
not
foreclose the Commission from taking any action with respect to our
filings with the Commission; and
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•
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we
may not assert Staff comments as a defense in any proceeding initiated
by
the Commission or any person under the federal securities laws of
the
United States.
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If
you
have any questions regarding the contents of this letter, please feel free
to
call me at (772) 231-1400.
Very
truly yours,
/s/
Robert E. Cauley
Robert
E.
Cauley
cc: Kristi
Beshears
Jeffrey
J. Zimmer
J.
Christopher Clifton
Robert
E.
King, Jr.