UNITED MORTGAGE TRUST - FORM 10-K

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EXCEL - IDEA: XBRL DOCUMENT - UNITED MORTGAGE TRUST	Financial_Report.xls
EX-31 - EXHIBIT 31 - UNITED MORTGAGE TRUST	v306441_ex31.htm
EX-23.1 - EXHIBIT 23.1 - UNITED MORTGAGE TRUST	v306441_ex23-1.htm
EX-32 - EXHIBIT 32 - UNITED MORTGAGE TRUST	v306441_ex32.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended

December 31, 2011.

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from _______________ to _______________.

Commission File Number 000-32409

UNITED MORTGAGE TRUST

(Exact name of registrant as specified in its charter)

MARYLAND		75-6493585
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

1301 Municipal Way, Grapevine TX 76051

(Address of principal executive offices) (Zip Code)

Issuer's telephone number: (214) 237-9305

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Shares of Beneficial interest, par value $0.01 per share

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No x

Indicate by check mark if the Registrant is not required to file reports

pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No x

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K £

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated Filer ¨ Accelerated Filer ¨ Non-accelerated filer ¨ Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant computed with reference to the price at which the common equity as last sold, or the average of the bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter.

There is currently no established public market on which the Company’s common shares are traded. The aggregate market value of the registrant’s shares of beneficial interest held by non-affiliates of the registrant at June 30, 2011 computed by reference to the price at which the common equity was last sold was $100,794,533

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

As of March 30, 2012, 6,437,466 of the Registrant's Shares of Beneficial Interest were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference to the Registrant’s definitive proxy statement for the 2012 annual meeting of shareholders.

Table of Contents
	Page No.
PART I
Item 1. Business	2
Item 1A. Risk Factors	8
Item 1B. Unresolved Staff Comments	15
Item 2. Properties	15
Item 3. Legal Proceedings	15
Item 4. (Removed and Reserved)	15

PART II
Item 5. Market for Registrant’s Common Equity Related Shareholder Matters and Issuer Purchases of Equity Securities	16
Item 6. Selected Financial Data	18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company	19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	40
Item 8. Consolidated Financial Statements and Supplementary Data	42
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	62
Item 9A. Controls and Procedures	62
Item 9B. Other Information	63

PART III
Item 10. Directors and Executive Officers of the Registrant	63
Item 11. Executive Compensation	68
Item 12. Security Ownership of Certain Beneficial Owners and Management	69
Item 13. Certain Relationships and Related Transactions	70
Item 14. Principal Accounting Fees and Services	75
Item 15. Exhibits and Financial Statement Schedules	75

PART I

This Annual Report 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. Forward-looking statements are not statements of fact and can be identified by words such as “anticipate,” “expect,” “estimate,” “intend,” “seek,” “plan,” “will,” “should,” “may” and similar terms, including their negative forms, and also by references to strategies, plans or intentions. Such statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the availability of and our ability to find suitable mortgage investments; the difficulties of the real estate industry generally in response to the “sub-prime crisis,” the “credit crisis,” the current difficulties in the housing and mortgage industries including the impact thereof on the homebuilding industry, the current negative economic environment and changes in economic and credit market conditions, changes in interest rates, our ability to adapt to changing circumstances, the continued financial viability of affiliates to whom we have extended loans, the level of reinvestment of dividends by our shareholders in our dividend reinvestment plan and the requirement to maintain qualification as a real estate investment trust. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore we cannot give assurance that such statements included in this Annual Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or by any other person that the results or conditions described in such statements or in our objectives and plans will be realized. Readers should carefully review our financial statements and the notes thereto, as well as the risk factors described in Item 1A and in our other filings with the Securities and Exchange Commission.

ITEM 1. BUSINESS

GENERAL

United Mortgage Trust (which we refer to in this report as “we,”, “us”, “our” and the “Company”) is a Maryland real estate investment trust formed on July 12, 1996. We acquire mortgage investments from several sources, including from affiliates of our Advisor. The amount of mortgage investments acquired from such sources depends upon the mortgage investments that are available from them or from other sources at the time we have funds to invest. We believe that all mortgage investments purchased from affiliates of the Advisor are at prices no higher than those that would be paid to unaffiliated third parties for mortgages with comparable terms, rates, credit risks and seasoning.

Our principal investment objectives are to invest proceeds from our dividend reinvestment plan, financing proceeds, proceeds from the repayment of our loans, capital transaction proceeds and retained earnings in the following types of investments: (i) first lien secured interim mortgage loans with initial terms of 12 months or less for the acquisition and renovation of single-family homes, which we refer to as “Interim Loans”; (ii) secured, line of credit to UMTH Lending Company, L.P. for origination of Interim Loans; (iii) lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “Land Development Loans”; (iv) lines of credit and loans secured by developed single-family lots, referred to as “Finished Lot Loans”; (v) lines of credit and loans secured by completed model homes, referred to as “Model Home Loans”; (vi) loans provided to entities that have recently filed for bankruptcy protection under Chapter 11 of the U.S. bankruptcy code, secured by a priority lien over pre-bankruptcy secured creditors, referred to as “Debtor in Possession Loans”, (vii) lines of credit and loans, with terms of 18 months or less, secured by single family lots and homes constructed thereon, referred to as “Construction Loans”; (viii) first lien secured mortgage loans with terms of 12 to 360 months for the acquisition of single-family homes, referred to as “Residential Mortgages”, and, (ix) discounted cash flows secured by assessments levied on real property. We collectively refer to the above listed loans as “Mortgage Investments”. Additionally, our portfolio includes obligations of affiliates of our Advisor, which we refer to as “recourse obligations.”

The typical terms for residential mortgages, contracts for deed and interim loans (collectively referred to as “mortgage investments”) are 360 months, 360 months and 12 months, respectively. The five-year line of credit loan we have extended to United Development Funding, L.P. (“UDF”) was extended for one year on December 31, 2011 and is now scheduled to mature on December 31, 2012. Finished lot loans and builder model home loans are expected to have terms of 12 to 48 months. The majority of interim loans are covered by recourse agreements that obligate either a third party with respect to the performance of a purchased loan, or a borrower that has made a corresponding loan to another party (the "underlying borrower"), to repay the loan if the underlying borrower defaults. Our loans to UDF are secured by the pledge of all of UDF’s land development loans and equity participations, and are subordinated to its senior debt.

We seek to produce net interest income from our mortgage investments while maintaining strict cost controls in order to generate net income for monthly distribution to our shareholders. We intend to continue to operate in a manner that will permit us to qualify as a Real Estate Investment Trust (“REIT”) for federal income tax purposes. As a result of that REIT status, we are permitted to deduct dividend distributions to shareholders, thereby effectively eliminating the "double taxation" that generally results when a corporation earns income (upon which the corporation is taxed) and distributes that income to shareholders in the form of dividends (upon which the shareholders are taxed).

The overall management of our business is vested in our Board of Trustees. UMTH General Services, L.P., a Delaware limited partnership (“Advisor” or “UMTHGS”) and a subsidiary of UMT Holdings, L.P. (“UMTH”), has been retained to manage our day-to-day operations and to use its best efforts to seek out and present, whether through its own efforts or those of third parties retained by it, investment opportunities that are consistent with our investment policies and objectives and consistent with the investment programs the trustees may adopt from time to time in conformity with our Declaration of Trust.

In addition to this annual report, we file quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). All documents that we file with the SEC are available free of charge on our website, which is www.unitedmorgagetrust.com. You may also read and copy any document that we file at the public reference facilities of the SEC at 450 Fifth Street NW, Washington DC 20549. Please call the SEC at (800) SEC-0330 for further information about the public reference facilities. These documents also may be accessed through the SEC’s electronic data gathering, analysis and retrieval system (“EDGAR”) via electronic means, including the SEC’s home page on the internet (http://www.sec.gov).

Our principal executive offices are located at 1301 Municipal Way, Grapevine TX 76051, telephone (214) 237-9305 or (800) 955-7917, facsimile (214) 237-9304.

INVESTMENT OBJECTIVES AND POLICIES OF UNITED MORTGAGE TRUST

PRINCIPAL INVESTMENT OBJECTIVES

Our principal investment objectives are to invest proceeds from our dividend reinvestment plan, financing proceeds, capital transaction proceeds and retained earnings in the following types of investments:

(i)

first lien secured interim mortgage loans with initial terms of 12 months or less for the acquisition and renovation of single-family homes, which we refer to as “Interim Loans”;

(ii)

secured line of credit to UMTH Lending Company, L.P. for origination of Interim Loans;

(iii)

lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “Land Development Loans”;

(iv)

lines of credit and loans secured by developed single-family lots, referred to as “Finished Lot Loans”;

(v)

lines of credit and loans secured by completed model homes, referred to as “Model Home Loans”;

(vi)

loans provided to entities that have recently filed for bankruptcy protection under Chapter 11 of the US bankruptcy code, secured by a priority lien over pre-bankruptcy secured creditors, referred to as “Debtor in Possession Loans”;

(vii)

lines of credit and loans, with terms of 18 months or less, secured by single family lots and homes constructed thereon, referred to as “Construction Loans”;

(viii)

first lien secured mortgage loans with terms of 12 to 360 months for the acquisition of single-family homes, referred to as “Residential Mortgages”; and

(ix)

discounted cash flows secured by assessments levied on real property.

We collectively refer the above listed loans as “Mortgage Investments”.

In addition, we intend to generate fee income by providing credit enhancements associated with residential real estate financing transactions in the various forms as recommended from time-to-time by our Advisor and approved by our Board of Trustees, including but not limited to, guarantees, pledges of cash deposits, letters of credit and tri-party inter-creditor agreements, all of which we refer to as “Credit Enhancements”. Mortgage Investments and Credit Enhancements are expected to:

(1)

produce net interest income and fees;

(2)

provide monthly distributions from, among other things, interest on Mortgage Investments and fees from credit enhancements; and

(3)

permit reinvestment of payments of principal and proceeds of prepayments, sales and insurance net of expenses.

There is no assurance that these objectives will be attained.

INVESTMENT POLICY

Most of our Mortgage Investments to date are geographically concentrated in the Texas market. We anticipate that the concentration will continue in the near future, but it is our intention to expand our geographic presence through the purchase of Mortgage Investments in other geographic areas of the United States. In making the decision to invest in other areas, we consider the market conditions prevailing at the time we invest.

As of December 31, 2011, our portfolio was comprised of:

Mortgage Loan Category:	Percentage of Mortgage Portfolio:
First lien secured interim mortgages 12 months or less and residential mortgages and contracts for deed		21	%
Secured LOC to UMTH Lending Co., L.P.		7	%
Land development loans		68	%
Finished lot loans		2	%
Construction loans		2	%

We no longer purchase Interim Loans. In 2011, we decreased our investment in our affiliated line of credit to UMTH Lending Co., L.P., secured by Interim Loans, by approximately $530,000. We plan to invest in Residential Mortgages to facilitate the sale of homes securing our Interim Loans. We plan to invest in Construction Loans for the construction of new single family homes. We plan to continue to invest in Land Development Loans, Finished Lot Loans, and Model Home Loans because, 1) Land Development Loans and Finished Lot Loans have provided us with suitable collateral positions, well capitalized borrowers and attractive yields; and, 2) Model Home Loans and Construction Loans are expected to provide us with suitable collateral positions, well capitalized borrowers and attractive yields. Model Home and Construction Loans are expected to produce higher yields commensurate with Land Development Loans, Finished Lot Loans and the Subordinate Line of Credit secured by Interim Loans. As we phase out of Interim Loans we will increase the percentage of our portfolio invested in Land Development Loans, Finished Lot Loans, Model Home Loans, Debtor in Possession Loans, and Construction Loans, until market conditions indicate the need for an adjustment of the portfolio mix.

UNDERWRITING CRITERIA

We will not originate residential mortgage loans, except to facilitate the resale of a foreclosed property. Funds awaiting investment in Mortgage Investments will be invested in government securities, money market accounts or other assets that are permitted investments for REITs. See “Temporary Investments” below.

The underwriting criteria for Mortgage Investments are as follows:

(1)

Priority of Lien

Land Development Loans and Finished Lot Loans must be secured by a first lien, second lien or a pledge of partnership interest that is insured by a title company. Second liens are subject to the Loan-to-Value (“LTV”) limitations set forth below.

Subordinate Line of Credit Secured by Interim Loans will be secured by a second lien, insured by a title company, and is subject to the Loan-to-Value limitations set forth below.

Interim Loans purchased must be secured by a first lien that is insured by a title insurance company.

Model Home Loans and Construction Loans will be secured by a first lien or a second lien that is insured by a title insurance company. Second liens are subject to the Loan-to-Value (“LTV”) limitations set forth below.

Residential Mortgages will be secured by a first lien that is insured by a title insurance company.

Credit Enhancements must be secured by first or second liens or pledges of partnership interests.

Debtor in Possession Loans will be secured by a priority lien over pre-bankruptcy secured creditors and a claim with super-priority over administrative expenses allowed by the bankruptcy court.

(2)

Rate and Fees

Our advisor, UMTH General Services, L.P. (“UMTHGS” or our “Advisor”) seeks to acquire Mortgage Investments that will provide us with a satisfactory net yield. Net yield is determined by the yield realized after payment of note servicing fees, if any, and administrative costs (ranging from 1% to 2% of our average invested assets). Rates will be either adjustable or fixed. No loans will be purchased at a premium above the outstanding principal balance. Our investment policy allows for acquisition of loans at various rates. Fees charged for Credit Enhancements will be determined by the degree of risk as determined and recommended by our Advisor. Credit Enhancement fees are expected to range between 0.5% and 3% per annum.

(3)

Term and Amortization

There is no minimum term for the loans we acquire.

Land Development Loans, Finished Lot Loans and Model Home Loans will generally have terms from 24 to 48 months.

Construction Loans will generally have terms of 12 to 18 months.

Interim Loans and Subordinate Interim Loans will generally have terms of 12 months or less.

Generally, Land Development Loans, Finished Lot Loans, Model Home Loans, Construction Loans and Interim Loans do not amortize. They are interest only loans with the principal paid in full when the loans mature.

Residential Mortgages will generally have terms and amortizations from 180 to 360 months.

Debtor in Possession Loans will generally have terms and amortizations from 6 to 60 months.

Credit Enhancements will range from 12 to 48 months.

(4)

Loan-to-Value (“LTV”), Investment-to-Value Ratio (“ITV”), Combined LTV Ratio (“CLTV”)

Land Development Loans, Finished Lot Loans, Residential Mortgages and Construction Loans: Except as set forth below, loans purchased may not exceed an 85% ITV. Except as set forth below, Land Development Loans, Finished Lot Loans, Residential Mortgages and Construction Loans will not exceed 85% of the value of the collateral securing the indebtedness (the LTV of the loan). The purchase of, or investment in, subordinate liens, secured loans or partnership interests securing loans will not exceed a CLTV of 85%, (subject to the exceptions listed below). May not exceed 85% LTV for first liens and 100% CLTV for second lien loans. CLTV shall mean the sum of all indebtedness senior to us plus the sum of our investment or loan.

Model Home Loans: LTV may not exceed 93% of each first lien loan, and will be a part of a pool of model home collateral and will also be cross-collateralized. CLTV may not exceed 100% of second lien loans. All expenses associated with the model home are borne by the home builder.

Subordinated Interim Loans and Interim Loans: Loans will not exceed a 75% CLTV without approval by our Board of Trustees.

Residential Mortgages: May not exceed 85% ITV and 85% LTV.

Debtor in Possession Loans will not exceed a 75% ITV.

(5)

Seasoning

None of the types of loans we currently purchase, or intend to purchase, are subject to seasoning requirements.

(6)

Borrower, Loan and Property Information

Land Development Loans, Finished Lot Loans, Model Homes Loans, Construction Loans, and Credit Enhancements: Borrower, loan and property information will be in accordance with guidelines set forth by the originating entities, United Development Funding and UMTH Land Development, L. P., including economic feasibility studies, engineering due diligence reports, exit strategy analysis, and construction oversight requirements. UMTHGS or our “Advisor”, our Advisor, will periodically monitor compliance and changes to underwriting guidelines.

Residential Mortgages: Borrower, loan and property information will be in accordance with guidelines set forth by the originating entities, UMTH Lending Company, L. P. UMTHGS or our Advisor; our Advisor will periodically monitor compliance and changes to underwriting guidelines.

Interim Loans: Loans shall be underwritten in accordance with the guidelines established by the originating company, UMTH Lending Company, L.P., including borrower and property information. Our Advisor will periodically monitor compliance and changes to underwriting guidelines.

Debtor in Possession Loans will be reviewed and underwritten on a case by case basis by our Advisor, due to their unique characteristics. Our Advisor will employ the services of outside consultants, when and if necessary, to effectively evaluate each opportunity.

(7)

Appraisals

Land Development Loans, Finished Lot Loans, Construction Loans, Residential Mortgages and Model Home Loans: Appraisal must demonstrate that the LTV, ITV or CLTV is in compliance with the above referenced LTV, ITV and CLTV standards. Loans exceeding LTV, ITV and CLTV guidelines must note the criteria on which the exception was based.

Subordinate Interim Loans and Interim Loans: Appraisal must demonstrate that the CLTV or ITV is not more than 75% (subject to the exceptions set forth in 4 above).

Debtor in Possession loans will be underwritten on a case by case basis, given their unique characteristics and circumstances.

The appraisals must be performed by appraisers approved by our Advisor.

(8)

Credit

Subordinate Interim Loans, Residential Mortgages and Interim Loans: Minimum credit scores and corresponding down payment requirements will be in accordance with the guidelines set by the originating company (currently UMTH Lending Company, L.P.). UMTHGS will periodically monitor compliance and changes to underwriting guidelines.

Land Development Loans, Finished Lot Loans, Model Home Loans, Construction Loans and Credit Enhancements: Extensions of credit to borrowers will be determined in accordance with net worth and down payment requirements prescribed by the originating companies (currently United Development Funding and UMTH Land Development, L.P.). UMTHGS as Advisor to UMT shall periodically monitor compliance and changes to underwriting guidelines

(9)

Hazard Insurance

Loans that are secured by a residence must have an effective, prepaid hazard insurance policy with a mortgagee's endorsement for our benefit in an amount not less than the outstanding principal balance on the loan. We reserve the right to review the credit rating of the insurance issuer and, if deemed unsatisfactory, request replacement of the policy by an acceptable issuer.

(10)

Geographical Boundaries

We may purchase Mortgage Investments and provide Credit Enhancements for real estate projects in any of the 48 contiguous United States.

(11)

Mortgagees' Title Insurance

Each Mortgage Investment purchased must have a valid mortgagees' title insurance policy insuring our lien position in an amount not less than the outstanding principal balance of the loan. Such title policy shall be issued by a title insurance company with an “S - Substantial” rating or higher, as rated by Demotech, Inc., an independent financial analysis firm, or other similar standard as set forth by our board of trustees.

(12)

Guarantees, Recourse Agreements, and Mortgage Insurance

Subordinate Interim Loans, Interim Loans and Residential Mortgages purchased shall contain personal guarantees of the borrower or principal of the borrower.

Subordinate Interim Loans and Interim Loans shall afford full recourse to the originating company.

Land Development Loans, Finished Lot Loans, Model Home Loans, Construction Loans and Credit Enhancements shall have guarantees and collateral arrangements as determined by the originating companies (United Development Funding and UMTH Land Development, L.P). Our Advisor shall review guarantees and recourse obligations.

Debtor in Possession loans shall be secured by a priority lien over pre-bankruptcy secured creditors. Our Advisor shall review guarantees and recourse obligations.

(13)

Pricing

Mortgage Investments will be purchased at no minimum percentage of the principal balance, but in no event in excess of the outstanding principal balance.

Yields on our loan portfolio and fees charged for Credit Enhancements will vary with perceived risk, interest rate, credit, LTV ratios, down payments, guarantees or recourse agreements among other factors. Our objectives will be accomplished through purchase of high rate loans, reinvestment of principal payments and other short-term investment of cash reserves and, if utilized, leverage of capital to purchase additional Mortgages Investments.

The principal amounts of Mortgage Investments and the number of Mortgage Investments in which we invest will be affected by market availability and also depends upon the amount of capital available to us from proceeds of our dividend reinvestment plan, retained earnings, repayment of our loans and borrowings. There is no way to predict the future composition of our portfolio since it will depend in part on the loans available at the time of investment.

TEMPORARY INVESTMENTS

We intend to use proceeds from our dividend reinvestment plan, retained earnings, proceeds from the repayment of our loans and bank borrowings to acquire Mortgage Investments. There can be no assurance as to when we will be able to invest the full amount of capital available to us in Mortgage Investments, although we will use our best efforts to invest or commit for investment all capital within 60 days of receipt. We will temporarily invest any excess cash balances not immediately invested in Mortgage Investments or for the other purposes described above, in certain short-term investments appropriate for a trust account or investments which yield "qualified temporary investment income" within the meaning of Section 856(c)(6)(D) of the Code or other investments which invest directly or indirectly in any of the foregoing (such as repurchase agreements collateralized by any of the foregoing types of securities) and/or such investments necessary for us to maintain our REIT qualification or in short-term highly liquid investments such as in investments with banks having assets of at least $50,000,000, savings accounts, bank money market accounts, certificates of deposit, bankers' acceptances or commercial paper rated A-1 or better by Moody's Investors Service, Inc., or securities issued, insured or guaranteed by the United States government or government agencies, or in money market funds having assets in excess of $50,000,000 which invest directly or indirectly in any of the foregoing.

OTHER POLICIES

We will not: (a) issue senior securities; (b) invest in the securities of other issuers for the purpose of exercising control; (c) invest in securities of other issuers, other than in temporary investments as described under " Temporary Investments;” (d) underwrite the securities of other issuers; or (e) offer securities in exchange for property.

We may borrow funds to make distributions to our shareholders or to acquire additional Mortgage Investments. Our ability to borrow funds is subject to certain limitations set forth in the Declaration of Trust, specifically, the Trust may not incur indebtedness in excess of 50% of the Net Asset Value of the Trust

Other than in connection with the purchase of Mortgage Investments or issuance of Credit Enhancements, which may be deemed to be a loan from us to the borrower, we do not intend to loan funds to any person or entity. Our ability to lend funds to the Advisor, a Trustee or Affiliates thereof is subject to certain restrictions as described in "Summary of Declaration of Trust - Restrictions on Transactions with Affiliates.”

We will not sell property to our Advisor, a Trustee or Affiliates thereof at terms less favorable than could be obtained from a non-affiliated party.

Although we do not intend to invest in real property, to the extent we do, a majority of the Trustees shall determine the consideration paid for such real property, based on the fair market value of the property. If a majority of the Independent Trustees so determine, or if the real property is acquired from the Advisor, as Trustee or Affiliates thereof, a qualified independent real estate appraiser shall determine such fair market value selected by the Independent Trustees.

We will use our best efforts to conduct our operations so as not to be required to register as an investment company under the Investment Company Act of 1940 and so as not to be deemed a "dealer" in mortgages for federal income tax purposes. See "Risks Related to Federal Income Taxation and Our Status as a REIT.”

We will not engage in any transaction which would result in the receipt by the Advisor or its Affiliates of any undisclosed "rebate" or "give-up" or in any reciprocal business arrangement which results in the circumvention of the restrictions contained in the Declaration of Trust and in applicable state securities laws and regulations upon dealings between us and the Advisor and its Affiliates.

The Advisor and its Affiliates, including companies, other partnerships and entities controlled or managed by such Affiliates, may engage in transactions described in our prospectus, including acting as Advisor, receiving distributions and compensation from us and others, the purchasing, warehousing, servicing and reselling of mortgage notes, property and investments and engaging in other businesses or ventures that may be in competition with us.

CHANGES IN INVESTMENT OBJECTIVES AND POLICIES

The investment restrictions contained in the Declaration of Trust may only be changed by amending the Declaration of Trust with the approval of the shareholders. However, subject to those investment restrictions, the methods for implementing our investment policies may vary as new investment techniques are developed. The Board of Trustees shall periodically, no less than annually review our investment policies and objectives and publish same in a public filing and direct mail communication to our shareholders.

COMPETITION

We believe that our principal competition in the business of acquiring and holding mortgage investments is from financial institutions such as banks, saving and loan associations, life insurance companies, institutional investors such as mutual funds and pension funds, and certain other mortgage REITs. While most of these entities have significantly greater resources than we do, we believe that we are able to compete effectively and to generate relatively attractive rates of return for shareholders due to our relationships with affiliated loan origination companies, our relatively low level of operating costs, our relationships with our sources of mortgage investments and the tax advantages of our REIT status.

EMPLOYEES

We have no employees however, our Advisor is staffed with employees who possess expertise in all areas required to fulfill its obligation as manager of our day-to-day management. UMTH owns 99.9% of UMTHGS, our Advisor.

ITEM 1A. RISK FACTORS

The following are certain risk factors that could affect our business, financial condition, operating results and cash flows. These risk factors should be considered in connection with the forward-looking statements contained in this Annual Report on Form 10-K because these risk factors could cause our actual results to differ materially from those expressed in any forward-looking statement. The risks highlighted below are not the only ones we face. If any of these events actually occur, our business, financial condition, operating results or cash flows could be negatively affected. We caution readers to keep these risk factors in mind and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of this report.

Risks Related to the Real Estate Industry

Our operations and results are subject to the risks associated with the real estate industry.

Our operating results and the value of our mortgage investments, and consequently the value of your shares, are subject to the risk that if our mortgage investments do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to you will be adversely affected. The following factors, among others, may adversely affect our results:

downturns in the national, regional and local economic climate;

competition from other real estate lenders;

local real estate market conditions, such as oversupply or reduction in demand for properties;

trends and developments in the homebuilding industry;

conditions in financial markets, including changes in interest rates, the availability and cost of financing, the fiscal and monetary policies of the United States government and the Board of Governors of the Federal Reserve System and international financial conditions;

unemployment rates;

increased operating costs, including, but not limited to, insurance expense, utilities, real estate taxes, state and local taxes;

civil disturbances, natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses; and

declines in the financial condition of our borrowers and our ability to collect on the loans we make to our borrowers.

Continued distressed conditions in the real estate and mortgage markets have had and may continue to have adverse effects on our results.

During 2011 the mortgage lending industry continued to experience some instability due to, among other things, defaults and foreclosures on sub-prime and prime loans and a resulting decline in the market value of such loans. These developments were initially referred to as the “sub-prime crisis” but it became evident in 2008 that the crisis had progressed beyond “sub-prime” mortgages as the default rate on prime mortgages also increased. The sub-prime crisis had become a credit crisis and part of an overall negative economic environment. In response to these negative market conditions, lenders, investors, regulators and other third parties questioned the adequacy of lending standards and other credit requirements for several loan programs made available to borrowers in recent years. This has led generally to reduced investor demand for mortgage loans and mortgage-backed securities, tightened credit requirements, reduced liquidity and increased credit risk premiums.

The deterioration in the housing market has had an adverse impact on our portfolio of mortgage investments because our interim loan borrowers rely on prospective home buyers who do not satisfy all of the income ratios, credit record criteria, loan-to-value ratios, seasoning, employment history and liquidity requirements of conventional mortgage financing. These factors place the loans in the “non-conforming” category, meaning that they are not insured or guaranteed by a federally owned or guaranteed mortgage agency. Accordingly, the risk of default by the borrower in those "non-conforming loans" is higher than the risk of default in loans made to persons who qualify for conventional mortgage financing.

We believe that the impact of these factors on our operations has been significant. We have adopted active strategies to monitor and manage our credit risk and our portfolio of mortgage investments, such as reducing our investments in interim loans secured by conventionally built homes, with the objective of limiting to the extent possible adverse financial effects from the credit crisis. However, we have two loans in California, which is one of the states where the sub-prime crisis has been felt the most and conditions could change in Texas and in our other markets. Therefore, we can give no assurances that there will not be a marked increase in defaults under our interim loans accompanied by a rapid decline in real estate values that could have further material adverse effect upon our financial condition and operating results.

Real estate properties are illiquid and are difficult to sell in a poor market environment like that of the present.

Real estate investments are relatively illiquid, which limits our ability to react quickly to adverse changes in economic or market conditions. Our ability to dispose of those of our assets which constitute real property depends on prevailing economic and market conditions. The current credit crunch has made it particularly difficult to sell properties because interested buyers may be unable to obtain the financing they need. We may be unable to sell our properties to repay debt, to raise capital we need to fund our planned development and construction program, or to fund distributions to investors.

Fluctuations in interest rates may affect our return on investment.

Mortgage interest rates may be subject to abrupt and substantial fluctuations. Changes in interest rates may impact both demand for our real estate finance products and the rate of interest on the loans we make. If prevailing interest rates rise above the average interest rate being earned by our mortgage investments, we may be unable to quickly liquidate our existing investments in order to take advantage of higher returns available from other investments. Furthermore, interest rate fluctuations may have a particularly adverse effect on the return we realize on our mortgage investments if we use money borrowed at variable rates to fund fixed rate mortgage investments. A portion of the loans we finance for UDF are junior in the right of repayment to senior lenders, who will provide loans representing 70% to 80% of total project costs. As senior lender interest rates available to our borrowers increase, demand for our mortgage loans may decrease, and vice versa.

Bankruptcy of borrowers may delay or prevent recovery on our loans.

The recovery of money owed to us may be delayed or impaired by the operation of the federal bankruptcy laws. Any borrower has the ability to delay a foreclosure sale for a period ranging from a few months to several months or more by filing a petition in bankruptcy, which automatically stays any actions to enforce the terms of the loan. The length of this delay and the associated costs will generally have an adverse impact on the return we realize on our investments.

Mortgage loan modification programs and future legislative action may adversely affect the value of, and the returns on, the mortgages in which we invest.

The U.S. government, through the Federal Housing Authority and the Federal Deposit Insurance Corporation, has commenced implementation of programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. The programs may involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans or the rate of interest payable on the loans or extending the payment terms of the loans. In addition, members of the U.S. Congress have indicated support for additional legislative relief for homeowners. These loan modification programs, as well as future legislative or regulatory actions that result in the modification of outstanding mortgage loans, may adversely affect the value of and the returns on the residential mortgages in which we invest.

Risks Related to Our Business

We may not be successful in managing credit risk; particularly as such risk is impacted by the poor economic conditions, which could adversely affect our results and our ability to pay distributions to our shareholders.

Despite our efforts to manage credit risk, there are many aspects of credit risk that we cannot control. In addition, the negative economic environment has created new circumstances that increase the difficulty of predicting the credit risks to which we will be exposed and limiting future delinquencies, defaults, and losses. Our borrowers may default and we may experience delinquencies at a higher rate than we anticipate. Our underwriting reviews may not be effective. Our loan loss reserves may prove to be inadequate. The value of the homes collateralizing our mortgage investments may decline. We may have difficulty selling any homes that are repossessed which could delay or prevent us from recovering our investment. Changes in lending trends, consumer behavior, bankruptcy laws, tax laws, regulations impacting the mortgage industry, and other laws may exacerbate loan losses. Other changes or actions by judges or legislators regarding mortgage loans and contracts including the voiding of certain portions of these agreements may reduce our earnings, impair our ability to mitigate losses, or increase the probability and severity of losses. Our loss mitigation efforts will impact our operating costs and may not be effective in reducing our future credit losses.

We invest in non-conforming loans which are subject to a higher risk of default than conventional mortgage loans.

Most of our mortgage investments are “non-conforming” in that they are not insured by a federally owned or guaranteed mortgage agency. Also, a portion of our loans involve, directly or indirectly, borrowers who do not satisfy all of the income ratios, credit record criteria, loan-to-value ratios, employment histories and liquidity requirements of conventional mortgage financing. Accordingly, the risk of default by the borrower in those "non-conforming loans" is higher than the risk of default in loans made to persons who qualify for conventional mortgage financing. The three year average default rate for our residential mortgages and contracts for deed was approximately 2.2% and for our interim loans was approximately 0.10%.

We have a heavy dependence upon the UDF line of credit which exposes us to concentrated credit risk and could result in adverse results with respect to delinquencies or defaults.

Our line of credit to UDF is currently $75 million, and, if fully funded, we generate a significant amount of our total earnings through that lending arrangement. Effective December 31, 2010, the line of credit was increased from $60 million to $75 million and extended for one year. Effective December 31, 2011, the line of credit was extended for one year and matures on December 31, 2012. The large amount that we have committed to the UDF line of credit means that we face a concentrated credit risk with UDF so that, in the event of delinquencies or defaults by UDF, a significant portion of our total portfolio of mortgage investments could be adversely affected. In addition, if we are unable to renew the line of credit when it expires or to find an alternative lending arrangement either with UDF or other borrowers that will allow us to use an equivalent amount of our lending resources and that will generate an equivalent or better return to us, our earnings will be negatively impacted which may result in an adverse impact on our ability to make distributions to our shareholders.

Our loans to UDF are junior to other lenders and expose us to the risks of the homebuilding industry could result in losses on our mortgage investments.

Our loans to UDF are secured by UDF’s interest in mortgages and equity participations that it has obtained to secure its loans to real estate developers. Some of those mortgages are junior mortgages. The developers obtain the money to repay the development loans by reselling the residential home lots to home builders or individuals who build single-family residences on the lots. The developer’s ability to repay their loans is based primarily on the amount of money generated by the developer’s sale of its inventory of single-family residential lots. As a result, we are exposed to the risks of the homebuilding industry, which is undergoing a significant downturn due in large part to the negative economic environment, the duration and ultimate severity of which are uncertain. Accordingly, continued or further deterioration of home building conditions or in the broader economic conditions of the homebuilding market could cause the number of homebuyers to decrease, which would increase the likelihood of defaults on the development loans and, consequently, increase the likelihood of a default on the UDF line of credit loan. If this were to occur, we may face the inability to recover the outstanding loan balance on foreclosure of collateral securing our loans because our rights to this collateral will be junior to the rights of senior lenders and because of the potentially reduced value of the underlying properties.

We may change our investment strategy, operating policies and/or asset allocations without shareholder consent which could result in losses.

We may change our investment strategy, operating policies and/or asset allocation with respect to investments, acquisitions, leverage, growth, operations, indebtedness, capitalization and distributions at any time without the consent of our shareholders. A change in our investment strategy may increase our exposure to interest rate and/or credit risk, default risk and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our making investments in asset categories different from our historical investments. These changes could adversely affect our financial condition, results of operations, the Net Asset Value (“NAV”) of our shares or our ability to pay dividends or make distributions.

We purchase most of our mortgage investments from affiliates of our Advisor, which may present a conflict of interest from our Advisor.

We acquire most of our mortgage investments from affiliates of the Advisor. Due to the affiliation between the Advisor and those entities and the fact that those entities may earn fees on the origination of mortgage investments sold to us, the Advisor has a conflict of interest in determining if mortgage investments should be purchased from affiliated or unaffiliated third parties. These arrangements could affect our Advisor’s judgment and advice with respect to acquisitions of investments, originations of loans, sales of properties and other dealings between us and our Advisor.

We are dependent upon our Advisor for sourcing and management of our investments and management of our operations and any adverse changes in the financial condition of our advisor or its affiliates or our relationship with them could hinder our operating performance and the return on our investments.

We rely heavily on UMTH General Services, L.P., our Advisor, and its affiliates for the sourcing and management of our investments and for management of our operations. A significant portion of our investment activities are with affiliates of our Advisor and therefore adverse changes in the financial condition of our Advisor or our relationship with our Advisor could hinder its ability to successfully manage our operations and our portfolio of investments and could limit our sources of investments. Because our Advisor and its affiliates engage in other business activities, conflicts of interest may arise in operating more than one entity with respect to allocating time between those entities. This may cause our operations and our shareholders’ investment to suffer.

We have a high geographic concentration of mortgage investments in Texas and adverse changes in economic or market conditions in Texas could negatively affect our financial performance and condition.

A large percentage of the properties securing our mortgage investments are located in Texas, with approximately 41% in the Dallas/Fort Worth area. As a result, we have a greater susceptibility to the effects of an economic downturn in that area or from slowdowns in certain business segments that represent a significant part of that area’s overall economic activity such as energy, financial services and tourism.

We face the risk of loss on non-insured, non-guaranteed mortgage loans.

We generally do not obtain credit enhancements for our mortgage investments, because the majority of those mortgage loans are "non-conforming" in that they do not meet all of the underwriting criteria required for the sale of the mortgage loan to a federally owned or guaranteed mortgage agency. Accordingly, during the time we hold mortgage investments for which third party insurance is not obtained, we are subject to the general risks of borrower defaults and bankruptcies and special hazard losses that are not covered by standard hazard insurance (such as those occurring from earthquakes or floods). In the event of a default on any mortgage investment held by us, including, without limitation, defaults resulting from declining property values and worsening economic conditions, we would bear the risk of loss of principal to the extent of any deficiency between the value of the related mortgage property and the amount owing on the mortgage loan. Defaulted mortgage loans would also cease to be eligible collateral for borrowings and would have to be held or financed by us out of other funds until those loans are ultimately liquidated, which could cause increased financing costs and reduced net income or a net loss.

We face risks under the representations, warranties and guarantees that we gave in connection with our securitization activities.

We have engaged in two securitizations of our mortgage investments as a means of providing funding. In these transactions, we receive the proceeds from third party investors for securities issued from our securitization vehicles which are collateralized by transferred mortgage investments from our portfolio. As part of those securitizations we made certain representations and warranties concerning the portfolio of mortgage investments conveyed and we also guaranteed certain obligations. If, because of irregularities in the underlying loans, our representations and warranties are inaccurate, we may be obligated to repurchase the loans from the purchasing entities at principal value, which may exceed market value.

Potential environmental liabilities could increase our costs and limit our ability to make distributions.

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous real property owner or operator may be liable for the cost of removing or remediating hazardous or toxic substances on, under or in such property. In the event that we are forced to foreclose on a defaulted mortgage investment to recover our investment, we may be subject to environmental liabilities in connection with that real property which may cause its value to be diminished. Hazardous substances or wastes, contaminants, pollutants or sources thereof (as defined by state and federal laws and regulations) may be discovered on properties during our ownership or after a sale of that property to a third party. If those hazardous substances are discovered on a property, we may be required to remove those substances or sources and clean up the property. We could incur full recourse liability for the entire cost of any removal and clean up and the cost of such removal and clean up could exceed the value of the property or any amount that we could recover from any third party. We may also be liable to tenants and other users of neighboring properties for environmental liabilities. In addition, we may find it difficult or impossible to sell the property prior to or following any such clean up. The costs of defending against claims of environmental liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or paying personal injury claims could reduce amounts available for distribution to our shareholders.

We obtain lines of credit and other borrowings, which increases our risk of loss due to potential foreclosure.

We finance our investment activities through the use of borrowed money from lines of credit and other borrowings. These borrowings may be secured by liens on our mortgage investments. Accordingly, we could lose our mortgage investments if we default on the indebtedness. Our debt service payments reduce our cash flow available for distributions. If we were unable to meet our debt service obligations, we risk the loss of some or all of our assets to foreclosure or sale to satisfy our debt obligations.

We employ leverage in connection with our investments, which increases the risk of loss in those investments.

We are allowed to borrow an aggregate amount not to exceed 50% of our net assets to acquire mortgage investments. In addition, we have engaged in securitizations in order to finance our loan purchases. Although the use of leverage can enhance returns and increase the number of investments that we can make, a further effect of leveraging is to increase the risk of loss. The higher the rate of interest on the financing, the more difficult it would be for us to meet our obligations and the greater the chance of default. We can offer no assurance that leveraged financing will be available to us on favorable terms or that, among other factors, the terms of such financing will parallel the maturities of the underlying assets acquired. If alternative financing is not available, we may have to liquidate assets at unfavorable prices to pay off such financing. The return on our investments and cash available for distribution to our shareholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that we can derive from the assets we acquire.

We rely on appraisals that may not be accurate or may be affected by subsequent events.

Because our investment decisions are based in major part upon the value of the real estate underlying our mortgage investments and less upon the creditworthiness of the borrowers, we rely primarily on the real property securing the mortgage investments to protect our investment. We rely on appraisals and on Broker Price Opinions ("BPO's"), both of which are paid for and most of which are provided by the loan originator, to determine the fair market value of real property used to secure the mortgage investments we purchase. BPO’s are determinations of the value of a property based on a study of the comparable values of similar properties prepared by a licensed real estate broker. We cannot be sure that those appraisals or BPO's are accurate. Moreover, since an appraisal or BPO is given with respect to the value of real property at a given point in time, subsequent events could adversely affect the value of real property used to secure a loan. Such subsequent events may include changes in general or local economic conditions, neighborhood values, interest rates and new construction. Moreover, subsequent changes in applicable governmental laws and regulations may have the effect of severely limiting the permitted uses of the property, thereby drastically reducing its value. Accordingly, if an appraisal is not accurate or subsequent events adversely affect the value of the property, the mortgage investment would not be as secure as anticipated, and, in the event of foreclosure, we may not be able to recover our entire investment.

Our mortgages may be considered usurious in which case we may incur penalties and those loans may be unenforceable and result in losses to us.

Usury laws impose limits on the maximum interest that may be charged on loans and impose penalties for violations that may include restitution of the usurious interest received, damages for up to three times the amount of interest paid and rendering the loan unenforceable. Most, if not all, of the mortgage investments we purchase are subject to state usury laws and therefore we face the risk that the interest rate for our loans could be held usurious in states with restrictive usury laws.

We face risks in complying with Section 404 of the Sarbanes-Oxley Act of 2002.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we could be subject to regulatory action or other litigation, and our operating results could be harmed. Beginning with 2007, we were required to document and test our internal control procedures to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires our management to assess annually the effectiveness of our internal control over financial reporting.

During the course of our testing, we may identify deficiencies that we may not be able to remediate in a timely manner. In addition, if we fail to maintain the adequacy of our internal accounting controls, as those standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. Failure to achieve and maintain an effective internal control environment could cause us to face regulatory action and also cause investors to lose confidence in our reported financial information, either of which could have an adverse impact on our operations and our shares.

We face the risk of financial loss, litigation and regulatory action arising from the fraud, misconduct or inadvertent errors made by employees and contractors of our Advisor.

We are dependent upon our Advisor and the employees and contractors of our Advisor with respect to virtually all aspects of our operations and financial affairs, Fraud, misconduct or inadvertent errors by those employees or contractors could cause financial harm to us or expose us to litigation or regulatory action and injure our reputation. These types of conduct could include, among other types, activities such as unauthorized expenditures, defalcations, incorrect reporting of our transactions or errors or misstatements in required filings. Our ability to protect against and detect fraud, misconduct or inadvertent errors is limited and we may not be successful in detecting and remedying these actions in which case we may suffer financial and other harm that would have a negative impact on the value of our shares.

Risks Related to Federal Income Taxation and Our Status as a REIT

We face the risk of an inability to maintain our qualification as a REIT.

We are organized and conduct our operations in a manner that we believe enables us to be taxed as a REIT under the Internal Revenue Code (the "Code"). To qualify as a REIT and avoid the imposition of federal income tax on any income we distribute to our shareholders, we must continually satisfy two income tests, two asset tests and one distribution test.

If, in any taxable year, we fail to distribute at least 90% of our taxable income, we will be taxed as a corporation and distributions to our shareholders will not be deductible in computing our taxable income for federal income tax purposes. Because of the possible receipt of income without corresponding cash receipts due to timing differences that may arise between the realization of taxable income and net cash flow (e.g. by reason of the original issue discount rules) or our payment of amounts that do not give rise to a current deduction (such as principal payments on indebtedness), it is possible that we may not have sufficient cash or liquid assets at a particular time to distribute 90% of our taxable income. In that event, we could declare a consent dividend or we could be required to borrow funds or liquidate a portion of our investments in order to pay our expenses, make the required distributions to shareholders, or satisfy our tax liabilities, including the possible imposition of a four percent excise tax. We may not have access to funds to the extent, and at the time, required to make such payments.

If we were taxed as a corporation, our payment of tax will substantially reduce the funds available for distribution to shareholders or for reinvestment and, to the extent that distributions had been made in anticipation of our qualification as a REIT, we might be required to borrow additional funds or to liquidate certain of our investments in order to pay the applicable tax. Moreover, should our election to be taxed as a REIT terminate or be voluntarily revoked, we may not be able to elect to be treated as a REIT for the following four-year period.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

In order to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, our sources of income, the nature and diversification of our mortgage investments, the amounts we distribute to our shareholders and the ownership of our shares. We may also be required to make distributions to shareholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Complying with REIT requirements may force us to liquidate otherwise attractive investments or to make investments inconsistent with our business plan.

In order to qualify as a REIT, we must also determine that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer. No more than 25% of the total value of our assets can be stock in taxable REIT subsidiaries. If we fail to comply with these requirements, we must dispose of a portion of our assets within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences. The need to comply with these gross income and asset tests may cause us to acquire other assets that are qualifying real estate assets for purposes of the REIT requirements that are not part of our overall business strategy and might not otherwise be the best investment alternative for us.

Dividends payable by REITs do not qualify for the reduced tax rates.

Tax legislation enacted in 2003 and modified in 2005 and 2010 reduced the maximum U.S. federal tax rate on certain corporate dividends paid to individuals and other non-corporate taxpayers to 15% (through 2012). Dividends paid by REITs to these stockholders are generally not eligible for these reduced rates. Although this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to non-REIT corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT entities that pay dividends, which could adversely affect the value of the shares of REITs, including our shares.

We may be subject to adverse legislative or regulatory tax changes.

Federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations are subject to amendment at any time. We cannot predict when or if any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.

Risks Related to Ownership of Our Shares

Our dividend can fluctuate because it is based on earnings.

The dividend rate is fixed quarterly by our trustees, based on earnings projections. As such, the dividend rate may fluctuate up or down. Earnings are affected by various factors including use of leverage, cash on hand, current yield on investments, loan losses, general and administrative operating expenses and amount of non-income producing assets. We made distributions in excess of earnings between 1999 and 2005 and in 2008, 2009, 2010 and 2011. The amount of the excess constituted a return of capital.

We have not established a minimum dividend payment level for our shareholders and there are no assurances of our ability to pay dividends in the future.

We intend to pay monthly dividends and to pay dividends to our shareholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. Payment of such dividends, together with compliance with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code of 1986, as amended, or Internal Revenue Code. We have not established a minimum dividend payment level for our shareholders and our ability to pay dividends may be harmed by the risk factors described herein. We have reduced our level of dividend payments in recent years in reflection of the decline in interest rates and the yield on our investments. Future dividend payments to our shareholders will be made at the discretion of our Board of Trustees and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our Board of Trustees may deem relevant from time to time. There are no assurances of our ability to pay dividends in the future.

Shareholders may have current tax liability on distributions they elect to reinvest in our common stock.

If our shareholders participate in our dividend reinvestment plan, they will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. In addition, our shareholders will be treated for tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value, if any. As a result, unless our shareholders are tax-exempt entities, they may have to use funds from other sources to pay their tax liability on the value of the shares of common stock received.

No active trading market for our shares currently exists and one may not develop in the future.

Our shares are not listed on any exchange nor to our knowledge are there any bona fide quotes for the shares on any inter-dealer quotation system or electronic communication network. We have no current plans to cause our shares to be listed on any exchange. As a result, an investor in our shares may be unable to sell those shares at a price equal to or greater than that which the investor paid, if at all.

Our shareholders may not be able to sell their shares under our share redemption program and, if our stockholders are able to sell their shares under the program, they will likely encounter a lengthy delay in receiving payment for their shares and may not be able to recover the amount of their investment in our shares.

Our Share Repurchase Plan (“SRP”) contains numerous restrictions that limit our stockholders’ ability to sell their shares. Shareholders must hold their shares for at least one year in order to participate in the SRP, except for hardship redemptions (as defined in the plan). In addition, the SRP limits us to purchasing, in any consecutive 12 month period, more than 5% of the outstanding shares at the beginning of the 12 month period and repurchases are further subject to cash availability. Shares are repurchased at their Net Asset Value (“NAV”). In recent years we have had a large number of requests from shareholders to purchase their shares and have been required to place shareholders in a queue and to make repurchases on a “first come, first served” basis in order for us to comply with the restrictions of our SRP. As a result, shareholders have experienced significant delays in receiving payment for their shares that they have submitted for purchase under the SRP. Since the repurchase price is equal to the NAV, a shareholder may receive less than the amount of their investment in the shares. Moreover, our trustees have the discretion to suspend or terminate the SRP upon 30 days notice. As a result of these restrictions and circumstances, the ability of our shareholders to sell their shares should they require liquidity and to recover the value they invested is significantly restricted.

Provisions of the Maryland law and in our Declaration of Trust may have an anti-takeover effect; investors may be prevented from receiving a “control premium” for their shares.

Provisions contained in our charter and bylaws, as well as Maryland corporate law may have anti-takeover effects that delay, defer or prevent a takeover attempt, which may prevent shareholders from receiving a “control premium” for their shares. For example, these provisions may defer or prevent tender offers for our shares or purchases of large blocks of our shares, thereby limiting the opportunities for our shareholders to receive a premium for their shares over then-prevailing market prices. These provisions include the following:

Ownership limit. Our Declaration of Trust limits related investors who acquire over 9.8% of our shares (“Excess Shares”) from voting those shares and we have the right to repurchase any Excess Shares held by any investor.

Maryland business combination statute. Maryland law restricts the ability of holders of more than 10% of the voting power of our shares to engage in a business combination with us.

Maryland control share acquisition statute. Maryland law limits the voting rights of “control shares” of a trust in the event of a “control share acquisition.”

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

We do not maintain any physical properties.

ITEM 3. LEGAL PROCEEDINGS

We are unaware of any threatened or pending legal action or litigation that individually or in the aggregate could have a material effect on us.

ITEM 4. (REMOVED AND RESERVED)

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

SHARE REDEMPTION PLAN

There is currently no established public trading market for our shares. As an alternative means of providing limited liquidity for our shareholders, we maintain a Share Redemption Plan, (“SRP”). Our trustees have the discretion to modify or terminate the SRP upon 30 days notice. Under the terms of our plan as modified and effective on May 1, 2009 (see below for a further description of the plan modifications), shareholders who have held their shares for at least one year are eligible to request that we repurchase their shares. In any consecutive 12 month period we may not repurchase more than 5% of the outstanding shares at the beginning of the 12 month period. The repurchase price is based on the “Net Asset Value” (NAV) as of the end of the month prior to the month in which the redemption is made. The NAV will be established by our Board of Trustees no less frequently than each calendar quarter. For reference, at December 31, 2011 and 2010 the NAV was $15.39 and $15.74 per share, respectively. Under the prior SRP terms, the redemption price was $20.00 per share. The Company will waive the one-year holding period ordinarily required for eligibility for redemption and will redeem shares for hardship requests. A “hardship” redemption is (i) upon the request of the estate, heir or beneficiary of a deceased shareholder made within two years of the death of the shareholder; (ii) upon the disability of a shareholder or such shareholder’s need for long-term care, providing that the condition causing such disability or need for long term care was not pre-existing at the time the shareholder purchased the shares and that the request is made within 270 days after the onset of disability or the need for long term care; and (iii) in the discretion of the Board of Trustees, due to other involuntary exigent circumstances of the shareholder, such as bankruptcy, provided that the request is made within 270 days after of the event giving rise to such exigent circumstances. Previously, there was no hardship exemption. Shares will be redeemed quarterly in the order that they are presented. Any shares not redeemed in any quarter will be carried forward to the subsequent quarter unless the redemption request is withdrawn by the shareholder. Previously, shares were redeemed monthly. Repurchases are subject to cash availability and Trustee discretion. Previously, the SRP provided that repurchases were subject to the availability of cash from the DRIP or the Company’s credit line. We have also purchased a limited number of shares outside of our SRP from shareholders with special hardship considerations.

Share repurchases have been at prices of $15.50 to $20.00 through our SRP. Shares repurchased for less than $20.00 per share were 1) shares held by shareholders for less than 12 months 2) shares purchased outside of our Share Redemption Program prior to the May 1, 2009 modifications to our SRP or 3) shares purchased under our SRP subsequent to the May 1, 2009 modifications to our SRP.

Prior to May 1, 2009 the redemption price was $20 based on the determination of our Board of Trustees regarding the value of the shares with reference to our book value, our operations to date and general market and economic conditions. Subsequent to May 1, 2009, the redemption price was equal to the NAV as of the end of the quarter in which the redemption was made.

The Company complies with Distinguishing Liabilities from Equity topic of FASB Accounting Standards Codification, which requires, among other things, that financial instruments that represent a mandatory obligation of the Company to repurchase shares be classified as liabilities and reported at settlement value. We believe that shares tendered for redemption by the shareholder under the Company’s share redemption program do not represent a mandatory obligation until such redemptions are approved at the discretion of our board of trustees. At such time, we will reclassify such obligations from equity to an accrued liability based upon their respective settlement values. As of December 31, 2011, we had approximately $56,000 of approved redemption requests included in our liabilities. These shares were redeemed in February 2012.

The following table summarizes the share repurchases made by us in 2011:

Month	Total number of shares repurchased		Average Purchase Price		Total number of shares purchased as part of a publicly announced plan		Total number of shares purchased outside of plan
January		-		-		-		-
February		2,574	$	15.79		2,574		-
March		-		-		-		-
April		2,516	$	15.74		2,516		-
May		893	$	15.67		893
June		-		-		-		-
July		1,012	$	15.67		1,012		-
August		2,505	$	15.67		2,505		-
September		361	$	15.58		361		-
October		3,857	$	15.58		3,857		-
November		143	$	15.50		143		-
December		272	$	15.50		272		-
Totals		14,133	$	15.55		14,133		-

On December 31, 2011, we had 6,437,420 shares outstanding compared to 6,426,563, and 6,422,883 shares outstanding at December 31, 2010 and 2009, respectively. The increase in shares is the net between more DRP shares issued and fewer SRP shares repurchased. The shares were held by 2,313, 2,311, and 2,262 beneficial owners in 2011, 2010, and 2009, respectively. No single shareholder owned 5% or more of our outstanding shares.

Modifications to the Share Redemption Plan (“SRP”)

On March 18, 2009, the Board approved certain modifications to the Company’s SRP and its Dividend Reinvestment Plan (“DRIP”),which modifications were disclosed in a Report on Form 8-K which we filed with the SEC on March 19, 2009. Pursuant to the requirements of the SRP and the DRIP, the Company sent its shareholders notice of amendment of the SRP and the DRIP, both to be effective on May 1, 2009. The modifications consisted of the following:

The redemption price is equal to the “Net Asset Value” (NAV) as of the end of the month prior to the month in which the redemption is made. The NAV is established by our Board of Trustees no less frequently than each calendar quarter. For reference, at December 31, 2011 and 2010 the NAV was $15.39 and $15.74 per share, respectively. Under the prior SRP terms, the redemption price was $20.00 per share. The Company will waive the one-year holding period ordinarily required for eligibility for redemption and will redeem shares for hardship requests. A “hardship” redemption is (i) upon the request of the estate, heir or beneficiary of a deceased shareholder made within two years of the death of the shareholder; (ii) upon the disability of a shareholder or such shareholder’s need for long-term care, providing that the condition causing such disability or need for long term care was not pre-existing at the time the shareholder purchased the shares and that the request is made within 270 days after the onset of disability or the need for long term care; and (iii) in the discretion of the Board of Trustees, due to other involuntary exigent circumstances of the shareholder, such as bankruptcy, provided that that the request is made within 270 days after of the event giving rise to such exigent circumstances. Previously, there was no hardship exemption. Shares will be redeemed quarterly in the order that they are presented. Any shares not redeemed in any quarter will be carried forward to the subsequent quarter unless the redemption request is withdrawn by the shareholder. Previously, shares were redeemed monthly. Repurchases are subject to cash availability and Trustee discretion. Previously, the SRP provided that repurchases were subject to the availability of cash from the DRIP or the Company’s credit line.

Modifications to the Dividend Reinvestment Plan (“DRIP”)

Effective May 1, 2009, our DRIP share purchase price was set at the NAV. Previously, the share purchase price was $20.00 per share.

Please refer to our Report on Form 8-K filed on March 19, 2009 for further information about the modifications to the SRP and DRIP.

DIVIDEND POLICY

Under our current dividend policy, we intend to retain up to 10% of our earnings to build share value, (“Retained Earnings”), and distribute to shareholders at least 90% of our taxable income each year (which does not ordinarily equal net income as calculated in accordance with accounting principles generally accepted in the United States) so as to comply with the REIT provisions of the Code. To the extent we have available funds, we declare regular monthly dividends (unless the trustees determine that monthly dividends are not feasible, in which case dividends would be paid quarterly). Any taxable income remaining after the distribution of the final regular monthly dividend each year, excluding our Retained Earnings, is distributed together with the first regular monthly dividend payment of the following taxable year or in a special dividend distributed prior thereto. The dividend policy is subject to revision at the discretion of the Board of Trustees. All distributions are made by us at the discretion of the Board of Trustees and depend on our taxable earnings, our Retained Earnings, our financial condition, maintenance of our REIT status and such other factors as the Board of Trustees deems relevant.

Distributions to shareholders are generally subject to taxation as ordinary income, although a portion of those distributions may be designated by us as capital gain or may constitute a tax-free return of capital. We declared dividends that resulted in a return of capital from 1997 through 2005 and in 2008, 2009, 2010 and 2011 and may do so in the future. Any distribution to shareholders of income or capital assets from us is accompanied by a written statement disclosing the source of the funds distributed. If, at the time of distribution, this information is not available, a written explanation of the relevant circumstances accompanies the distribution and the written statement disclosing the source of the funds is distributed to the shareholders not later than 60 days after the close of the fiscal year in which the distribution was made. In addition, we annually furnish to each of our shareholders a statement setting forth distributions during the preceding year and their characterization as ordinary income, capital gains, or return of capital.

We began making distributions to our shareholders on September 29, 1997. Monthly distributions have continued each month thereafter. At year-end 2011 we had paid monthly dividends for 160 consecutive months. Distributions for the years ended December 31, 2011, 2010, and 2009 were made at a rate of 2.90% ($0.58), 2.90% ($0.58), and 3.7% ($0.73), respectively. The dividend portion of the distribution was 1.24% ($0.25), 2.16% ($0.43), and 3.3% ($0.65), per weighted share for 2011, 2010, and 2009, respectively. The portion of these distributions that did not represent a dividend represented a return of capital. The rate of return of these distributions on the NAV of outstanding shares during 2011, 2010 and 2009 was at an annualized rate of 3.76%, 3.68% and 4.60%, respectively.

ITEM 6. SELECTED FINANCIAL DATA

We present below selected financial information. We encourage you to read the financial statements and the notes accompanying the financial statements in this Annual Report. This information is not intended to be a replacement for the financial statements.

	Years ended December 31,
	2011		2010		2009		2008		2007
OPERATING DATA
Interest income, affiliates	$	3,850,099	$	5,697,380	$	7,657,170	$	8,981,198	$	14,001,947
Interest income		1,279,412		1,671,327		1,414,502		2,186,413		2,830,897
Other income		-		-		-		5,071		-
Total revenues		5,129,511		7,368,707		9,071,672		11,172,682		16,832,844
Total expenses		3,537,358		4,396,679		4,875,279		4,389,897		6,024,927
Net income	$	1,592,153	$	2,972,028	$	4,196,393	$	6,782,785	$	10,807,917
Net income per share	$	0.25	$	0.46	$	0.65	$	1.04	$	1.59
Weighted average shares outstanding		6,432,781		6,422,407		6,417,813		6,535,278		6,805,072

	Years ended December 31,
	2011			2010			2009			2008			2007
BALANCE SHEET DATA
Cash	$	363,561		$	7,325		$	338,836		$	1,944,271		$	1,597,883
Investment in trusts receivable		1,098,797			1,243,638			2,023,327			2,505,788			3,110,703
Investment in residential mortgages		4,904,537			5,557,396			5,005,413			2,830,762			2,317,750
Interim mortgages, affiliates		17,319,590			24,638,389			34,249,793			41,574,804			41,641,334
Interim mortgages		35,886			248,585			294,600			348,600			12,251,098
Allowance for loan losses		(340,487	)		(459,361	)		(222,463	)		(635,820	)		(2,343,163	)
Real estate owned, net		11,090,796			15,980,479			9,426,875			6,658,707			508,219
Line of credit receivable, affiliates		78,356,781			69,714,261			63,303,613			47,889,473			25,083,216
Line of credit receivable, non-affiliate		4,132,639			4,755,129			8,202,706			4,677,860			-
Deficiency notes		8,063,129			7,301,046			7,189,311			6,980,510			1,725,754
Deficiency notes, affiliate		29,507,820			12,739,093			10,315,478			5,332,105			1,848,355
Reserves - deficiency notes		(4,757,746	)		(4,517,746	)		(4,314,128	)		(3,131,155	)		-
Recourse obligations, affiliates		18,361,710			18,321,173			16,449,734			16,578,484			16,035,790
Other assets		8,492,926			12,644,137			10,273,004			9,062,097			5,902,757
Total assets	$	176,629,939		$	168,173,544		$	162,535,599		$	142,616,486		$	109,679,696

Lines of credit payable	$	6,680,333		$	5,515,442		$	3,788,477		$	-		$	-
Dividend payable		310,000			310,000			310,000			646,853			-
Participation payable, affiliate		65,503,661			57,050,973			53,768,482			38,321,843			-
Other liabilities		5,032,958			4,173,482			2,783,883			1,285,016			1,276,073
Total liabilities		77,526,952			67,049,897			60,650,842			40,253,712			1,276,073

Total shareholders' equity		99,102,987			101,123,647			101,884,757			102,362,774			108,403,623
Total liabilities and shareholders' equity	$	176,629,939		$	168,173,544		$	162,535,599		$	142,616,486		$	109,679,696

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY

GENERAL

We invest in (i) first lien secured interim mortgage loans with initial terms of 12 months or less for the acquisition and renovation of single-family homes, which we refer to as “Interim Loans”; (ii) secured line of credit to UMTH Lending Company, L.P. for origination of Interim Loans; (iii) lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “Land Development Loans”; (iv) lines of credit and loans secured by entitled and developed single-family lots, referred to as “Finished Lot Loans”; (v) lines of credit and loans secured by completed model homes, referred to as “Model Home Loans”; (vi) loans provided to entities that have recently filed for bankruptcy protection under Chapter 11 of the US bankruptcy code, secured by a priority lien over pre-bankruptcy secured creditors, referred to as “Debtor in Possession Loans”, (vii) lines of credit and loans, with terms of 18 months or less, secured by single family lots and homes constructed thereon, referred to as “Construction Loans; and (viii) first lien secured mortgage loans with terms of 12 to 360 months for the acquisition of single-family homes, referred to as “Residential Mortgages” , and, (ix) discounted cash flows secured by assessments on real property. We collectively refer the above listed loans as “Mortgage Investments”. Additionally, our portfolio includes obligations of affiliates of our Advisor, which we refer to as “recourse loans.”

The typical terms for residential mortgages, contracts for deed and interim loans (collectively referred to as “mortgage investments”) are 360 months, 360 months and 12 months, respectively. The UDF line of credit had a five year term. Effective December 31, 2011, the loan was extended for a period of one year and matures on December 31, 2012. Finished lot loans and builder model home loans are expected to have terms of 12 to 48 months. The majority of interim loans are covered by recourse agreements that obligate either a third party with respect to the performance of a purchased loan, or obligate a borrower that has made a corresponding loan to another party (the "underlying borrower"), to repay the loan if the underlying borrower defaults. Our loans to UDF are secured by the pledge of all of UDF’s land development loans and equity participations, and are subordinated to its bank lines of credit.

At the end of 2011, our mortgage portfolio totaled approximately $105,848,000. Approximately 21% of our mortgages were first lien secured interim mortgages and residential mortgages and contracts for deed, approximately 7% were secured LOC to UMTH Lending Co., L.P., approximately 68% were land development loans, approximately 2% were finished lot loans, and approximately 2% were invested in construction loans. As noted above, our portfolio also includes obligations of affiliates of our Advisor, which we refer to as “recourse loans” and “deficiency notes”.

We no longer purchase Interim Loans. We decreased our investment in our affiliated line of credit to UMTH Lending Co., L.P., secured by Interim Loans, by approximately $530,000 in 2011. We plan to invest in Residential Mortgages to facilitate the sale of homes securing our Interim Loans. We plan to invest in Construction Loans for the construction of new single family homes. We plan to continue to invest in Land Development Loans, Finished Lot Loans, and Model Home Loans because, 1) Land Development Loans and Finished Lot Loans have provided us with suitable collateral positions, well capitalized borrowers and attractive yields; and, 2) Model Home Loans and Construction Loans are expected to provide us with suitable collateral positions, well capitalized borrowers and attractive yields. Model Home and Construction Loans are expected to produce higher yields commensurate with Land Development Loans, Finished Lot Loans and the Subordinate Line of Credit secured by Interim Loans. As we phase out of Interim Loans we will increase the percentage of our portfolio invested in Land Development Loans, Finished Lot Loans. Model Home Loans, Debtor in Possession Loans, and Construction Loans, until market conditions indicate the need for an adjustment of the portfolio mix.

The following table summarizes mortgage loans by type and original loan size held by United Mortgage Trust at December 31, 2011.

Description	No. of Loans		Interest Rate			Final Maturity Date	Periodic Payment Terms	Prior Liens	Face amount of Mortgage (1)		Carrying amount of Mortgage (2)		Past Due Amounts (3)
Single family residential 1^st mortgages and interim loans (4):
Original balance > $100,000		8		10.0% - 11.0	%	11/24/11– 5/1/38	n/a	n/a	$	900,123	$	849,374	$	1,227
Original balance $50,000 - $99,999		121		8.5% - 12.75	%	6/1/06 – 3/1/39	n/a	n/a		3,433,218		3,239,655		26,501
Original balance $20,000 - $49,999		183		9.0% - 14.5	%	6/14/03 – 5/19/36	n/a	n/a		1,645,845		1,553,054		17,706
Original balance under $20,000		7		9.0% - 14.5	%	12/1/10 – 9/1/31	n/a	n/a		60,034		56,650		299

First Lien secured interim mortgages
Ready America Funding (5)		11		14.0	%	n/a	n/a	n/a		16,448,641		16,448,641		-
Secured LOC to UMTH Lending Co., L.P. (4),(5)		21		12.5% - 13.5	%	n/a	n/a	n/a		7,861,044		7,861,044		-

Land Development Loans
UDF III Economic Interest Participation		2		14.0	%	12/31/11	n/a	n/a		71,366,686		71,366,686		-
Construction & Lot Banking Loans		5		13.0	%	10/28/10	n/a	n/a		4,132,639		4,132,639		-
Totals		358							$	105,848,230	$	105,507,743	$	45,733

(1)

Current book value of loans.

(2)

Net of allowance for loan losses on mortgage loans of $340,487 at December 31, 2011.

(3)

Amounts greater than thirty (30) days past due.

(4)

Lines of credit with Ready America Funding and UMTH Lending Co., L.P. are collateralized by 11 and 21 loans, respectively.

(5)

The Company has a first lien collateral position in these loans funded by the originator. The advances to the originator do not have specific maturity dates.

Below is a reconciliation and walk forward of mortgage loans, net of allowance for loan losses for the year ended December 31, 2011.

Balance at beginning of period	$	105,698,037
Additions during period:
Other (increase in UDF III Participation)		8,452,688
Deductions during period:
Collections of principal, net		(974,475	)
Other decreases, net		(7,491,281	)
Foreclosures		(296,100	)
Other (net change in allowance for loan loss)		118,874
Balance at close of period	$	105,507,743

MATERIAL TRENDS

Housing Industry

We are a real estate investment trust and derive a substantial portion of our income from loans secured by single-family homes (both finished homes and homes under construction), single-family home lots, and entitled land under development into single-family home lots. We continue to concentrate our investment activities in Texas. We believe these areas continue to experience demand for new construction of single-family homes, however the U.S. housing market suffered declines over the past four years, particularly in geographic areas that had experienced rapid growth, steep increases in property values and speculation. However, we expect to see continued healthy demand for our products as the supply of new homes, finished lots and land is once again aligned with our market demand.

Material Trends Affecting Our Business

We believe that the housing market reached a bottom in its five-year decline and has begun to recover. This recovery likely will continue to be regional in its early stages, led by those housing markets with balanced supply, affordable and stable home prices, lower levels of foreclosures, strong economies, and strong demand fundamentals. Nationally, we expect the recovery will continue to experience headwinds from weak demand fundamentals, specifically consumer confidence and employment, as well as from the limited availability of bank financing, and a persisting oversupply of home inventory and higher levels of foreclosures in the region most affected by the housing bubble. The national consumer confidence index, which fell to record lows during the economic downturn, has recovered somewhat, but remains below levels historically associated with recession than to normalized conditions. Unemployment remains elevated and access to conventional real estate and commercial financing remains challenging across most of the country. These factors pose obstacles to a robust recovery on a national scale, which, we believe, is contingent upon the reengagement of the consumer and the return of final demand. However, we expect the recovery will be stronger in markets such as Texas, where consumer confidence averaged nearly 17 points higher than the national index from December 2010 to December 2011; where the job growth rate over the past 12 months was approximately 60 basis points higher than the national rate; and where approximately 15% of all homebuilding permits in the country were issued in 2010. Further, according to the Bureau of Labor Statistics, 30.3% of the total net new jobs created in the United States since the official end of the national recession were created in Texas (from June 2009 to December 2011). Currently, the majority of our portfolio relates to property located in the state of Texas, and we intend to invest in markets that demonstrate similarly sound economic and demand fundamentals – fundamentals that we believe will be the drivers of the recovery – and balanced supplies of homes and finished lots. We believe the fact that new single-family home permits, starts, and sales have all risen from their respective lows reflects a continued return of real demand for new homes. However, we anticipate the former bubble market states – principally California, Arizona, Nevada and Florida – will be slower to recover, as those markets have seen overbuilding and extensive price correction and are experiencing weakened economies and continued foreclosures.

From a national perspective, ongoing credit constriction, a less robust economic recovery, continued high unemployment, and housing price instability have made potential new home purchasers and real estate lenders cautious. As a result of these factors, the national housing market has experienced a protracted decline, and the time necessary to correct the market likely means a corresponding slower recovery for the housing industry.

Nationally, capital constraints at the heart of the credit crisis have reduced the number of real estate lenders able or willing to finance development, construction or the purchase of homes and have increased the number of undercapitalized or failed builders and developers. In correlation, the number of new homes and finished lots developed has decreased, which may result in a shortage of new homes and developed lots in select real estate markets in 2012. We believe this shortage will be most prominent in markets that did not participate in the housing bubble, avoiding overbuilding and maintaining balanced supplies and affordable and stable home prices. With lenders imposing stricter underwriting standards, mortgages to purchase homes have become more difficult to obtain in some markets. To support the secondary residential mortgage market and prevent further deterioration of mortgage lending, the Federal Reserve began an unprecedented program to purchase approximately $1.25 trillion of residential mortgage backed securities between January 5, 2009 and March 31, 2010. This program ended on March 31, 2010, as scheduled by the Federal Reserve. On September 21, 2011, the Federal Reserve announced that it would begin reinvesting the principal payments from its mortgage-backed securities holdings into additional purchases of agency mortgage-backed securities to help further support conditions in mortgage markets. Any limitations or restrictions on the availability of financing or on the liquidity provided in the secondary residential mortgage market by Government Sponsored Enterprises such as Fannie Mae and Freddie Mac could adversely affect interest rates and mortgage availability, which could cause the number of homebuyers to decrease, which could increase the likelihood of borrowers defaulting on our loans and, consequently, reduce our ability to pay distributions to our shareholders.

Nationally, new home sales rose slightly during the fourth quarter from the pace of sales in the third quarter of 2011, though levels remain near historical lows. However, national fundamentals that drive home sales continue to improve in most markets and home affordability remains near record-highs, so we expect the pace of home sales will continue to increase over 2012. The U.S. Census Bureau reports that the sales of new single-family residential homes in December 2011 were at a seasonally adjusted annual rate of 307,000 units. This number is up approximately 1.7% from the September 2011 figure of 302,000, but down approximately 7.3% year-over-year from the December 2010 estimate of 331,000.

Nationally, new single-family home inventory continued to improve in the fourth quarter of 2011 as it has done consistently since the second quarter of 2007. Through much of the downturn, homebuilders reduced their starts and focused on selling their existing new home inventory. The number of new homes for sale fell by approximately 33,000 units from December 2010 to December 2011 and by 4,000 units in the fourth quarter 2011. We believe that, with such reductions, the new home market has been restored to equilibrium in most markets, even at low levels of demand. The seasonally adjusted estimate of new homes for sale at the end of December 2011 was 157,000 – a balanced supply of 6.1 months at the December sales rate but the lowest number of homes available for sale since the U.S. Census Bureau began keeping records of this statistic in 1963. We believe that what is necessary now to regain prosperity in housing markets is the return of healthy levels of demand.

According to the U.S. Census Bureau, new single-family residential home permits and starts fell nationally from 2006 through early 2009, as a result and in anticipation of an elevated supply of and decreased demand for new single-family residential homes in that period. Since bottoming in early 2009, however, single-family permits and starts have improved significantly. Single-family homes authorized by building permits in December 2011 were at a seasonally adjusted annual rate of 444,000 units. This was essentially unchanged year-over-year from the rate of 445,000 in December 2010, and is approximately 31.7% higher than the low of 337,000 set in January 2009. Single-family home starts for December 2011 stood at a seasonally adjusted annual rate of 470,000 units. This pace is up approximately 11.6% from the December 2010 estimate of 421,000 units. Further, the December 2011 pace of home starts is 33.1% higher than the low of 353,000 set in March 2009. Such increases suggest to us that new home inventories are generally in balance and the homebuilding industry now anticipates greater demand for new homes in coming months relative to the demand evident at the bottom of the new homebuilding cycle.

The primary factors affecting new home sales are home price stability, home affordability, and housing demand. Housing supply may affect both new home prices and the demand for new homes. When the supply of new homes exceeds new home demand, new home prices may generally be expected to decline. Also, home foreclosures cause the inventory of existing homes to increase, which may add additional downward price pressure on home prices. Declining new home prices may result in diminished new home demand as people postpone a new home purchase until such time as they are comfortable that stable price levels have been reached. The converse point is also true and equally important. When new home demand exceeds new home supply, new home prices may generally be expected to increase; and rising new home prices, particularly at or near the bottom of the housing cycle, may result in increased new home demand as people become confident in home prices and accelerate their timing of a new home purchase. Hence, we intend to concentrate our investments in housing markets with affordable and stable home prices, balanced supply, lower incidences of foreclosures, and strong demand fundamentals. These demand fundamentals are generally job growth, the relative strength of the economy and consumer confidence, household formations, and population growth – both immigration and in-migration.

The U.S. Census Bureau forecasts that California, Florida and Texas will account for nearly one-half of the total U.S. population growth between 2000 and 2030 and that the total population of Arizona and Nevada will double during that period. The U.S. Census Bureau projects that between 2000 and 2030 the total populations of Arizona and Nevada will grow from approximately 5 million to more than 10.7 million and from approximately 2 million to nearly 4.3 million, respectively; Florida’s population will grow nearly 80% between 2000 and 2030, from nearly 16 million to nearly 28.7 million; Texas’ population will increase 60% between 2000 and 2030, from nearly 21 million to approximately 33.3 million; and California’s population will grow 37% between 2000 and 2030, from approximately 34 million to nearly 46.5 million.

In 2009, the Harvard Joint Center for Housing Studies forecasted that an average of between approximately 1.25 million and 1.48 million new households will be formed per year over the next ten years. Likewise, The Homeownership Alliance, a joint project undertaken by the chief economists of Fannie Mae, Freddie Mac, the Independent Community Bankers of America, the National Association of Home Builders, and the National Association of Realtors, has projected that 1.3 million new households will be formed per year over the next decade and approximately 1.8 million housing units per year should be started to meet such new demand, including approximately 1.3 million new single-family homes per year based on the estimation of the Homeownership Alliance that 72% of all housing units built will be single-family residences. The U.S. Census Bureau estimates that approximately 1.14 million new households were formed in 2011.

While housing woes have beleaguered the national economy, Texas housing markets have held up as some of the healthiest in the country. Furthermore, Texas is the largest homebuilding market in the country based on the U.S. Census Bureau’s measurements of housing permits and starts. We have concentrated our investment portfolio in Texas as we believe Texas markets, though weakened from their highs in 2007, have remained fairly healthy due to strong demographics, economies and job growth, balanced housing inventories, stable home prices and high housing affordability ratios. Texas did not experience the dramatic price appreciation (and subsequent depreciation) that states such as California, Florida, Arizona, and Nevada experienced. The following graph, created with data from the fourth quarter 2011 Federal Housing Finance Agency’s (“FHFA”) Purchase Price Only Index, illustrates the declines in home prices nationally, as well as in California, Florida, Arizona, and Nevada over the past few years. Price declines have begun to moderate in those states in recent quarters, though. Further, the graph illustrates how Texas has maintained relative home price stability throughout the downturn. The Standard (Purchase-Only) Home Price Index indicates that Texas had a home price appreciation of 1.49% between the fourth quarter of 2010 and the fourth quarter of 2011. Texas’ home prices continue to demonstrate more stability than the national average of -2.43%. Further, the index also reports that over the past five years, Texas home prices have appreciated 3.46% compared to a national depreciation of -19.16% over the same time period.

FHFA’s Purchase Price Only Index tracks average house price changes in repeat sales on the same single-family properties. The Purchase Price Only Index is based on more than 6 million repeat sales transactions and is based on data obtained from Fannie Mae and Freddie Mac for mortgages originated over the past 37 years. FHFA analyzes the combined mortgage records of Fannie Mae and Freddie Mac, which form the nation’s largest database of conventional, conforming mortgage transactions. The conforming loan limit for mortgages purchased since the beginning of 2006 has been $417,000. Loan limits for mortgages originated in the latter half of 2007 through December 31, 2008 were raised to as much as $729,750 in high-cost areas in the contiguous United States. Legislation generally extended those limits for 2009-originated mortgages. An appropriations act (PL111-88) further extended those limits for 2010 originations in places where the limits were higher than those that would have been calculated under pre-existing rules.

Median new home prices in the four major Texas markets have begun to rise. According to numbers publicly released by Metrostudy, a leading provider of primary and secondary market information, the median new home prices for the fourth quarter of 2011 in the metropolitan areas of Austin, Houston, Dallas-Fort Worth, and San Antonio are $220,488, $218,045, $227,560 and $193,752, respectively.

Using the Department of Housing and Urban Development’s estimated 2011 median family income for the respective metropolitan areas of Austin, Houston, Dallas and San Antonio, the median income earner in those areas has 1.54 times, 1.37 times, 1.37 times, and 1.40 times the income required to qualify for a mortgage to purchase the median priced new home in the respective metropolitan area. These numbers illustrate the affordability of Texas homes. Our measurement of housing affordability, as referenced above, is determined as the ratio of median family income to the income required to qualify for a 90 percent, 30-year fixed-rate mortgage to purchase the median-priced new home, based on the average interest rate over the fourth quarter of 2011 and assuming an annual mortgage insurance premium of 70 basis points for private mortgage insurance, plus a cost that includes estimated property taxes and insurance for the home. Using the Department of Housing and Urban Development’s 2012 income data to project an estimated median income for the United States of $65,000 and the December 2011 national median sales prices of new homes sold of $266,000, we conclude that the national median income earner has 1.38 times the income required to qualify for a mortgage loan to purchase the median-priced new home in the United States. This estimation reflects the increase in home affordability in housing markets outside of Texas over the past 60 months, as new home prices in housing markets outside of Texas generally have fallen. Recently, however, such price declines have begun to stabilize. We believe that such price stabilization indicates that new home affordability has been restored to the national housing market.

Since the national recession’s official end, Texas employment markets have experienced strong job growth. According to the United States Department of Labor, Texas added approximately 204,500 jobs in the 12 months ended December 2011, which was the second largest year-over-year increase of any state in the country. In December 2011, Texas’ employment levels exceeded pre-recession levels. Furthermore, Texas added an even greater amount of jobs in the private sector (261,200) over the past 12 months, which was the largest private sector job increase of any state over the past 12 months and is a growth rate of 3.0%. Since the national recession’s end in June 2009, Texas has added 357,400 net new jobs, which is approximately 30.3% of all net jobs added nationwide over that 30 month period. Further, Texas has added approximately 1.2 million new jobs over the past 10 years, approximately 1,018,700 in the private sector, comparing well to national employment growth that added approximately 1.4 million total jobs over that ten-year period and just 831,000 private sector jobs in those ten years. From December 2010 to December 2011, Austin added 16,300 jobs year-over-year. Dallas-Fort Worth added 45,200 jobs over that same time period, which was the fourth greatest job gain of any city in the country over the past 12 months, just behind Houston, which enjoyed the greatest job gain of any city in the country in that time. Houston added 75,000 jobs over that period and San Antonio added 2,800 jobs in that time.

Texas’ unemployment rate fell year-over-year to 7.4% in December 2011 from 8.2% in December 2010. The decrease in the state unemployment rate occurred in spite of significant growth in Texas’ labor force. Texas has added approximately 149,916 workers to its labor force over the past 12 months, which stands at an all-time high. The growth in Texas’ labor force stands in contrast with the national labor force, which has fallen by approximately 988,000 workers, as of December 2011, from its peak in October 2008. The national unemployment rate fell year-over-year from December 2010 (9.4%) to December 2011 (8.5%). In addition, all four major Texas labor markets have unemployment rates below the national unemployment rate.

We believe that Texas cities will continue to be among the first in the country to recover based on employment figures, consumer confidence, gross metropolitan product, and new home demand. According to the Texas Workforce Commission, Texas tends to enter into recessions after the national economy has entered a recession and usually leads among states in the economic recovery. The National Bureau of Economic Research has concluded that the U.S. economy entered into a recession in December 2007, ending an economic expansion that began in November 2001. We believe, based on transitions in the Texas Leading Index as prepared by the Federal Reserve Bank of Dallas, that Texas entered into recession in late Fall 2008, trailing the national recession by nearly a year and emerged from the recession in the late spring of 2009. We believe the Texas economy is now leading the national economic recovery. The Texas Leading Index has risen significantly since reaching a low of 100.5 in March 2009 and, as of December 2011, was 120.3, which is higher than at any period during 2009 or 2010. The Texas Leading Index, produced monthly by the Federal Reserve Bank of Dallas, combines eight measures that tend to anticipate changes in the Texas business cycle by approximately three to nine months.

Further, we believe Texas consumers are beginning to return to their normal consumption habits. The aggregate value of state sales tax receipts in Texas increased 9.4% year-over-year in December 2011 from December 2010 – the 22nd consecutive month in which Texas has experienced year-over-year improvement in sales tax receipts.

The U.S. Census Bureau reported in its 2011 Estimate of Population Change for the period from April 1, 2010 to July 1, 2011 that Texas led the country in population growth during that period. The estimate concluded that Texas’ population grew by 421,215 people, or 2%, a number that was 1.19 times greater than the next closest state in terms of raw population growth, California, and nearly twice as great as the second closest state in terms of raw population growth, North Carolina. Over the last decade, July 1, 2000 to July 1, 2010, Texas grew by nearly 4.3 million residents, averaging nearly 427,000 new residents per year. This population growth was 1.17 times greater in terms of raw population growth than the next closest state, California, and 2.63 times greater than the second closest state, Florida. The U.S. Census Bureau also reported that among the 15 counties that added the largest number of residents between July 1, 2008 and July 1, 2009, six were in Texas: Harris (Houston), Tarrant (Fort Worth), Bexar (San Antonio), Collin (North Dallas), Dallas (Dallas) and Travis (Austin). In March 2010, the U.S. Census Bureau reported that Texas’ four major metro areas – Austin, Houston, San Antonio, and Dallas-Fort Worth – were among the top 20 in the nation for population growth from 2008 to 2009. Dallas-Fort Worth-Arlington led the nation in numerical population growth with a combined estimated population increase of 146,530. Houston-Sugarland-Baytown was second in the nation with a population increase of 140,784 from July 1, 2008 to July 1, 2009. Austin-Round Rock had an estimated population growth of 50,975 and San Antonio had an estimated population growth of 41,437 over the same period. The percentage increase in population for each of these major Texas cities ranged from 2% to 3.1%.

The national foreclosure tracking service, RealtyTrac, estimates that the Texas foreclosure rate continues to be significantly healthier than the national average. We do not expect the four major Texas housing markets to be materially adversely affected by foreclosures and anticipate that home foreclosures will continue to be mostly concentrated in the bubble market states of California, Florida, Arizona and Nevada. The mortgage analytic company, CoreLogic, reports that, through the fourth quarter of 2011, approximately 44.3% of all homes with negative equity were located in one of those four states compared to approximately just 3.1% of all the negative equity homes in the country that were located in the state of Texas. Homebuilding and residential construction employment will likely remain generally weak in 2012, but Texas again will likely continue to outperform the national standards. We believe that Texas’ housing sector is healthier, the cost of living and doing business is lower, and its economy is more dynamic and diverse than the national average.

In contrast to the conditions of many homebuilding markets in the country, new home sales are greater than new home starts in Texas markets, indicating that homebuilders in Texas continue to focus on preserving a balance between new home demand and new home supply. We believe that homebuilders and developers in Texas have remained disciplined on new home construction and project development. New home starts are outpaced by new home sales in all four major Texas markets where such data is available: Austin, Dallas-Fort Worth, Houston and San Antonio. Inventories of finished new homes and total new housing (finished vacant, under construction, and model homes) remain at generally healthy and balanced levels in all of these major Texas markets. Each major Texas market experienced a rise in the number of months of finished lot inventories as homebuilders began reducing the number of new home starts in 2008, causing each major Texas market to reach elevated levels. However, the number of finished lots available in each market has fallen significantly even though the months’ supply remains elevated. Furthermore, finished lot shortages are beginning to emerge in many desirable submarkets in the major Texas markets. This is a trend that we expect to continue as the lack of commercial financing for development has constrained finished lot development over the past four years even as new home demand and sales continue. We believe that such demand and sales will increase and these finished lot shortages will become more pronounced in coming quarters. As of December 2011, Houston has an estimated inventory of finished lots of approximately 33.0 months, Austin has an estimated inventory of finished lots of approximately 36.0 months, San Antonio has an estimated inventory of finished lots of approximately 33.4 months and Dallas-Fort Worth has an estimated inventory of finished lots of approximately 50.3 months. A 24-28 month supply is considered equilibrium for finished lot supplies.

As stated previously, the elevation in months’ supply of finished lot inventory in Texas markets owes itself principally to the decrease in the pace of annual starts rather than an increase in the raw number of developed lots, and as the homebuilders increase their pace of home starts, we expect to see the months’ supply of lot inventory continue to improve. Indeed, the raw number of finished lots available in each Texas market has been significantly reduced from their peaks. Since peaking in the first quarter of 2008, Houston’s finished lot supply is down 30.6% from 73,047 to 50,674 in the fourth quarter of 2011. San Antonio’s finished lot inventory has fallen 31.4% to 19,152 since peaking at 27,937 in the second quarter of 2008. Austin’s finished lot inventory peaked in the first quarter of 2009 at 27,176, and is down 28.2% to 19,517. The finished lot inventory for Dallas-Fort Worth peaked in the first quarter of 2008 at 91,787 lots and has fallen 35.3% to 59,408 lots. Such inventory reduction continued in the fourth quarter of 2011 in all four of these markets as the number of finished lots dropped by more than 500 in Austin, more than 1,500 in Dallas-Fort Worth, more than 2,000 in Houston, and nearly 150 in San Antonio. Annual starts in each of the Austin, San Antonio, Houston and Dallas-Fort Worth markets are outpacing lot deliveries, and we expect to see increased finished lot sales through 2011 as homebuilders replenish their inventory.

Although Texas markets continue to be some of the strongest homebuilding markets in the country, the pace of homebuilding in Texas has slowed over the past four years as a result of the national economic downturn and reduced availability of construction financing. According to the Federal Deposit Insurance Corporation, banks in the Dallas region¹ reduced their construction and development loans by 5.6% from the second quarter of 2011 to the third quarter of 2011 – the 14th straight quarterly decline in the region’s construction and development outstanding loan portfolio. While the decline in housing starts has caused the month supply of vacant lot inventory to become elevated from its previously balanced position, it has also preserved a balance in housing inventory. Annual new home sales in Austin outpace starts 6,643 versus 6,500, with annual new home sales declining year-over-year by approximately 7.0%. Finished housing inventory stands at an elevated level of 3.6 months, while total new housing inventory (finished vacant, under construction and model homes) fell to a slightly elevated supply of 7.3 months. The generally accepted equilibrium levels for finished housing inventory and total new housing inventory are a 2.0-to-2.5 month supply and a 6.0-to-6.5 month supply, respectively. San Antonio is a healthy homebuilding market. Annual new home sales in San Antonio run ahead of starts 7,025 versus 6,880, with annual new home sales declining year-over-year by approximately 11.0%. Finished housing inventory rose to a healthy 2.3 month supply. Total new housing inventory fell to a healthy 6.1 month supply. Houston, too, is a healthy homebuilding market. Annual new home sales there outpace starts 18,607 versus 18,416, with annual new home sales declining year-over-year by approximately 9.5%. Finished housing inventory remained generally healthy at a 2.8 month supply while total new housing inventory fell to a healthy 6.4 month supply, respectively. Dallas-Fort Worth is a relatively healthy homebuilding market as well. Annual new home sales in Dallas-Fort Worth outpace starts 14,623 versus 14,183, with annual new home sales declining year-over-year by approximately 13.0%. Finished housing inventory stands at a generally healthy 2.7 month supply, while total new housing inventory fell to a slightly elevated 6.8 month supply. All numbers are as released by Metrostudy, leading provider of primary and secondary market information.

¹FDIC Dallas Region is composed of Arkansas, Colorado, Louisiana, Mississippi, New Mexico, Oklahoma, Tennessee, and Texas.

The Real Estate Center at Texas A&M University has reported that existing housing inventory levels are healthy and in most instances, supply is constrained. Through December 2011, the number of months of home inventory for sale in Austin, Houston, Dallas, Fort Worth, Lubbock, and San Antonio was 4.2 months, 5.9 months, 4.7 months, 5.2 months 6.6 months, and 6.6 months, respectively. Like new home inventory, a 6-month supply of inventory is considered a balanced market with more than 6 months of inventory generally being considered a buyer’s market and less than 6 months of inventory generally being considered a seller’s market. Through December 2011, the number of existing homes sold to date in (a) Austin was 21,167, up 6.5% year-over-year; (b) San Antonio was 18,403, down 0.25% year-over-year; (c) Houston was 58,812, up 3.5% year-over-year, (d) Dallas was 42,507, up 0.3% year-over-year, (e) Fort Worth was 8,086, down 1.8% year-over-year, and (f) Lubbock was 2,773, down 2.5% year-over-year. These figures and year-over-year comparisons are likely distorted by the presence and expiration of the federal homebuyer tax credit in June 2010 that likely pulled demand forward in the first six months of 2010 at the expense of demand in subsequent quarters.

In managing and understanding the markets and submarkets in which we acquire loans, we monitor the fundamentals of supply and demand. We monitor the economic fundamentals in each of the markets in which we acquire loans by analyzing demographics, household formation, population growth, job growth, migration, immigration and housing affordability. We also monitor movements in home prices and the presence of market disruption activity, such as investor or speculator activity that can create false demand and an oversupply of homes in a market. Further, we study new home starts, new home closings, finished home inventories, finished lot inventories, existing home sales, existing home prices, foreclosures, absorption, prices with respect to new and existing home sales, finished lots and land, and the presence of sales incentives, discounts, or both, in a market.

We face a risk of loss resulting from adverse changes in interest rates. Changes in interest rates may impact both demand for our real estate finance products and the rate of interest on the loans we acquire. In some instances, the loans we acquire will be junior in the right of repayment to senior lenders, who will provide loans representing 60% to 75% of total project costs. As senior lender interest rates available to our borrowers increase, demand for our mortgage loans may decrease, and vice versa. Deterioration in the value of the land, a diminution of the site improvement and similar reimbursements, and a decrease in the sales price of the residential lots can occur in cases where the developer pays too much for the land to be developed, the developer is unable or unwilling to develop the land in accordance with the assumptions required to generate sufficient income to repay the loans purchased by us, or is unable to sell the residential lots to homebuilders at a price that allows the developer to generate sufficient income to repay the loans purchased by us. Our Advisor actively monitors the markets and submarkets in which we purchase loans, including mortgage markets, homebuilding economies, the supply and demand for homes, finished lots, and land and housing affordability to mitigate such risks. Our Advisor also actively manages our loan portfolio in the context of events occurring with respect to the loan and in the market and submarket in which we purchased the loan. We anticipate that there may be defaults on development loans purchased by us and that we will take action with respect to such defaults at any such time that we determine it prudent to do so, including such time as we determine it prudent to maintain and protect the value of the collateral securing a loan by originating another development loan to another developer with respect to the same project to maintain and protect the value of the collateral securing our initial loan.

Developers and homebuilders from whom we acquire loans and with whom we enter into subordinate debt positions use the proceeds of our loans and investments to develop raw real estate into residential home lots and construct homes. The developers obtain the money to repay our development loans by reselling the residential home lots to homebuilders or individuals who build single-family residences on the lots or by obtaining replacement financing from other lenders. Homebuilders obtain the money to repay our loans by selling the homes they construct or by obtaining replacement financing from other lenders. If interest rates increase, the demand for single-family residences may decrease. Also, if mortgage financing underwriting criteria become stricter, demand for single-family residences may decrease. In such an interest rate and/or mortgage financing climate, developers and builders may be unable to generate sufficient income from the resale of single-family residential lots and homes to repay loans held by us, and developers’ and builders’ costs of funds obtained from lenders in addition to us may increase, as well. Accordingly, increases in single-family mortgage interest rates or decreases in the availability of mortgage financing could increase the number of defaults on loans acquired by us.

We are not aware of any material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting real estate and interest rates generally, that we reasonably anticipate to have a material impact on either the income to be derived from our investments in mortgage loans or entities that make mortgage loans, other than those referred to in this Annual Report on Form 10-K. The disruption of mortgage markets, in combination with a significant amount of negative national press discussing constriction in mortgage markets and the poor condition of the national housing industry, including declining home prices, have made potential new home purchasers and real estate lenders very cautious. The economic downturn, the failure of highly respected financial institutions, significant volatility in equity markets around the world, unprecedented administrative and legislative actions in the United States, and actions taken by central banks around the globe to stabilize the economy have further caused many prospective home purchasers to postpone their purchases. Our future results could be negatively impacted by prolonged weakness in the economy, high levels of unemployment, a significant increase in mortgage interest rates or further tightening of mortgage lending standards.

Outlook

In summary, we believe there is a general lack of buyer urgency to purchase homes in these times of economic uncertainty. We believe that this has further slowed the sales of new homes and expect that this will result in a slowing of the sales of finished lots developed by our borrowers in certain markets; however, we continue to believe that the prices of those lots should not change materially. We also anticipate that the decrease in the availability of replacement financing may increase the number of defaults on development loans we invest in or extend the time period anticipated for the repayment of loans. We believe that United Mortgage Trust has been active in monitoring current market conditions and in implementing various measures to manage our risk and protect our return on our investments by shifting our portfolio to investments that are less directly sensitive to the adverse market conditions and that produce higher yields and by aggressively liquidating non-performing loans. Based on that assessment, we do not anticipate a significant disruption to our normal business operations. Nevertheless, our assessments inherently involve predicting future events and we cannot be sure of the length or extent of the current credit crisis and if it continues over an extended period of time, or if its severity increases, its impact on the economy as a whole and on the housing and mortgage lending market could cause us to suffer a higher level of delinquencies and losses than we are currently predicting and result in a material adverse impact on our business.

RECOURSE OBLIGATIONS

Prior to July 1, 2003, we made loans with recourse to (1) Capital Reserve Group, Inc. (“CRG”), which is owned by Todd Etter and William Lowe, (2) Ready America Funding Corp. (“RAFC”), which is owned by South Central Mortgage Inc. (“SCMI”), which is owned by Todd Etter and by Eastern Intercorp, Inc., a company owned by Craig Pettit, and (3) SCMI, (we refer to these three companies as the "originating companies"), each of which has used the funds to originate underlying loans that are pledged to us as security for such originating company's obligations to us under the recourse obligations of affiliates. In addition to the originating companies discussed above, the Company made loans with recourse to Wonder Funding; LP (“Wonder”); a Delaware limited partnership that is owned by Ready Mortgage Corp. (“RMC”). RMC is beneficially owned by Craig Pettit.

When principal and interest on an underlying loan is due in full, at maturity or otherwise, the corresponding obligation owed by the originating company to us is also due in full.

In addition, some of the originating companies have sold loans to us, which we refer to as the "purchased loans," and have entered into recourse agreements under which the originating company agreed to reimburse us for certain losses that we incur with respect to those purchased loans.

Before year end 2005, our arrangement was if the originating company foreclosed on property securing an underlying loan, or if we foreclosed on property securing a purchased loan, and the proceeds from the sale were insufficient to pay the loan in full, the originating company had the option of (1) repaying the outstanding balance owed to us associated with the underlying loan or purchased loan, as the case may be, or (2) delivering to us an unsecured deficiency note in the amount of the deficiency.

The owners of the originating companies are among the founders of UMT Holdings. Since July 1, 2003 they have originated interim mortgage loans through UMT Holdings, rather than through the originating companies. As a result, the originating companies do not intend to borrow additional funds from or to sell additional loans to us.

On March 30, 2006, but effective December 31, 2005, each originating company agreed to give us secured promissory notes to consolidate (1) all outstanding amounts owed by such originating company to us under the recourse obligations of such originating company and the deficiency notes described above and (2) the estimated maximum future liability to us under the recourse arrangements described above. Each originating company issued to us a secured variable amount promissory note dated December 31, 2005 (we refer to each of those notes as a “Secured Note”) in the initial principal amounts shown below. The initial amounts represent all principal and accrued interest owed as of such date. The initial principal amounts are subject to possible increases up to the maximum amounts shown below, if losses are incurred upon the foreclosure of purchased loans covered by recourse arrangements. The Secured Notes (including related guaranties discussed below) are secured by an assignment of the distributions on Class C units, Class D units and Class EIA units of limited partnership interest of UMTH held by the originating companies and an Indemnification Agreement provided by UMTH as detailed in the following table and the paragraphs following the table.

Name	Initial principal amount		Balance at December 31, 2011		Promissory Note principal amount (2)		Units pledged as security	C Units distributed during 2011		Units remaining	Estimated Collateral Value (3)
CRG	$	2,725,442	$	4,470,793	$	4,300,000	4,984 Class C and 2,710 Class D		-	2,880 Class C and 2,710 Class D	$	4,785,770
RAFC	$	3,243,369	$	8,451,488	$	7,100,000	11,165Class C, 6,659 Class D & 1,066 Class EIA		-	8,391 Class C, 6,659 Class D & and 1,066 EIA	$	13,786,203
SCMI	$	3,295,422	$	3,480,792	$	3,488,643	4,545 Class C and 3,000 Class D		-	3,013 Class C and 3,000 Class D	$	5,574,161
RAFC / Wonder(1)	$	1,348,464	$	1,958,637	$	1,400,000	1,657 Class C		-	1,238 Class C	$	1,238,000
Wonder Indemnification (1)		n/a		n/a		n/a	$1,134,000		-	n/a	$	822,000
Totals	$	10,612,697	$	18,361,710	$	16,288,643					$	26,206,134

(1)

Wonder is collateralized by an indemnification agreement from RMC in the amount of $1,134,000, which includes the pledge of 3,870 C Units. 2,213 of the pledged C Units also cross-collateralize the RAFC obligation.

(2)

The CRG, RAFC and Wonder balances at December 31, 2011 exceeded the stated principal amount per their variable Secured Notes by approximately $171,000, $1,351,000 and $559,000, respectively. Per the terms of the Secured Notes, the unpaid principal balance may be greater or less than the initial principal amount of the note and is not considered an event of default. The rapid rate of liquidation of the remaining portfolio of properties caused a more rapid increase in the Unpaid Principal Balance (“UPB”) than we originally anticipated and outpaced the minimum principal reductions scheduled for the loans.

(3)

Estimated collateral value reflects pledge of D units of limited partnership interest of UMTH held by WLL, Ltd., RAFC and KLA, Ltd. UMTH D units represent equity interests in UMT Holdings, LP. Pledge of the UMTH D units entitles the beneficiary to a pro-rata share of UMTH partnership D unit cash distributions.

Through September 2007, the Secured Notes incurred interest at a rate of 10% per annum. The CRG, RAFC and RAFC/Wonder Secured Notes amortize over 15 years. The SCMI Secured Note amortizes over approximately 22 years, which was the initial amortization of the deficiency notes from SCMI that were consolidated. The Secured Notes required the originating company to make monthly payments equal to the greater of (1) principal and interest amortized over 180 months and 264 months, respectively, or 2) the amount of any distributions paid to the originating company with respect to the pledged Class C and EIA units. Effective October, 2007, the recourse loans were modified to accommodate the anticipated increases in principal balances throughout the remaining liquidation periods of the underlying assets, suspend the principal component of the amortized loans for the period of July 2007 through June 2009, and reduce the interest rate from 10% to 6%. The above modifications have been extended through December 31, 2011. Management has not recognized any reserves on these loans as the underlying collateral value exceeds the outstanding loan amounts.

The Secured Notes have also been guaranteed by the following entities under the arrangements described below, all of which are dated effective December 31, 2005:

UMT Holdings. This guaranty is limited to a maximum of $10,582,336 of all amounts due under the Secured Notes.

WLL, Ltd., an affiliate of CRG. This guaranty is of all amounts due under Secured Note from CRG, is non-recourse and is secured by an assignment of 2,492 Class C Units and 1,355 Class D units of limited partnership interest of UMT Holdings held by WLL, Ltd.

RMC. This guaranty is non-recourse, is limited to 50% of all amounts due under the Secured Note from RAFC and is secured by an assignment of 3,870 Class C units of limited partnership interest of UMT Holdings.

Wonder. Wonder Funding obligations are evidenced by a note from RAFC (RAFC/Wonder Note) and are secured by a pledge of a certain Indemnification Agreement given by UMTH to RAFC and assigned to UMT in the amount of $1,134,000, which amount is included in the UMTH limited guarantee referenced above.

SCMC. This guaranty is limited to a maximum of $2,213,000 due under the Secured Note from RAFC and is secured by an assignment of 2,213 Class C units of limited partnership interest of UMT Holdings.

KLA, Ltd. KLA has given the following guaranties: (1) Guaranty of obligations of SCMI under the First Amended and Restated Secured Variable Amount Promissory Note to the Company dated as of October 1, 2007 with a then current principal balance of $3,472,073 and is secured by an assignment of 3,000 of Guarantor’s Class D units of partnership interest in UMT Holdings, L.P. (2) Guaranty of obligations of CRG under the First Amended and Restated Secured Variable Amount Promissory Note dated as of October 1, 2007 with a then current principal balance of $4,053,799.93 and is secured by a pledge of 1,355 of Guarantor’s Class D units of partnership interest in UMTH.

In addition, WLL, Ltd. has obligations to UMT Holdings under an indemnification agreement between UMT Holdings, WLL, Ltd. and William Lowe, under which UMT Holdings is indemnified for certain losses on loans and advances made by UMT Holdings to William Lowe. That indemnification agreement allows UMT Holdings to offset any amounts subject to indemnification against distributions made to WLL, Ltd. with respect to the Class C and Class D units of limited partnership interest held by WLL, Ltd. Because WLL, Ltd. has pledged these Class C and Class D units to us to secure its guaranty of CRG’s obligations under its Secured Note, we and UMT Holdings entered into an Intercreditor and Subordination Agreement dated as of December 31, 2005 under which UMT Holdings has agreed to subordinate its rights to offset amounts owed to it by WLL, Ltd. to our lien on such units.

These loans were reviewed by management and no reserves are deemed necessary at December 31, 2011.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2011, 2010, and 2009

Residential Mortgages, Contracts for Deed and Interim Mortgages

As of December 31, 2011, our residential mortgage portfolio consisted of 328 residential mortgages (including 234 loans in a securitization), 3 contracts for deed, and 33 interim loans. The portfolio had an unpaid principal balance (“UPB”) of approximately $23,018,000. The average performing loan in the portfolio had a current annual yield of 12.15%, an investment-to-value ratio of 14.86%, an average UPB of $64,000, and a remaining term of 170 months for residential mortgages and contracts for deed. Interim loans have terms of 12 months or less, depending on the collateral securing the interim mortgage and the borrower. The more extensive the rehabilitation work on the property or the construction requirements, the longer the term of the loan. The average construction loan has a term of nine months; the average rehabilitation loan has a term of six months.

As of December 31, 2010, our residential mortgage portfolio consisted of 334 residential mortgages (including 235 loans in a securitization), 3 contracts for deed, and 98 interim loans. The portfolio had an unpaid principal balance (“UPB”) of approximately $31,299,000. The average performing loan in the portfolio had a current annual yield of 11.12%, an investment-to-value ratio of 35.12%, an average UPB of $72,000, and a remaining term of 170 months for residential mortgages and contracts for deed. Interim loans have terms of 12 months or less, depending on the collateral securing the interim mortgage and the borrower. The more extensive the rehabilitation work on the property or the construction requirements, the longer the term of the loan. The average construction loan has a term of nine months; the average rehabilitation loan has a term of six months.

As of December 31, 2009, our residential mortgage portfolio consisted of 332 residential mortgages (including 249 loans in a securitization), 3 contracts for deed, and 121 interim loans. The portfolio had an unpaid principal balance (“UPB”) of approximately $41,351,000. The average performing loan in the portfolio had a current annual yield of 11.64%, an investment-to-value ratio of 59.96%, an average UPB of $91,000, and a remaining term of 134 months for residential mortgages and contracts for deed. Interim loans have terms of 12 months or less, depending on the collateral securing the interim mortgage and the borrower. The more extensive the rehabilitation work on the property or the construction requirements, the longer the term of the loan. The average construction loan has a term of nine months; the average rehabilitation loan has a term of six months.

RESIDENTIAL MORTGAGE PORTFOLIO TABLE

	As of December 31,
	2011			2010			2009
Residential mortgages owned outright		91			96			80
Loans remaining in first securitization		123			123			131
Loans remaining in second securitization		111			112			118
Contracts for deed owned outright		3			3			3
Interim mortgages		33			98			121
Unpaid principal balance, net	$	23,018,000		$	31,229,000		$	41,351,000
Annual yield		12.15	%		11.12	%		11.64	%
Percent of revenues		14.9	%		35.12	%		59.96	%
Average Loan UPB	$	64,000		$	72,000		$	91,000

Line of Credit, Affiliate – Land Development Loans

On June 20, 2006, the Company entered into a Second Amended and Restated Secured Line of Credit Promissory Note as modified by an amendment effective September 1, 2006 - (the "Amendment") with UDF, a Nevada limited partnership that is affiliated with the Company's Advisor, UMTHGS. The Amendment increased an existing revolving line of credit facility ("Loan") to $45 million. The purpose of the Loan is to finance UDF's loans and investments in real estate development projects. On July 29, 2009, our trustees approved an amendment to increase the revolving line of credit facility to an amount not to exceed $60,000,000. Effective December 31, 2010, the loan was extended for a period of one year and the loan amount was increased from $60,000,000 to $75,000,000. Effective December 31, 2011, the loan was extended for a period of one year and matures on December 31, 2012.

The Loan is secured by the pledge of all of UDF's land development loans and equity investments pursuant to the First Amended and Restated Security Agreement dated as of September 30, 2004, executed by UDF in favor of UMT (the “Security Agreement”). Those UDF loans may be first lien loans or subordinate loans.

The Loan interest rate is the lower of 15% or the highest rate allowed by law, further adjusted with the addition of a credit enhancement to a minimum of 14%.

UDF may use the Loan proceeds to finance indebtedness associated with the acquisition of any assets to seek income that qualifies under the Real Estate Investment Trust provisions of the Internal Revenue Code to the extent such indebtedness, including indebtedness financed by funds advanced under the Loan and indebtedness financed by funds advanced from any other source, including Senior Debt, is no more than 85% of 80% (68%) of the appraised value of all subordinate loans and equity interests for land development and/or land acquisition owned by UDF and 75% for first lien secured loans for land development and/or acquisitions owned by UDF.

On September 19, 2008, UMT entered into an Economic Interest Participation Agreement with UDF III pursuant to which UDF III purchased (i) an economic interest in the UDF Loan and (ii) a purchase option to acquire a full ownership participation interest in the Loan (the “Option”).

Pursuant to the Economic Interest Agreement, each time UDF requests an advance of principal under the UMT Loan, UDF III will fund the required amount to UMT and UDF III’s economic interest in the UMT Loan increases proportionately. UDF III’s economic interest in the UMT Loan gives UDF III the right to receive payment from UMT of principal and accrued interest relating to amounts funded by UDF III to UMT which are applied towards UMT’s funding obligations to UDF under the UMT Loan. UDF III may abate its funding obligations under the Economic Participation Agreement at any time for a period of up to twelve months by giving UMT notice of the abatement.

The Option gives UDF III the right to convert its economic interest into a full ownership participation interest in the UMT Loan at any time by giving written notice to UMT and paying an exercise price of $100. The participation interest includes all rights incidental to ownership of the UMT Loan and the Security Agreement, including participation in the management and control of the UMT Loan. UMT will continue to manage and control the UMT Loan while UDF III owns an economic interest in the UMT Loan. If UDF III exercises its Option and acquires a participation interest in the UMT Loan, UMT will serve as the loan administrator but both UDF III and UMT will participate in the control and management of the UMT Loan. At December 31, 2011 and 2010 UDF III had funded approximately $71,367,000 and $62,194,000, respectively, to UDF under this agreement of which approximately $65,504,000 and $57,051,000 were outstanding under the Economic Interest Participation Agreement at December 31, 2011 and 2010, respectively.

On June 21, 2010, UDF entered into a new promissory note agreement with a private investor, the proceeds from which were used to pay off the Textron loan agreement in full. Pursuant with this transaction, the Company entered into a second amendment to our subordination and intercreditor agreement which subordinates the UMT loan to the new loan from the private investor, reducing the amount subject to subordination from $30,000,000 to $15,000,000.

The lending facility to UDF represents the continuing evolution of the Company's investment policy away from its original investment objective of long term residential mortgages to a portfolio which consists primarily of the increase in the Loan to UDF, an affiliate of our Advisor, lot banking loans, construction loans and model home loans. The Company's Trustees believe that the interest rate environment, increasing default rates, which have resulted in lower yields from traditional residential mortgage investments and the recent broader deterioration of the sub-prime mortgage market, requires that we seek other investments that are capable of providing superior returns, credit and collateral for our shareholders. Our Trustees were also influenced by the results of our existing loan arrangement with UDF. From June 2003 through December 2011, UMT has funded to UDF approximately $126 million in first lien, subordinate loans and equity investments and received approximately $120 million in loan and equity repayments.

We anticipate the increasing concentration of our investments in the Loan, lot banking, model home loans and construction loans and that residential mortgages and interim loans will continue to diminish as a significant component of our total investment portfolio.

The Company monitors the line of credit for collectability on a continuing basis based on the affiliate’s payment history. No valuation allowance or charge to earnings was recorded for the years ended December 31, 2011, 2010, and 2009 based on the Company’s evaluation. Outstanding balances were approximately $ 71,367,000, $62,194,000, and $57,110,000 at year end 2011, 2010, and 2009, respectively.

Properties Pledged as Collateral

At year end 2011, approximately 41% of the properties securing our interim loan Mortgage Investments were located in Texas, 55% in California, 1% or less in 11 other states.

At year end 2010, approximately 37% of the properties securing our interim loan Mortgage Investments were located in Texas, 40% in California, 6% in Tennessee, 3% in each Missouri and Ohio, 4% in Georgia, 2% in Illinois, 1% or less in 15 other states.

At year end 2009, approximately 36% of the properties securing our interim loan Mortgage Investments were located in Texas, 38% in California, 6% in Tennessee, 3% in each Missouri and Ohio, 4% in Georgia, 2% in each Indiana and Illinois, 1% or less in 14 other states.

We expect to continue making loans principally in the major metropolitan areas of Texas.

Each of the properties serving as security for our Mortgage Investments is covered by a mortgagee’s title insurance policy, and in the case of residential properties, hazard insurance in an amount sufficient to cover the outstanding balance. Some of our mortgage investments are covered by full or limited recourse agreements with note sellers. In making the decision to invest in loans secured by property located in other states, we consider the availability of non-judicial foreclosure, as is available in Texas, to be the primary legal consideration. While Texas does not provide a statutory right of redemption and permits deficiency judgments, we do not rely upon those provisions in the enforcement of our liens and therefore we believe that the risks in mortgage investments in most other states will not be significantly different than those we face in Texas.

Loan Servicing

We neither buy nor sell servicing rights to the loans we purchase, nor do we retain servicing rights. Residential mortgages and contracts for deed are serviced by PSC, an affiliate of our Advisor. We pay monthly loan servicing fees to Prospect Service Corp., (“PSC”), which is owned by UMTH, of 1/12th of 1/2 of 1% of the UPB of each loan. In addition, we paid a monthly loan servicing fee of 0.8% of the UPB to REOPC, an affiliate of our Advisor, for maintaining our foreclosed properties. This arrangement with respect to interim loans ended in the last quarter 2006; however, PSC continues to service our long term residential loans. Interim loans are serviced by us or by the entity to which we loaned funds, the majority of which are affiliates of our Advisor, including UMTHLC and RAFC. We do not pay monthly servicing fees other than as listed above.

Comparative Income and Expenses

During the years ended December 31, 2011, 2010, and 2009, total revenues were approximately $5,130,000, $7,369,000, and $9,072,000, respectively, representing a decrease over the prior year of ($2,239,000) or (30%), ($1,703,000) or (19%), and ($2,101,000) or (19%), respectively. The overall decrease in all three years was primarily attributable to the reduced balance in the UDF line of credit (net of the Economic Interest Participation Agreement with UDF III), the reduced balance in non-affiliate interim mortgages and amortizations and pay-offs in the securitized mortgage portfolios. See Liquidity and Capital Resources section for further discussion.

Revenue derived from affiliates decreased ($1,847,000) or (32%), ($1,960,000) or (26%), and ($1,324,000) or (15%), and revenues from non-affiliates increased (decreased) ($392,000) or (23%), $257,000 or 18%, and ($771,000) or (35%) during the years ended December 31, 2011, 2010, and 2009, respectively. The overall decrease in affiliate income is due primarily to the lower outstanding balance in the UDF line of credit (net of the Economic Interest Participation Agreement with UDF III) which was partially offset by the higher outstanding balance in the UMTHLC deficiency note and the placement of certain affiliate interim mortgages on non-accrual status.

Total expenses during 2011, 2010, and 2009 were approximately $3,537,000, $4,397,000, and $4,875,000, respectively, representing an increase (decrease) over the prior year of approximately ($860,000) or (20%), ($479,000) or (10%), and $485,000 or 11%, respectively. The 2011 decrease was due primarily to a reduction of provision for loan losses expense in the amount of $400,000, a $380,000 reduction in REO and legal expenses, and a $140,000 decrease in trust administration fees, offset partially by an increase in interest expense of approximately $116,000. The 2010 decrease was due primarily to a reduction in the provision for loan losses expense of approximately $1,301,000 which was partially offset by an increase in interest expense of approximately $369,000. The 2009 increase was primarily attributable to the increase in provision for loan losses expense of approximately $388,000 and an increase of approximately $100,000 in interest expense. These items are discussed in more detail below.

PROVISION FOR LOAN LOSSES: decreased 35% in 2011, decreased 54% in 2010, and increased 19% in 2009, respectively.

The increase or decrease in provisions for loan losses between years depends on how many loans are foreclosed since we create the allowance for loan losses on default rates and foreclosure trends. The tables below illustrate loss rates as a percentage of the nonrecourse portfolio for 1) interim loans and 2) residential mortgages and contracts for deed:

Interim Mortgages:

Year	Unpaid principal balance at year ends of unaffiliated loans		Loan losses charged- off		Loss rate as a percentage of unaffiliated loans
2011	$	36,000		-		0.00	%
2010	$	249,000		-		0.00	%
2009	$	294,600		-		0.00	%

Residential Mortgages and Contracts for Deed:

Year	Unpaid principal balance including securitized loans		Loan losses charged- off		Loss rate as a percentage of loans
2011	$	11,235,000	$	609,000		5.42	%
2010	$	12,394,000	$	827,000		6.67	%
2009	$	12,431,000	$	843,000		6.78	%

Loan loss reserves are established when a.) the collectability of current loan balances becomes uncertain or b.) the underlying collateral value for foreclosed properties is less than its carrying value. For current loan balances, a loan loss reserve is created based on a three year look back of historical default rates, as well as a specific analysis on a loan by loan basis. The Company decreased its provision for loan losses in 2011, decreased them in 2010 and increased its provision for loan losses in 2009 in order to ensure adequate reserves over the long-term based on our assessment of market conditions. The Company’s three year historical default rate for residential mortgages and contracts for deed is approximately 2.2% of the remaining outstanding unpaid principal balance of the loans it owns outright, excluding the securitized loans. The Company’s three year historical default rate for interim mortgages is approximately 0.10%. The Company continually monitors the adequacy of its loan loss reserves and will provide for additional reserves in the future if needed. The Company charges additions to the loan loss reserves to current period earnings through a provision for loan losses. Amounts determined to be uncollectible are charged directly against, or charged-off, and decrease the loan loss reserve, while amounts recovered on previously charged off accounts increase the loan loss reserve.

INTEREST EXPENSE: Increased 25% in 2011, increased 359% in 2010, and increased 100% in 2009.

Interest expense was approximately $589,000, $473,000, and $103,000, respectively, in 2011, 2010, and 2009. The Company’s primary credit facility matured in November 2007 and in 2008 the Company had no credit facility or long term debt outstanding. The increase in 2010 was due to the use of the bank line of credit during the full year and the term loan credit facility entered into in April, 2010. In August 2009, the Company entered into a new revolving line of credit facility with a bank for $5,000,000. The outstanding balance on this line was $4,143,000 and $4,408,000 at December 31, 2011 and 2010, respectively. On April 21, 2010, the Company entered into a new term loan credit facility with a bank for $1,600,000. The outstanding balance on this loan at December 31, 2011 and December 31, 2010 was approximately $1,107,000. During 2011, the Company entered into three new term loan credit facilities with three different banks for $5,000,000, $250,000, and $4,300,000. The outstanding balances on these loans at December 31, 2011 were approximately $181,000, $104,000, and $2,253,000.

Use of these credit facilities is the reason for the increased interest expense in 2011 over 2010 and 2010 over 2009. We used our credit facilities to provide additional funds for investment. The use of our credit facilities, depends on the number of suitable investments available at any given time and the amount of cash we have on hand. Interest expense fluctuates based on 1) how heavily we rely on our credit facilities and 2) the increase or decrease in the interest rate we pay under the credit facility. See Liquidity and Capital Resources section for further discussion.

LOAN SERVICING FEES: Decreased 13% in 2011, and increased 116% and 78% in 2010 and 2009, respectively.

Loan servicing fees paid to PSC for servicing some of our Mortgage Investments change as a result of the amount we had invested in residential mortgages and contracts for deed which decreased 12% in 2011, increased 11% in 2010 and 32% in 2009. Increases in the loan servicing fee were expected as the long term mortgage portfolio stabilizes or increases, and decreases in the loan servicing fee should occur as the long term mortgage portfolio decreases. Loan servicing fees were approximately $21,000, $24,000, and $11,000, in 2011, 2010, and 2009, respectively.

TRUST ADMINISTRATION FEES: Decreased 12% in 2011, increased 9% in 2010, and decreased 3% in 2009.

The trust administration fee was paid to our Advisor. The current monthly fee is calculated as 1/12th of 1% of our average invested assets. The trust administration fee increases and decreases as our invested assets increase or decrease as we draw on or pay down the credit facility that we use to acquire mortgage investments. Trust administration fees paid in 2011, 2010, and 2009 were approximately $1,000,000, $1,138,000, and $1,042,000, respectively and are based on the balance of average invested assets.

GENERAL AND ADMINISTRATIVE EXPENSES: Decreased 27% in 2011 increased 26%, and 2% in 2010 and 2009, respectively.

General and administrative expenses were approximately $1,208,000, $1,650,000, and $1,307,000, respectively, in 2011, 2010, and 2009. The major categories of general and administrative expenses include transfer agent fees, legal fees, printing and reproduction costs, accounting and audit fees, recording fees, expenses to maintain REO properties, trustee fees and insurance. The decrease in 2011 resulted from lower expenses in all categories. The increase in 2010 and 2009 was primarily due to higher accounting and legal services expenses and expenses incurred to maintain REO properties

Operating expense as a percentage of income, net of interest expense and provision for loan losses was 43.45%, 38.17%, and 26.01%, for 2011, 2010, and 2009, respectively. Operating expense as a percentage of average invested assets was 1.77%, 2.04%, and 1.54%, for the years, respectively.

Net income was approximately $1,592,000, $2,972,000, and $4,196,000, for 2011, 2010, and 2009, respectively, representing a decrease of 46%, 29%, and 38% in 2011, 2010 and 2009, respectively. The decreases in 2011 and 2010 were driven primarily by reduced income from affiliates, as discussed above, due to the pay-off of the UDF line of credit in September 2008, and a reduction in the interim loans affiliates. The decrease in 2009 was driven primarily by reduced income from affiliates due to the pay-off (reduction) of UMTHLC interim mortgages, and the pay-off of the UDF line of credit in September 2008 and an increase in the provision for loan losses expense. Earnings per share in 2011, 2010, and 2009 were $0.25, $0.46, and $0.65, for the respective years. Daily use of leverage was $5.1 million in 2011, as compared to $4.7 million in 2010, and $1.2 million in 2009. Performing Mortgage Investment yields were approximately 12.15%, 11.12%, and 11.64%, in 2011, 2010, and 2009, respectively, further impacting earnings. Average daily cash balances of $679,000 in 2011, compared to $421,000 in 2010, and $677,000 in 2009, again positively or negatively impacting earnings in successive years.

Foreclosed Properties

Affiliated Foreclosed Properties. We do not reclassify foreclosed loans that have been pledged to us as collateral (an “underlying loan”) for recourse loans we have made to affiliates of our Advisor, because our affiliates are obligated to perform under the term of those recourse loans with us (“affiliate loans”). If the borrower on an underlying loan defaults, the affiliate has the option to accrue interest payable to us while they bring the underlying loan current in its payments. We, in turn, accrue an interest receivable on the recourse loan. When the underlying loan becomes a paying loan again, the affiliate resumes paying us interest on the recourse loan. If the underlying loan is foreclosed and the real estate sells, our affiliate pays us all accrued interest and principal from the proceeds from the sale of the property. Any deficiency is reclassified to Recourse Obligations, affiliates or Deficiency Notes, affiliates.

Unaffiliated Foreclosed Properties. We began 2011, 2010, and 2009 with 12, 11, and 19 foreclosed residential mortgages and contracts for deed, respectively, and foreclosed an additional 1, 7, and 11 loans during the respective years. We sold 11, 6, and 19, foreclosed properties in 2011, 2010, and 2009, respectively, leaving 2, 12, and 11, foreclosed properties at the end of each of the three years, respectively. Non-affiliate foreclosed properties as a percentage of total unaffiliated residential mortgages and contracts for deed at year end were 0.94%, 5.02%, and 4.32%, respectively.

We began 2011, 2010, and 2009 with 143, 150, and 104, foreclosed interim loans, respectively, and foreclosed an additional 3, 6, and 65, properties during the respective years. We sold 62, 13, and 19, foreclosed properties, during 2011, 2010, and 2009, respectively, leaving 84, 143, and 150, foreclosed interim loans at the respective year ends. In December of 2006 we ceased funding interim loans for the construction of single family homes originated by an unaffiliated lender, Residential Development Corporation and began liquidating properties securing Residential Development Corporation non-performing loans. Accordingly, 2008 foreclosures were significantly higher than prior years.

At December 31, 2011 our foreclosed property portfolio consisted of 86 residential properties of which 20 were rental properties. Our exit strategy for these properties is to dispose of them, over time, and recover our cost. This includes marketing available properties for sale or rental including providing seller financing to qualified third party buyers. Active rental properties can be seasoned over time and if the tenant can then qualify for third party or seller financing the property can then be sold and its cost recovered. These rental properties also provide cash flow to the Company during this process and reduce our holding costs.

In December 2006, we ceased funding individual interim loans for the construction of single family homes. In 2008, we completed foreclosure on the remaining non-performing interim mortgage loans funded to Residential Development Corp. (“RDC”). As a result, our outstanding balance of interim mortgage loans to non-affiliates was approximately $36,000 and $249,000 at December 31, 2011 and 2010, respectively.

The following tables detail major categories of foreclosed loans for each of the last three fiscal years:

RESIDENTIAL MORTGAGES & CFDs	2011		2010		2009
Number of loans defaulted at beginning of year		12		11		19
Aggregate gross value	$	622,000	$	537,000	$	865,000

Additional defaults during year		1		7		11
Aggregate gross value	$	45,000	$	351,000	$	509,000

Defaulted properties disposed of during year		11		6		19
Aggregate gross value	$	561,000	$	267,000	$	837,000

Number of loans defaulted at end of year		2		12		11
Aggregate gross value	$	106,000	$	621,000	$	537,000

INTERIM LOANS	2011		2010		2009
Number of loans defaulted at beginning of year		143		150		104
Aggregate gross value	$	10,180,000	$	9,428,000	$	5,964,000

Additional defaults during year		3		6		65
Aggregate gross value	$	251,000	$	2,226,000	$	4,635,000

Defaulted properties disposed of during year		62		13		19
Aggregate gross value	$	4,919,000	$	1,474,000	$	1,171,000

Number of loans defaulted at end of year		84		143		150
Aggregate gross value	$	5,512,000	$	10,180,000	$	9,428,000

Changes in Our Mortgage Portfolio

The Company no longer purchases interim loans or contracts for deed. Such balances will decrease over time as the existing portfolios liquidate. We plan to continue to invest in land development loans, finished lot loans, model home loans and construction loans secured by conventionally built houses because, 1) land development loans and finished lot loans have provided us with suitable collateral positions, well capitalized borrowers and attractive yields; 2) interim loans, while offering full recourse from our borrowers and attractive yields are dependent on sub-prime mortgage products to facilitate the sale of the properties securing our loans; and, 3) model home and construction loans are expected to provide us with suitable collateral positions, well capitalized borrowers and attractive yields. In addition, blended yields for land development loans and finished lot loans have produced higher returns than those of residential mortgages and contracts for deed. Model home and construction loans are expected to produce higher yields commensurate with land development loans, finished lot loans and interim loans. As we phase out of interim loans, we will increase the percentage of our portfolio invested in land development loans, finished lot loans, model home loans and construction loans until market conditions indicate the need for an adjustment of the portfolio mix.

The table below summarizes our gross mortgage portfolio by asset type as of December 31, 2011, 2010, and 2009:

Category	2011		2010		2009
First lien secured interim mortgages 12 months or less and residential mortgages & contracts for deed	$	22,488,000	$	23,642,000	$	30,925,000
Secured, LOC to UMTH Lending Co., L.P.		7,861,000		15,566,000		16,842,000
Land development loans		71,366,000		62,194,000		56,848,000
Finished lot loans		2,249,000		-		1,988,000
Construction loans		1,884,000		4,755,000		6,477,000

Deficiency Notes – Affiliate and Non-Affiliate

The Company has made loans in the normal course of business to affiliates and non-affiliates, the proceeds from which have been used to originate underlying loans that are pledged to us as security for such obligations. When principal and interest on an underlying loan is due in full, at maturity or otherwise, the corresponding obligation owed by the originating company to the Company is also due in full. If the borrower or the Company foreclosed on property securing an underlying loan, or if we foreclosed on property securing a purchased loan, and the proceeds from the sale were insufficient to pay the loan in full, the originating company had the option of (1) repaying the outstanding balance owed to us associated with the underlying loan or purchased loan, as the case may be, or (2) delivering to the Company an unsecured deficiency note in the amount of the deficiency.

As of December 31, 2011, the Company had two deficiency notes with non-affiliates in the amount of approximately $8,063,000. One note in the amount of approximately $1,725,000 bears interest at a rate of 14% per annum. The second note in the amount of approximately $6,338,000. The Company does not accrue interest on this note as the underlying collateral value approximates the note balance, net of reserves.

As of December 31, 2010, the Company had two deficiency notes with non-affiliates in the amount of approximately $7,301,000. One note in the amount of approximately $1,726,000 bears interest at a rate of 14% per annum. The second note in the amount of approximately $5,575,000. The Company does not accrue interest on this note as the underlying collateral value approximates the note balance, net of reserves.

As of December 31, 2007, UMTHLC issued to the Company a variable amount promissory note in the amount of $5,100,000 to evidence its deficiency obligations to the Company. The initial principal amount of the note was approximately $1,848,000. The principal balance as of December 31, 2011 and 2010 was $29,508,000, and $12,739,000, respectively. The principal balance will fluctuate from time to time based on the underlying loan activity and the amount of deficiencies realized by the affiliate. The note requires monthly principal and interest payments based on a ten-year amortization for the outstanding principal balance. Effective January 2011 the interest rate was reduced to 6%. The note is secured by a limited guaranty by UMTHGS, the Advisor, equal to a monthly amount not to exceed 33% of the advisory fee received by UMTHGS under the terms of its advisory agreement with the Company.

Dividends and Distributions to Shareholders

Distributions per share of beneficial interest were $0.58, $0.58, and $0.73 per weighted share for 2011, 2010, and 2009, respectively, on earnings of $0.25, $0.46, and $0.65, respectively. In 2011, 2010, and 2009 we distributed approximately 234%, 125%, and 112%, of our net income. The portion of the distributions that does not represent earnings represents return of capital. (See the table below.) Distributions declared by our trustees during 2011, 2010, and 2009 were at an annualized rate of return of 2.9%, 2.9%, and 3.7%, respectively. The rate of return of these distributions on the NAV of outstanding shares during 2011, 2010 and 2009 was at an annualized rate of 3.76%, 3.68% and 4.60% respectively. We are under no obligation to pay dividends at that same rate and from time to time the rate at which we pay dividends may be adjusted by our trustees.

	For the Years Ended December 31,
	2011		2010		2009
Dividend paid per Share	$	0.58	$	0.58	$	0.73
Amount paid in excess of earnings per Share	$	0.33	$	0.15	$	0.09

LIQUIDITY AND CAPITAL RESOURCES FOR THE YEARS ENDED

DECEMBER 31, 2011, 2010, and 2009

Sources and Uses of Funds

Cash flows from operating activities are generally the result of net income adjusted for provision for loan losses, (increases) decreases in accrued interest receivable and increases (decreases) in accounts payable and accrued liabilities. Cash (used in) provided by operations was approximately ($1,775,000), $2,059,000, and $1,329,000 during the years ended December 31, 2011, 2010 and 2009, respectively.

Cash flows from investing activities generally reflect fundings and payments received from lending activities. The Company provided cash in investing activities of approximately $3,173,000, in 2011, primarily from receipts from deficiency notes and sales of real estate owned. The Company used approximately $552,000, and $2,049,000 in investing activities in 2010 and 2009, respectively, primarily as a result of investments in real estate owed and affiliate lines of credit.

Cash flows from financing activities generally reflect proceeds from the issuance of shares, borrowings or repayments on the lines of credit, the purchase of treasury stock and the payment of dividends. The Company used approximately $1,042,000, $1,838,000 and $886,000 in financing activities in 2011, 2010 and 2009, respectively. The primary uses are the purchase of treasury stock and the payment of dividends and primary sources are proceeds from the issuance of shares and from borrowings on the lines of credit. The decrease in cash used in 2011 compared to 2010 was primarily due to a reduction in treasury stock repurchased and an increase in borrowings on the lines of credit.

Credit Facilities

During August 2009, the Company entered into a revolving line of credit facility with a bank for $5,000,000. The line of credit bears interest at prime plus one percent, with a floor of 5.50% and requires monthly interest payments. Principal and all unpaid interest will be due at maturity, which is August 2012. The line is collateralized by a first lien security interest in the underlying real estate financed by the line of credit. The outstanding balance on this line of credit was approximately $4,143,000, and $4,408,000 at December 31, 2011 and 2010, respectively.

In March, 2010, the Company sold two residential mortgage loans, with full recourse, to unaffiliated investors for approximately $169,000. These sales were accounted for as recourse borrowings. The notes require monthly principal and interest payments at a rate of 9.5% amortized over 30 years with all unpaid principal and interest due at maturity. One loan, had a balance of approximately $70,000, at December 31, 2011 and 2010, respectively, and matures on May 1, 2015. The other loan, had a balance of approximately $97,000 on December 31, 2011 and approximately $98,000 on December 31, 2010, and matures on November 23, 2013. The total outstanding balance on these notes was approximately $167,000 and $168,000 at December 31, 2011 and 2010 respectively.

On April 21, 2010, the Company entered into a term loan credit facility with a bank for $1,600,000. The loan bears interest at prime plus one percent, with a floor of 7.0%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which is October 21, 2011. The term loan credit facility was extended effective December 21, 2011 through December 19, 2012, and the interest rate was reduced from 7.0% to 5.5%. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2011 and 2010 was approximately $1,107,000.

On January 27, 2011, United Mortgage Trust initiated a private offering of Secured Subordinated Notes (“Notes,” to accredited investors “Note Holders”). The Notes are being offered through a wholly owned subsidiary, UMT Home Finance II, L.P. (“HF II”). HF II is a Delaware limited partnership that was formed on November 29, 2010 as a Special Purpose Entity, for the purpose of originating and holding loans made to fund the acquisition of finished lots and the construction of single-family homes on the subject lots (“Loans”). HF II will issue up to $5 million in 7.5% Notes. The Notes will be secured by an undivided security interest on the pool of loans owned by HF II. The offering of the Notes is not registered under the Securities Act, in reliance upon the exemption from registration for non-public offerings provided by Rule 506 of Regulation D promulgated under the Securities Act of 1933. As of December 31, 2011, approximately $300,000 was outstanding and approximately $50,000, $100,000 and $150,000 matures on April 1, 2012, March 1, 2016 and April 1, 2016, respectively. Through March 30, 2012, approximately $1,375,000 had been raised through this private placement.

On May 27, 2011, the Company entered into a term loan credit facility with a bank for $4,300,000. The loan bears interest at prime plus one percent, with a floor of 5.0%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which is May 27, 2014. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2011 was approximately $2,253,000.

On August 1, 2011, the Company entered into a term loan credit facility with a bank for $250,000. The loan bears interest at prime plus one percent, with a floor of 4.75%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which is August 1, 2012. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2011 was approximately $104,000.

On October 26, 2011, the Company entered into a term loan credit facility with a bank for $5,000,000. The loan bears interest at prime plus one percent, with a floor of 5.0%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which is October 26, 2014. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2011 was approximately $181,000. As of December 31, 2011 the Company was not in compliance with one of its debt covenants; however the Company obtained a waiver letter from the lending institution of its covenant violation.

DRP Funds

We use funds made available from our DRP, funds made available under bank lines of credit and the proceeds from repayments of principal and interest on loans we have made to purchase mortgage investments. We do not have commitments to purchase any mortgage investments but rather purchase them, as funds are available. Dollars are approximate. Shares are offered under our DRIP without the payment of any commissions.

	December 31,
	2011			2010			2009
Shares issued		24,990			35,150			46,000
Dividend reinvestment proceeds	$	391,000		$	558,000		$	815,000
Number of shares returned to treasury		(14,133	)		(31,470	)		(60,000	)
Value of shares repurchased	$	(276,000	)	$	(566,000	)	$	(1,113,000	)
Principal receipts:
First lien mortgage notes and trust receivables	$	922,000		$	1,454,000		$	217,000
Real estate owned (Investments)	$	3,258,000		$	(6,895,000	)	$	716,000
Interim loans	$	325,000		$	46,000		$	64,000
Interim loans and deficiency notes, affiliate	$	1,559,000		$	9,897,000		$	2,787,000
Net receipts(fundings) - lines of credit	$	622,000		$	3,448,000		$	(3,241,000	)
Net receipts(fundings) - lines of credit, affiliate	$	(711,000	)	$	(3,128,000	)	$	(1,301,000	)
Net borrowings(payments) – bank lines of credit	$	2,272,000		$	1,727,000		$	3,788,000

As of December 31, 2011, we had issued an aggregate of 8,324,756 shares, with 1,887,336 shares repurchased and retired to treasury, leaving 6,437,420 shares outstanding. Total capital raised from share issuances was approximately $165,936,000.

As of December 31, 2010, we had issued an aggregate of 8,299,766 shares, with 1,873,203 shares repurchased and retired to treasury, leaving 6,426,563 shares outstanding. Total capital raised from share issuances was approximately $165,545,000.

As of December 31, 2009, we had issued an aggregate of 8,264,616 shares, with 1,841,733 shares repurchased and retired to treasury, leaving 6,422,883 shares outstanding. Total capital raised from share issuances was approximately $164,987,000.

Since inception and as of December 31, 2011, we have invested an aggregate of approximately $539 million in interim loans from various sources, and UDF had drawn down an aggregate of approximately $125.9 million from us on its line of credit. In 2011 we funded approximately $2.6 million in interim loans and approximately $720,000 in draws to UDF, compared to approximately $2.1 million in interim loans and $5.1 million in draws to UDF in 2010, and approximately $2 million in interim loans and $2 million funded to UDF in 2009. The following table sets forth, as a percentage of total funds invested with all sources, the percentage of mortgage investments made to affiliates during 2011, 2010, and 2009.

Affiliated Company	2011			2010			2009
RAFC		0	%		1	%		7	%
UMTHLC		3	%		3	%		22	%
UDF		2	%		11	%		6	%

Total of affiliate mortgage investments		5	%		15	%		35	%

The following table shows the dollar amounts of investments funded with affiliates of our Advisor in the three comparable years:

Affiliated Company	2011		2010		2009
RAFC	$	944	$	549,000	$	2,708,000
UMTHLC	$	946,000	$	1,598,000	$	8,195,000
UDF	$	720,000	$	5,143,000	$	2,231,000

In addition, we no longer fund draws directly to RAFC, but we do fund draws directly to vendors for projects that are active and serviced by RAFC.

Outstanding balances for interim loans purchased from affiliates of our Advisor and the UDF line of credit at December 31, 2011, 2010, and 2009 purchased from affiliates were:

Affiliated Company	2011		2010		2009
RAFC	$	16,449,000	$	16,592,000	$	23,602,000
UMTHLC	$	7,861,000	$	15,566,000	$	16,842,000
UDF	$	71,367,000	$	62,194,000	$	57,110,000

We no longer purchase residential mortgages or contracts for deed other than to carry back a note on the sale of a foreclosed property or to reclassify an interim loan.

Transactions with Related Parties

We do not have employees. All administrative services and facilities are provided to us by our Advisor under the terms of an Advisory Agreement effective August 1, 2006, (now subject to an Advisory Agreement effective January 1, 2011). The services of our Advisor, UMTHGS, include all day-to-day administrative services including managing our development of investment guidelines, overseeing servicing, negotiating purchases of loans and overseeing the acquisition or disposition of investments and managing our assets. We pay UMTHGS a monthly trust administration fee, depending on our annual distribution rate, ranging from 1/12th of 1% up to 1/12th of 2% of the amount of average invested assets per month. The agreement also provides for a subordinated incentive fee equal to 25% of the amount by which our net income for a year exceeds a 10% per annum non-compounded cumulative return on our adjusted contributions. No incentive fee was paid during 2011, 2010 or 2009. In addition, for each year in which it receives a subordinated incentive fee, the Advisor will receive a 5-year option to purchase 10,000 shares at a price of $20.00 per share (not to exceed 50,000 shares). As of December 31, 2011, 2010, and 2009, the Advisor has not received options to purchase shares under this arrangement.

The Advisor and its affiliates are also entitled to reimbursement of costs of goods, materials and services obtained from unaffiliated third parties for our benefit, except for note servicing and for travel and expenses incurred in connection with efforts to acquire investments for us or to dispose of any of our investments. During 2011, 2010 and 2009, the Company paid the Advisor approximately $76,000 each year as reimbursement for costs associated with providing shareholder relations activities.

The Advisory Agreement provides for the Advisor to pay all of our expenses and for us to reimburse the Advisor for any third-party expenses that should have been paid by us but which were instead paid by the Advisor. However, the Advisor remains obligated to pay: (1) the employment expenses of its employees, (2) its rent, utilities and other office expenses (except those relating to office space occupied by the Advisor that is maintained by us) and (3) the cost of other items that are part of the Advisor's overhead that is directly related to the performance of services for which it otherwise receives fees from us.

The Advisory Agreement also provides for us to pay to the Advisor a debt placement fee. We may engage the Advisor, or an Affiliate of the Advisor, to negotiate lines of credit on behalf of the Company. UMT shall pay a negotiated fee, not to exceed 1% of the amount of the line of credit secured, upon successful placement of the line of credit. The Company paid debt placement fees of approximately $43,000 and $50,000 to an affiliate of the Advisor in June and October 2011, respectively. These fees are amortized monthly, as an adjustment to interest expense, over the term of the credit facility agreements described in Note D.

Loan servicing fees are paid to PSC and were paid to REOPC. The fees are paid monthly and calculated as 1/12th of 1/2% and 0.8% of the outstanding principal balance of each loan or value of each property, respectively. In addition, each received real estate sales commissions on a scale of 1% to 4% of the sales price of a foreclosed property when the property is liquidated.

Below is a chart listing fees paid to the Advisor and PSC in the past three years:

Type of Fee	Payee	2011		2010		2009
Trust management fee, net	UMTHGS	$	1,000,000	$	1,138,000	$	1,042,000
Investor relations service fee	UMTHGS	$	76,000	$	76,000	$	76,000
Loan servicing fees	PSC	$	21,000	$	24,000	$	11,000

Critical Accounting Policies

We have prepared our financial statements in accordance with accounting principles generally accepted in the United States (“GAAP.”) GAAP represents a comprehensive set of accounting and disclosure rules and requirements, the application of which requires management judgments and estimates. In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies”, we have identified the most critical accounting policies upon which our financial statements are based as follows:

Interest Income Accrual

The Company’s portfolio of residential mortgages, contracts for deed, interim loans and lines of credit produce monthly interest income; however, the Company may not receive interest income on a particular loan if a borrower fails to make its monthly interest payment.

The Company has two types of loans and its accrual method differs for them: nonrecourse loans and recourse loans.

A nonrecourse loan is one that is not currently covered under a recourse agreement. The majority of the Company’s nonrecourse loans are residential mortgages and contracts for deed.

A recourse loan is one that is covered under a recourse agreement that obligates either a third party guaranteeing the performance of a loan, or a borrower that has made a corresponding loan to another party (the "underlying borrower"), to repay the loan to the Company if the underlying borrower defaults. The majority of the Company’s recourse loans are interim loans made to borrowers that make corresponding loans which are pledged to the Company as security for the borrower's obligations to the Company. All loans that the Company makes to affiliates of its Advisor are recourse loans.

With respect to nonrecourse loans, the Company will accrue interest, if based on the underlying borrower’s payment history and based on analysis by the loan servicing staff, when applicable, it is determined that the likelihood of an interest payment being made is probable. The Company will cease accruing interest when the likelihood that an interest payment will be made is less than probable, generally if a payment is more than 90 days past due. If and when the loan is foreclosed, the Company no longer considers the property to be income producing and reclassifies it as foreclosed.

With respect to recourse loans, the Company’s borrower, or a guarantor, is obligated to pay all interest accrued and principal at the end of the loan term, or extensions thereof. As a result, the Company continues to accrue interest on recourse loans even if the likelihood that the underlying borrower will make an interest payment is less than probable. Interest on recourse loans continues to accrue until the loan is fully paid off however, we are reserving for the accrued interest

There is no assurance that the interest income accrued by the Company will be paid by a borrower. When income is accrued with respect to a foreclosed loan, the Company sells the mortgage property and receives proceeds from the sale. The Company first applies the proceeds to any accrued interest related to the loan and then applies the balance of the proceeds to the outstanding loan balance. If the proceeds from the sale of the property are not sufficient to reduce the outstanding loan balance to zero, the remaining balance is referred to as the “charge-off amount.” The charge-off amount is recorded against the mortgage investment loss reserve: accrued interest income, plus the outstanding loan balance, less proceeds from the sale of the property equals the amount charged-off against loss reserves. If the loan was a recourse loan, the Company’s borrower or a guarantor is obligated to pay the remaining balance with interest and the borrower or guarantor, as applicable, would deliver a deficiency note (“deficiency note”) to the Company for the remaining balance.

On March 30, 2006, but effective as of December 31, 2005, all outstanding amounts owed by certain of the Company’s affiliates under (1) loans made by the Company to such affiliates, (2) deficiency notes from such affiliates to the Company and (3) the estimated maximum future liability to the Company under recourse arrangements, were consolidated into secured, variable amount promissory notes delivered by such affiliates to the Company, and reflected as recourse obligations in the accompanying balance sheets.

Loan Loss Reserves

Loan loss reserves are established when it becomes clear that the current market value of foreclosed properties is less than the outstanding balances of loans plus accrued interest. A loan loss reserve is created based on a three year look back of default rates. It is calculated as the difference between the outstanding loan balance of a foreclosed property, plus accrued interest income, less the estimated proceeds from the sale of the foreclosed property. The Company’s three year historical default rate for residential mortgages and contracts for deed is approximately 2.2% of the remaining outstanding unpaid principal balance of the loans it owns outright, excluding the securitized loans. The Company’s three year historical default rate for interim mortgages is approximately 0.10%. The Company charges additions to the loan loss reserve to current period earnings through a provision for loan losses. Amounts determined to be uncollectible are charged directly against the reserve, or “charged-off,” and decrease the reserve for loan losses, while amounts recovered on previously charged off accounts increase the reserve.

The changes in the reserve for loan losses during the years ended December 31, 2011, 2010, and 2009 are summarized as follows:

	2011			2010			2009
Balance, beginning of year	$	5,233,000		$	5,075,000		$	4,490,000
Provision for loan losses		720,000			1,111,000			2,413,000
Reduction of values of foreclosed mortgages and loans charged off		(239,000	)		(953,000	)		(1,828,000	)
Balance, end of year	$	5,714,000		$	5,233,000		$	5,075,000

In December of 2006 we ceased funding interim loans through an unaffiliated lender, Residential Development Corp. (“RDC”). In 2007 and 2008, we experienced increased delinquency and foreclosures on loans funded to RDC. Throughout 2007 and 2008, we implemented the following actions with regard to RDC:

Ceased funding loans to RDC

Began aggressive liquidation of properties securing non-performing loans

Engaged the services of asset managers to assist in the management of RDC delinquencies and liquidation of RDC assets

Began detailed examination of RDC lending practices and collateral positions

Re-evaluated market values of properties securing the RDC loans

Began review of all recourse afforded us by RDC and its principal owner

We continued these efforts throughout 2011 and 2010 and will continue until the RDC portfolio is fully liquidated. Throughout 2011, 2010, and 2009 UMT allocated $240,000, $432,000, and $1,292,000, respectively, of reserves for losses associated with the RDC portfolio. In the event that aggressive liquidation of the portfolio may result in additional losses, we will provide for additional reserves as needed.

DISCLOSURE OF CONTRACTUAL OBLIGATIONS

As of December 31, 2011, 2010, and 2009, the Company does not have any contractual obligations to make future payments under any debt obligations or long-term lease agreements.

DIVIDENDS DECLARED AND DISTRIBUTIONS MADE

During the year ended December 31, 2011, we declared dividends and made distributions on a monthly basis as shown below. We maintained a 2.9% annualized dividend rate during the year and distributed approximately 234% of our net income. Distributions paid on NAV were made at a rate of 3.76% and 3.68% for the years ended December 31, 2011 and 2010 respectively. We are under no obligation to make distributions at any particular rate, although we are obligated to distribute 90% of our REIT Taxable Income in order to continue to qualify as a REIT for federal income tax purposes. The amount distributed in excess of earnings per share represents return of capital.

	For the Years Ended December 31,
	2011		2010		2009
Dividend paid per Share	$	0.58	$	0.58	$	0.73
Amount paid in excess of earnings per Share	$	0.33	$	0.15	$	0.09

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We may be exposed to interest rate changes primarily in connection with our bank.

During August 2009, the Company entered into a new revolving line of credit facility with a bank for $5,000,000. The line of credit bears interest at prime plus one percent, with a floor of 5.50% and requires monthly interest payments. Principal and all unpaid interest will be due at maturity, which is August 2012. The line is collateralized by a first lien security interest in the underlying real estate financed by the line of credit. The outstanding balance on this line of credit was approximately $4,143,000, and $4,408,000 at December 31, 2011 and 2010, respectively. On April 21, 2010, the Company entered into a new term loan credit facility with a bank for $1,600,000. The loan bears interest at prime plus one percent, with a floor of 7.0%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which is October 21, 2011. The term loan credit facility was extended effective December 21, 2011 through December 19, 2012, and the interest rate was reduced from 7.0% to 5.5%. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2011and 2010 was approximately $1,107,000. On May 27, 2011, the Company entered into a new term loan credit facility with a bank for $4,300,000. The loan bears interest at prime plus one percent, with a floor of 5.0%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which is May 27, 2014. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2011 was approximately $2,253,000. On August 1, 2011, the Company entered into a new term loan credit facility with a bank for $250,000. The loan bears interest at prime plus one percent, with a floor of 4.75%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which is August 1, 2012. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2011 was approximately $104,000. On October 26, 2011, the Company entered into a new term loan credit facility with a bank for $5,000,000. The loan bears interest at prime plus one percent, with a floor of 5.0%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which is October 26, 2014. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2011 was approximately $181,000. On January 27, 2011, United Mortgage Trust initiated a private offering of Secured Subordinated Notes (“Notes,” to accredited investors “Note Holders”). The Notes are being offered through a wholly owned subsidiary, UMT Home Finance II, L.P. (“HF II”). HF II is a Delaware limited partnership that was formed on November 29, 2010 as a Special Purpose Entity, for the purpose of originating and holding loans made to fund the acquisition of finished lots and the construction of single-family homes on the subject lots (“Loans”). HF II will issue up to $5 million in 7.5% Notes. The Notes will be secured by an undivided security interest on the pool of loans owned by HF II. The offering of the Notes is not registered under the Securities Act, in reliance upon the exemption from registration for non-public offerings provided by Rule 506 of Regulation D promulgated under the Securities Act of 1933. As of December 31, 2011, approximately $300,000 was outstanding and approximately $50,000, $100,000 and $150,000 matures on April 1, 2012, March 1, 2016 and April 1, 2016, respectively.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

UNITED MORTGAGE TRUST

INDEX TO FINANCIAL STATEMENTS

	Page No.
Report of Independent Registered Public Accounting Firm	46

Consolidated Balance Sheets as of December 31, 2011 and 2010	47

Consolidated Statements of Income for the Years Ended December 31, 2011, 2010 and 2009	48

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2011, 2010 and 2009	49

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009	50

Notes to Consolidated Financial Statements	52

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

United Mortgage Trust

We have audited the accompanying consolidated balance sheets of United Mortgage Trust as of December 31, 2011 and 2010, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years ended December 31, 2011. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Mortgage Trust as of December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

/s/ Whitley Penn LLP

Dallas, Texas

March 30, 2012

UNITED MORTGAGE TRUST

CONSOLIDATED BALANCE SHEETS

	December 31,
	2011			2010
Assets
Cash and cash equivalents	$	363,561		$	7,325

Mortgage investments:
Investment in trust receivable		1,098,797			1,243,638
Investment in residential mortgages		4,904,537			5,557,396
Interim mortgages, affiliates		17,319,590			24,638,389
Interim mortgages		35,886			248,585
Allowance for loan losses		(340,487	)		(459,361	)
Total mortgage investments		23,018,323			31,228,647

Lines of credit receivable, affiliate		78,356,781			69,714,261
Lines of credit receivable, non-affiliates		4,132,639			4,755,129
Accrued interest receivable		1,433,610			981,994
Accrued interest receivable, affiliates		9,032,145			12,721,070
Reserves – accrued interest receivable		(2,418,413	)		(1,399,431	)
Recourse obligations, affiliates		18,361,710			18,321,173
Real estate owned, net		11,090,796			15,980,479
Deficiency notes		8,063,129			7,301,046
Deficiency notes, affiliates		29,507,820			12,739,093
Reserves – deficiency notes		(4,757,746	)		(4,517,746	)
Other assets		445,584			340,504
Total assets	$	176,629,939		$	168,173,544

Liabilities and Shareholders’ Equity
Liabilities:
Dividend payable	$	310,000		$	310,000
Lines of credit payable		6,680,333			4,407,989
Accounts payable and accrued liabilities		936,279			1,046,462
Accounts payable and accrued liabilities, affiliates		2,522,158			2,958,808
Participation payable, affiliate		65,503,661			57,050,973
Notes payable		1,574,521			1,275,665
Total liabilities		77,526,952			67,049,897

Commitments and contingencies

Shareholders' equity:
Shares of beneficial interest; $0.01 par value; 100,000,000 shares authorized; 8,324,756 and 8,299,766 shares issued, respectively; and 6,437,420 and 6,426,563 outstanding, respectively		83,227			82,971
Additional paid-in capital		147,151,952			146,817,612
Cumulative distributions in excess of earnings		(11,620,748	)		(9,485,280	)
		135,614,431			137,415,303
Less treasury stock of 1,887,336 and 1,873,203 shares, respectively, at cost		(36,511,444	)		(36,291,656	)
Total shareholders' equity		99,102,987			101,123,647
Total liabilities and shareholders' equity	$	176,629,939		$	168,173,544

See accompanying notes to consolidated financial statements.

UNITED MORTGAGE TRUST

CONSOLIDATED STATEMENTS OF INCOME

	Year Ended December 31,
	2011		2010		2009
Revenues:
Interest income, affiliates	$	3,850,099	$	5,697,380	$	7,657,170
Interest income		1,279,412		1,671,327		1,414,502
Total revenues		5,129,511		7,368,707		9,071,672
Expenses:
Trust administration fee – related parties		1,000,000		1,137,943		1,041,630
Loan servicing fee – related parties		21,064		24,264		11,242
General and administrative expenses – related parties		85,077		81,186		212,407
General and administrative expenses		1,122,433		1,569,060		1,094,167
Provision for loan losses		720,000		1,111,406		2,412,500
Interest expense – related parties		104,757		77,473		22,223
Interest expense		484,027		395,347		81,110
Total expenses		3,537,358		4,396,679		4,875,279

Net income	$	1,592,153	$	2,972,028	$	4,196,393

Net income per share of beneficial interest	$	0.25	$	0.46	$	0.65

Weighted average shares outstanding		6,435,781		6,422,407		6,417,813

Distributions per weighted share outstanding	$	0.58	$	0.58	$	0.73

See accompanying notes to consolidated financial statements.

UNITED MORTGAGE TRUST

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2011, 2010 and 2009

	Shares of Beneficial Interest				Additional			Cumulative Distributions
	Shares		Par Value		Paid-in Capital			in Excess of Earnings			Treasury Shares		Treasury Stock			Total
Balance at December 31, 2008		8,218,591	$	82,126	$	145,444,793		$	(8,551,085	)		1,782,022	$	(34,613,060	)	$	102,362,774

Proceeds from shares issued		46,025		520		814,931			-			-		-			815,451
Purchase of treasury stock		-		-		-			-			59,711		(1,112,780	)		(1,112,780	)
Dividends ($0.73 per share)		-		-		-			(4,377,081	)		-		-			(4,377,081	)
Net income									4,196,393								4,196,393
Balance at December 31, 2009		8,264,616	$	82,646	$	146,259,724		$	(8,731,773	)		1,841,733	$	(35,725,840	)	$	101,884,757

Proceeds from shares issued		35,150		325		557,888			-			-		-			558,213
Purchase of treasury stock		-		-		-			-			31,470		(565,816	)		(565,816	)
Dividends ($0.58 per share)		-		-		-			(3,725,535	)		-		-			(3,725,535	)
Net income		-		-		-			2,972,028			-		-			2,972,028
Balance at December 31, 2010		8,299,766	$	82,971	$	146,817,612		$	(9,485,280	)		1,873,203	$	(36,291,656	)	$	101,123,647

Proceeds from shares issued		24,990		256		390,594			-			-		-			390,850
Purchase of treasury stock		-		-		(56,254	)		-			14,133		(219,788	)		(276,042	)
Dividends ($0.58 per share)		-		-		-			(3,727,621	)		-		-			(3,727,621	)
Net income		-		-		-			1,592,153			-		-			1,592,153
Balance at December 31, 2011		8,324,756	$	83,227	$	147,151,952		$	(11,620,748	)		1,887,336	$	(36,511,444	)	$	99,102,987

See accompanying notes to consolidated financial statements.

UNITED MORTGAGE TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2011			2010			2009
Operating Activities
Net income	$	1,592,153		$	2,972,028		$	4,196,393
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses		720,000			1,111,406			2,412,500
Depreciation and amortization		8,377			2,376			1,380
Changes in assets and liabilities:
Accrued interest receivable		(864,450	)		249,216			(338,991	)
Accrued interest receivable, affiliates		(2,512,888	)		(3,557,897	)		(4,592,115	)
Other assets		(113,457	)		161,738			(63,033	)
Accounts payable and accrued liabilities		129,817			(1,736,582	)		92,101
Accounts payable and accrued liabilities, affiliates		(734,926	)		2,856,468			(378,759	)
Net cash (used in) provided by operating activities		(1,775,374	)		2,058,753			1,329,476

Investing Activities
Investments in trust receivable		-			(85,977	)		(3,251	)
Principal receipts on trust receivable		144,841			865,666			161,699
Investment in residential mortgages		(124,000	)		(1,140,567	)		(117,300	)
Principal receipts on residential mortgages		776,859			588,584			55,514
Investment in interim mortgages and deficiency notes		(81,161	)		(49,786	)		(436,802	)
Principal receipts on interim mortgages and deficiency notes		324,555			46,015			64,011
Investments in interim mortgages and deficiency notes, affiliates		(2,555,881	)		(242,092	)		(77,301	)
Principal receipts on interim mortgages and deficiency notes, affiliate		1,558,934			8,651,460			2,786,993
Investments in recourse obligations, affiliates		(55,989	)		(1,941,493	)		(182,743	)
Principal receipts from recourse obligations, affiliates		15,452			70,055			232,627
Principal investments in lines of credit receivable, affiliate		(710,908	)		(2,763,147	)		(1,301,212	)
Principal receipts from (investments in) lines of credit receivable, non-affiliates		622,490			3,447,576			(3,240,733	)
Investments in real estate owned		(594,973	)		(9,473,091	)		(7,300	)
Principal receipts on real estate owned		3,853,004			1,474,994			16,319
Net cash provided by (used in) investing activities		3,173,223			(551,803	)		(2,049,479	)

Financing Activities
Net borrowings on lines of credit payable		2,272,344			1,726,965			3,788,477
Proceeds from notes payable		298,856			168,212			-
Proceeds from issuance of shares of beneficial interest		390,850			558,213			815,452
Purchase of treasury stock		(276,042	)		(565,816	)		(1,112,780	)
Dividends		(3,727,621	)		(3,725,535	)		(4,377,081	)
Net cash used in financing activities		(1,041,613	)		(1,837,961	)		(885,932	)

Net increase (decrease) in cash and cash equivalents		356,236			(331,011	)		(1,605,935	)

Cash and cash equivalents at beginning of year		7,325			338,336			1,944,271

Cash and cash equivalents at end of year	$	363,561		$	7,325		$	338,336

Supplemental Disclosure of Cash Flow Information
Cash paid for interest	$	421,464		$	327,838		$	51,887

Non-Cash Financing and Investing Activity
Transfers of affiliate and non-affiliate loans to foreclosed properties or recourse obligations	$	296,100		$	8,848,643		$	108,084
(Increase) decrease participation receivable, affiliates	$	(8,452,688	)	$	(3,282,492	)	$	(15,446,638	)
(Decrease) increase participation payable, affiliates	$	8,452,688		$	3,282,492		$	15,446,638
(Increase) decrease participation accrued interest receivable , affiliates	$	(298,276	)	$	(159,355	)	$	(1,345,463	)
Increase (decrease) participation accrued interest payable, affiliates	$	298,276		$	159,355		$	1,345,463
(Increase) decrease in UDF Loan	$	(720,021	)	$	(365,010	)	$	-
(Increase) decrease in accrued interest receivable, affiliates	$	720,021		$	365,010		$	-
(Increase) decrease accrued interest receivable, affiliates	$	7,221,884		$	408,425		$	437,779
(Increase) decrease interim mortgages & deficiency notes, affiliates	$	(7,221,884	)	$	(408,425	)	$	(437,779	)
(Increase) decrease accrued interest receivable	$	-		$	-		$	80,790
(Increase) decrease interim mortgages & deficiency notes	$	-		$	-		$	(80,790	)
(Increase) decrease interim mortgages & deficiency notes, affiliates	$	7,266,302		$	1,245,760		$	-
(Increase) decrease interim mortgages & deficiency notes, affiliates	$	(7,266,302	)	$	(1,245,760	)	$	-
(Increase) decrease line of credit receivable affiliates	$	1,241,097		$	-		$	-
(Increase) decrease interim mortgages & deficiency notes, affiliates	$	(1,241,097	)	$	-		$	-
(Increase) decrease interim mortgages & deficiency notes, affiliates	$	-		$	(813,155	)	$	-
Receipts from real estate owned	$	-		$	813,155		$	-
(Increase) decrease interim mortgages & deficiency notes	$	(792,778	)	$	(289,863	)	$	(707,197	)
Receipts from real estate owned	$	792,778		$	289,863		$	707,197

See accompanying notes to consolidated financial statements.

UNITED MORTGAGE TRUST

Notes to Consolidated Financial Statements

December 31, 2011 and 2010

A. NATURE OF BUSINESS

THE COMPANY

United Mortgage Trust (the “Company”) is a Maryland real estate investment trust that qualifies as a real estate investment trust (a “REIT”) under federal income tax laws. The Company is the sole general partner of and owns a 99.99% limited partnership interest in UMT Home Finance, L.P. (“UMT HF”) and UMT Home Finance II, L.P. (“HF II”). Both entities are Delaware limited partnerships. The Company owns 100% of UMT LT Trust, a Maryland real estate investment trust, and the Company owns a 99.99% limited partnership interest in UMT Properties, L.P. and UMT 15^th Street, L.P., both of which are Delaware limited partnerships.

The Company invests exclusively in: (i) first lien secured interim mortgage loans with initial terms of 12 months or less for the acquisition and renovation of single-family homes, which we refer to as “Interim Loans”; (ii) secured, subordinate line of credit to UMTH Lending Company, L.P. for origination of Interim Loans; (iii) lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “Land Development Loans”; (iv) lines of credit and loans secured by entitled and developed single-family lots, referred to as “Finished Lot Loans”; (v) lines of credit and loans secured by completed model homes, referred to as “Model Home Loans”; (vi) loans provided to entities that have recently filed for bankruptcy protection under Chapter 11 of the US bankruptcy code, secured by a priority lien over pre-bankruptcy secured creditors, referred to as “Debtor in Possession Loans”, (vii) lines of credit and loans, with terms of 18 months or less, secured by single family lots and homes constructed thereon, referred to as “Construction Loans; and (viii) first lien secured mortgage loans with terms of 12 to 360 months for the acquisition of single-family homes, referred to as “Residential Mortgages”, and, (ix) discounted cash flows secured by assessments on real property. We collectively refer to the above listed loans as “Mortgage Investments”. Additionally, the Company’s portfolio includes obligations of affiliates of our Advisor, which refer to as “recourse loans.”

The Company has no employees. The Company pays a monthly trust administration fee to UMTH General Services, L.P. (“UMTHGS” or “Advisor”), a subsidiary of UMT Holdings, L.P. (“UMTH”), a Delaware real estate finance company and affiliate, for the services relating to its daily operations. The Company’s offices are located in Grapevine, Texas.

THE ADVISOR

The Company uses the services of UMTHGS to manage its day-to-day operations and to recommend investments for purchases. The Company’s President is Stuart Ducote. Other UMTH partners and officers include David A. Hanson, who is President of UMTHGS and secretary of UMTH and its subsidiaries. Todd Etter is a shareholder, director and Chairman of the Board of UMT Services, Inc., UMTH’s general partner and a Director of United Development Funding, Inc. (“UDF”) the general partner of UDF. Mr. Etter is also the sole owner of South Central Mortgage, Inc. ("SCMI"), a Texas corporation that sold Mortgage Investments to the Company. In addition, he is a director and shareholder of Capital Reserve Group, Inc. (“CRG”), in addition SCMI owns 50% of Ready America Funding Corp. (“RAFC”). Both CRG and RAFC are Texas corporations that used funds borrowed from the Company to make loans to other borrowers and assign such loans to the Company as security for CRG and RAFC obligations to the Company. Hollis Greenlaw is a shareholder, director and President and Chief Executive officer of UMT Services, Inc. and a partner and the President and Chief Executive Officer of UMTH, and a director and the President and Chief Executive Officer of United Development Funding, Inc., the general partner of UDF, with whom the Company has extended a line of credit. He is Chief Executive Officer of UMTH Land Development, L.P., the general partner of United Development Funding III, L.P. (“UDF III”). Craig Pettit is a partner of UMTH, and is the sole proprietor of two companies that own 50% of RAFC. He currently functions as the President of RAFC. William Lowe is a partner of UMTH and owns 50% of CRG. Michael K Wilson is a partner of UMTH and a director of UMT Services, Inc. Cara Obert is a partner of UMTH. She also serves as Chief Financial Officer and Treasurer of UMT Services, Inc. and UMTH Land Development, L.P. Besides the subsidiaries above referenced, UMTH is the parent company of UMTH Lending Company, L.P. (“UMTHLC”), a Delaware limited partnership that sells interim loans to the Company, REO Property Company, L.P., (“REOPC”), a Delaware limited partnership that has provided services to the Company, and of Prospect Service Corp. (“PSC”), a Texas corporation that services the Company’s residential mortgages and contracts for deed.

ADVISORY AGREEMENT

UMTHGS is responsible for the day-to-day operations of the Company and for seeking out, underwriting and presenting Mortgage Investments to the Company for consideration and purchase, under the guidance of the Company’s trustees. In that regard, it employs the requisite number of staff to accomplish these tasks, leases its own office space and pays its own overhead. The Company pays a trust administration fee for services rendered by the Advisor.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements are as follows:

BASIS OF ACCOUNTING

The accounts are maintained and the consolidated financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and certain wholly-owned subsidiaries and all significant intercompany accounts and transactions have been eliminated.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts in consolidated financial statements and accompanying notes. Actual results could differ from these estimates and assumptions.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

RESIDENTIAL MORTGAGES, CONTRACTS FOR DEED AND INTERIM LOANS

Residential mortgages, contracts for deed and interim loans are recorded at the lower of cost or estimated net realizable value, net of discounts and loan acquisition costs paid to the Advisor. The Mortgage Investments are collateralized by real property owned by the borrowers.

The majority of residential mortgages and contracts for deed are 360 month real estate lien notes that are purchased by the Company from several sources, including SCMI, an affiliate of the Advisor. Interim loans are real estate lien notes purchased by the Company from various sources including affiliates of the Advisor. Interim loans have terms of 12 months or less. The Company is not a loan originator nor does it purchase Mortgage Investments for resale. The Company intends to hold Mortgage Investments to maturity.

Generally, the Company does not retain servicing rights on its Mortgage Investments. The Company relies on various servicing sources, including affiliated companies, to service its Mortgage Investments.

INTEREST INCOME ACCRUAL

The Company has two types of loans and its accrual method differs for them: nonrecourse loans and recourse loans.

A nonrecourse loan is one that is not currently covered under a recourse agreement. The majority of the Company’s nonrecourse loans are residential mortgages and contracts for deed.

A loan is placed on non-accrual status when income recognition is suspended at either the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful based on a review of economic conditions, the estimated value of the underlying collateral and other relevant factors. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. Any payments received on loans classified as non-accrual status are typically applied first to outstanding loan amounts and then to the recovery of lost interest.

With respect to recourse loans, the Company’s borrower, or a guarantor, is obligated to pay all interest accrued and principal at the end of the loan term, or extensions thereof. As a result, the Company continues to accrue interest on recourse loans even if the likelihood that the underlying borrower will make an interest payment is less than probable. Interest on recourse loans continues to accrue until the loan is fully paid off. Generally, non-recourse loans are placed on non-accrual when there is a clear indication the borrower may not be able to make payments as they become due, which is generally 90 days past due. The Company is reserving for the accrued interest.

On March 30, 2006, but effective as of December 31, 2005, all outstanding amounts owed by certain of the Company’s affiliates under (1) loans made by the Company to such affiliates, (2) deficiency notes from such affiliates to the Company and (3) the estimated maximum future liability to the Company under recourse arrangements, were consolidated into secured, variable amount promissory notes delivered by such affiliates to the Company, and are reflected as recourse obligations in the accompanying balance sheets.

LOAN LOSS RESERVES

Loan loss reserves are established when it becomes clear that the current market value of foreclosed properties is less than the outstanding balances of loans plus accrued interest. A loan loss reserve is created based on a three year look back of default rates. It is calculated as the difference between the outstanding loan balance of a foreclosed property, plus accrued interest income, less the estimated proceeds from the sale of the foreclosed property. The Company’s three year historical default rate for residential mortgages and contracts for deed is approximately 2.2% of the remaining outstanding unpaid principal balance of the loans it owns outright, excluding the securitized loans. The Company’s three year historical default rate for interim mortgages is approximately 0.10%. The Company charges additions to the loan loss reserves to current period earnings through a provision for loan losses. Amounts determined to be uncollectible are charged directly against, or “charged-off and decrease the loan loss reserves, while amounts recovered on previously charged off accounts increase the reserve.

The changes in the reserve for loan losses during the years ended December 31, 2011, 2010, and 2009 are summarized as follows:

	2011			2010			2009
Balance, beginning of year	$	5,233,000		$	5,075,000		$	4,490,000
Provision for loan losses		720,000			1,111,000			2,413,000
Reduction of values of foreclosed mortgages and loans charged off		(239,000	)		(953,000	)		(1,828,000	)
Balance, end of year	$	5,714,000		$	5,233,000		$	5,075,000

In December of 2006 the Company ceased funding interim loans for the construction of single family homes (“Construction Loans”). Prior to December of 2006 the Company funded Construction Loans through an unaffiliated lender, Residential Development Corp. (“RDC”). In 2009 and 2008 the Company experienced increased delinquency and foreclosures on loans funded to RDC. Throughout 2007 and 2008, the Company implemented the following actions with regard to RDC:

Ceased funding loans to RDC

Began aggressive liquidation of properties securing non-performing loans

Engaged the services of asset managers to assist in the management of RDC delinquencies and liquidation of RDC assets

Began detailed examination of RDC lending practices and collateral positions

Re-evaluated market values of properties securing the RDC loans

Began review of all recourse afforded the Company by RDC and its principal owner

The Company continued these efforts throughout 2011 and 2010 and will continue until the RDC portfolio is fully liquidated. Throughout 2011, 2010, and 2009 UMT allocated approximately $240,000 $432,000, and $1,292,000, respectively, of reserves, for losses associated with the RDC portfolio. In the event that aggressive liquidation of the portfolio may result in additional losses, we will provide for additional reserves as needed.

ACCOUNTING FOR AND DISPOSITION OF FORECLOSED PROPERTIES

When the Company takes possession of real estate through foreclosure it attempts to resell the property to recover all costs associated with the default, including legal fees, transaction costs, and repair expenses. Upon sale of the property, a gain or loss is realized. If a foreclosed loan is subject to a recourse agreement with an unaffiliated borrower and is not fully repaid, the borrower delivers a new promissory note to the Company in the amount of the deficiency. These promissory notes are paid in installments.

INCOME TAXES

The Company intends to continue to qualify as a REIT under the Internal Revenue Code of 1986 the (“Code”) as amended. A REIT is generally not subject to federal income tax on that portion of its REIT taxable income (“Taxable Income”) that is distributed to its shareholders provided that at least 90% of Taxable Income is distributed. No provision for taxes has been made in the consolidated financial statements, as the Company believes it is in compliance with the requirements in the Code for the treatment as a REIT. The dividend (earnings) portion of distributions paid to shareholders are considered ordinary income for income tax purposes.

FASB ASC 740 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. In accordance with FASB ASC 740, we must determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. We believe we have no such uncertain positions.

We file income tax returns in the United States federal jurisdiction. At December 31, 2011, tax returns related to fiscal years ended December 31, 2008 through December 31, 2010 remain open to possible examination by the tax authorities. No tax returns are currently under examination by any tax authorities. We did not incur any penalties or interest during the years ended December 31, 2011 and 2010.

EARNINGS PER SHARE

FASB Accounting Standards Codification (“ASC”) Topic 260, Earnings per Share, provides for the calculation of basic and diluted earnings per share. Basic earnings per share include no dilution and are computed by dividing income available to shareholders by the weighted average number of shares outstanding for the period. Dilutive earnings per share reflect the potential dilution of securities that could share in the earnings of the Company. Because the Company’s potential dilutive securities are not dilutive, the accompanying presentation is only of basic earnings per share.

DISTRIBUTION POLICY AND DISTRIBUTIONS DECLARED

The Company makes distributions each year (not including return of capital for federal income tax purposes) equal to at least 90% of the REIT’s taxable income. Since September 1997 the Company has made monthly distributions to its shareholders and intends to continue doing so. The trustees declare the distribution rate quarterly and distributions are made at the rate declared at the end of the following month for shareholders of record as of the 15th of the preceding month. The Company distributed 234%, 125% and 112% of earnings during 2011, 2010 and 2009, respectively, and made distributions in excess of earnings of 134%, 25% and 12% during 2011, 2010 and 2009, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS

In accordance with the reporting requirements of FASB ASC 825, Disclosures About Fair Value of Financial Instruments, the Company calculates the fair value of its assets and liabilities that qualify as financial instruments under this statement and includes additional information in notes to the Company’s consolidated financial statements when the fair value is different than the carrying value of those financial instruments. The estimated fair value of accrued interest receivable, accrued interest receivable from affiliate, accounts payable and accrued liabilities (including affiliates) approximate the carrying value due to the relatively short maturity of these instruments. The carrying value of residential mortgages and contracts for deed, interim mortgages (including affiliates), lines of credit receivable (including affiliates), recourse obligations from affiliates, deficiency notes (including affiliates) and lines of credit payable also approximate fair value since these instruments bear market rates of interest. None of these instruments are held for trading purposes.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current year presentation in the consolidated statements of income as follows: trust administration fees, loan servicing fees, general and administrative expenses and interest expense. Certain prior year amounts have been reclassified to conform to the current year presentation in the consolidated statements of cash flows as follows in Non-Cash Financing and Investing Activity: (increase) decrease in UDF Loan, (increase) decrease in accrued interest receivable, affiliates, (increase) decrease interim mortgages & deficiency notes, affiliates, (increase) decrease accrued interest receivable, (increase) decrease interim mortgages & deficiency notes, receipts from real estate owned.

C. DEFICIENCY NOTES – AFFILIATE AND NON-AFFILIATE

The Company has made loans in the normal course of business to affiliates and non-affiliates, the proceeds from which have been used to originate underlying loans that are pledged to the Company as security for such obligations. When principal and interest on an underlying loan is due in full, at maturity or otherwise, the corresponding obligation owed by the originating company to the Company is also due in full. If the borrower or the Company foreclosed on property securing an underlying loan, or if the Company foreclosed on property securing a purchased loan, and the proceeds from the sale were insufficient to pay the loan in full, the originating company had the option of (1) repaying the outstanding balance owed to the Company associated with the underlying loan or purchased loan, as the case may be, or (2) delivering to the Company an unsecured deficiency note in the amount of the deficiency.

As of December 31, 2010, the Company had two deficiency notes with non-affiliates in the amount of approximately $7,301,000. One note in the amount of approximately $ 1,726,000 bears interest at a rate of 14% per annum. The second note in the amount of approximately $5,575,000. The Company does not accrue interest on this note as the underlying collateral value approximates the note balance, net of reserves.

As of December 31, 2007, UMTHLC issued to the Company a variable amount promissory note in the amount of $5,100,000 to evidence its deficiency obligations to the Company. The initial principal amount of the note was approximately $1,848,000. The principal balance as of December 31, 2011 and 2010 was approximately $29,508,000 and $12,739,000, respectively. The principal balance will fluctuate from time to time based on the underlying loan activity and the amount of deficiencies realized by the affiliate. Effective January 2011, the deficiency note was modified and the interest rate was reduced from 10% to 6%. The note requires monthly principal and interest payments based on a ten-year amortization for the outstanding principal balance. The note is secured by a limited guaranty by UMTHGS, the Advisor, equal to a monthly amount not to exceed 33% of the advisory fee received by UMTHGS under the terms of its advisory agreement with the Company.

D. LONG TERM DEBT

During August 2009, the Company entered into a revolving line of credit facility with a bank for $5,000,000. The line of credit bears interest at prime plus one percent, with a floor of 5.50% and requires monthly interest payments. Principal and all unpaid interest will be due at maturity, which is August 2012. The line is collateralized by a first lien security interest in the underlying real estate financed by the line of credit. The outstanding balance on this line of credit was approximately $4,143,000 and $4,408,000 at December 31, 2011 and 2010, respectively.

On April 21, 2010, the Company entered into a term loan credit facility with a bank for $1,600,000. The note payable loan bears interest at prime plus one percent, with a floor of 7.0%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which is October 21, 2011. The term loan credit facility was extended effective December 21, 2011 through December 19, 2012, and the interest rate was reduced from 7.0% to 5.5%. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2011 and 2010 was approximately $1,107,000.

On October 26, 2011, the Company entered into a term loan credit facility with a bank for $5,000,000. The loan bears interest at prime plus one percent, with a floor of 5.0%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which is October 26, 2014. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at December 31, 2011 was approximately $181,000. As of December 31, 2011 the Company was not in compliance with one of its debt covenants; however, the Company obtained a waiver letter from the lending institution of its covenant violation.

Below is a Five Year Maturity Schedule of Long Term Debt:

		2012				2013				2014				2015				2016				Thereafter
Long Term Debt Maturity		$	5,406,000			$	97,000			$	2,502,000				-			$	250,000				-

E. OPTIONS TO PURCHASE SHARES OF BENEFICIAL INTEREST

For each year in which an Independent Trustee of the Company serves, the Trustee receives 5-year options vested upon grant to purchase 2,500 shares of Company stock at $20 per share.

Following is a summary of the options transactions:

	2011			2010		2009
Outstanding at beginning of year		45,000			32,500		20,000
Granted		12,500			12,500		12,500
Expired		(2,500	)		—		—
Exercised					—		—
Outstanding at end of year		55,000			45,000		32,500
Exercisable at end of year		55,000			45,000		32,500
Exercise price per share	$	20		$	20	$	20

F. RELATED PARTY TRANSACTIONS

1) UMTH is a Delaware limited partnership which is in the real estate finance business. UMTH holds a 99.9% limited partnership interest in UMTHLC, which originates interim loans that the Company is assigned, UMTH Land Development, L.P., which holds a 50% profit interest in UDF and acts as UDF's asset manager, and PSC, which services the Company’s residential mortgages and contracts for deed and manages the Company’s real estate owned (“REO”). In addition, UMTH has a limited guarantee of the obligations of CRG, RAFC, and SCMI, a Texas corporation that sold mortgage investments to the Company, under the Secured Notes. UDF III which is managed by UMTH Land Development, L.P., has previously provided a limited guarantee of the UDF line of credit and has purchased an economic participation in a revolving credit facility we have provided to UDF.

2) UMTHLC is a Delaware limited partnership, and subsidiary of UMTH. The Company has loaned money to UMTHLC so it can make loans to its borrowers. The loans are collaterally assigned to the Company, as security for the promissory note between UMTHLC and the Company. The unpaid principal balance of the loans at December 31, 2011 and 2010 was approximately $7,861,000 and $15,566,000, respectively.

On March 26, 2009, the Company executed a secured line of credit promissory note with UMTHLC in the amount of $8,000,000. The note bears interest at 12.50% per annum, matures on September 26, 2012 and is secured by first lien mortgage interests in single family residential properties. The outstanding balance on this line of credit at December 31, 2011 and December 31, 2010 was approximately $6,990,000 and $7,520,000, respectively, and is included in the balances noted in the paragraph above.

See Note C above for discussion of additional related party transactions with UMTHLC.

3) CRG is a Texas corporation that is 50% owned by Todd Etter and William Lowe, partners of UMTH, which owns the Advisor. CRG was in the business of financing home purchases and renovations by real estate investors. The Company loaned money to CRG to make loans to other borrowers. During 2006 the Company took direct assignment of the remaining loans from CRG with full recourse.

4) RAFC is a Texas corporation that is 50% owned by SCMI, which is owned by Todd Etter. RAFC is in the business of financing interim loans for the purchase of land and the construction of modular and manufactured single-family homes placed on the land by real estate investors. The Company continues to directly fund obligations under one existing RAFC loan, which was collaterally assigned to the Company, but does not fund new originations. The unpaid principal balance of the loans at December 31, 2011 and 2010 was approximately $16,449,000 and $16,592,000, respectively.

5) Wonder Funding, LP (“Wonder”) is a Delaware limited partnership that is owned by Ready Mortgage Corp. (“RMC”). RMC is beneficially owned by Craig Pettit. Wonder is in the business of financing interim loans for the purchase of land and the construction of single family homes. The Company has ceased funding any new originations. As of December 31, 2011, all remaining obligations owed by Wonder to the Company are included in the recourse obligations discussed below.

6) Recourse Obligations. The Company has made recourse loans to (a) CRG, which is owned by Todd Etter and William Lowe, (b) RAFC, which is owned by SCMI and two companies owned by Craig Pettit, Eastern Intercorp, Inc. and Ready Mortgage Corp. (“RMC”), and (c) SCMI, which is owned by Todd Etter, (these companies are referred to as the "originating companies"). In addition to the originating companies discussed above, the Company made loans with recourse to Wonder. Each of these entities used the proceeds from such loans to originate loans, that are referred to as "underlying loans," that are pledged to the Company as security for such originating company's obligations to the Company. When principal and interest on an underlying loan are due in full, at maturity or otherwise, the corresponding obligation owed by the originating company to the Company is also due in full.

In addition, some of the originating companies have sold loans to the Company, referred to as the "purchased loans," and entered into recourse agreements under which the originating company agreed to repay certain losses the Company incurred with respect to purchased loans.

If the originating company forecloses on property securing an underlying loan, or the Company forecloses on property securing a purchased loan, and the proceeds from the sale are insufficient to pay the loan in full, the originating company has the option of (1) repaying the outstanding balance owed to the Company associated with the underlying loan or purchased loan, as the case may be, or (2) delivering an unsecured deficiency note in the amount of the deficiency to the Company.

On March 30, 2006, but effective December 31, 2005, the Company and each originating company agreed to consolidate (1) all outstanding amounts owed by such originating company to the Company under the loans made by the Company to the originating company and under the deficiency notes described above and (2) the estimated maximum future liability to the Company under the recourse arrangements described above, into secured promissory notes. Each originating company issued to the Company a secured variable amount promissory note dated December 31, 2005 (the “Secured Notes”) in the principal amounts shown below, which amounts represent all principal and accrued interest owed as of such date. The initial principal amounts are subject to increase up to the maximum amounts shown below if the Company incurs losses upon the foreclosure of loans covered by recourse arrangements with the originating company. The Secured Notes (including related guaranties discussed below) are secured by an assignment of the distributions on the Class C units, Class D units and Class EIA units of limited partnership interest of UMT Holdings held by each originating company.

Name	Initial principal amount		Balance at December 31, 2011		Promissory Note principal amount (2)		Units pledged as security	C Units distributed during 2011		Units remaining	Estimated Collateral Value (3)
CRG	$	2,725,442	$	4,470,793	$	4,300,000	4,984 Class C and 2,710 Class D		-	2,880 Class C and 2,710 Class D	$	4,785,770
RAFC	$	3,243,369	$	8,451,488	$	7,100,000	11,165Class C, 6,659 Class D & 1,066 Class EIA		-	8,391 Class C, 6,659 Class D & and 1,066 EIA	$	13,786,203
SCMI	$	3,295,422	$	3,480,792	$	3,488,643	4,545 Class C and 3,000 Class D		-	3,013 Class C and 3,000 Class D	$	5,574,161
RAFC / Wonder(1)	$	1,348,464	$	1,958,637	$	1,400,000	1,657 Class C		-	1,238 Class C	$	1,238,000
Wonder Indemnification (1)		n/a		n/a		n/a	$1,134,000		-	n/a	$	822,000
Totals	$	10,612,697	$	18,361,710	$	16,288,643					$	26,206,134

(1)

(2)

(3)

Through September 2007, the Secured Notes incurred interest at a rate of 10% per annum. The CRG, RAFC, and RAFC/Wonder Secured Notes amortize over 15 years. The SCMI Secured Note amortizes over approximately 22 years, which was the initial amortization of the deficiency notes from SCMI that were consolidated. The Secured Notes required the originating company to make monthly payments equal to the greater of (1) principal and interest amortized over 180 months and 264 months, respectively, or (2) the amount of any distributions paid to the originating company with respect to the pledged Class C and EIA units. Effective, October, 2007, the recourse loans were modified to accommodate the anticipated increases in principal balances throughout the remaining liquidation periods of the underlying assets, suspended the principal component of the amortized loans for the period of July 2007 through June 2009, and reduced the interest rate from 10% to 6%. The above modifications have been extended through December 31, 2011. Management has not recognized any reserves on these loans as the underlying collateral value exceeds the outstanding loan amounts.

The Secured Notes have also been guaranteed by the following entities under the arrangements described below, all of which are dated effective December 31, 2005:

UMT Holdings. This guaranty is limited to a maximum of $10,582,336 of all amounts due under the Secured Notes.

SCMC. This guaranty is limited to a maximum of $2,213,000 due under the Secured Note from RAFC and is secured by an assignment of 2,213 Class C units of limited partnership interest of UMT Holdings.

KLA, Ltd. KLA has given the following guaranties: (1) Guaranty of obligations of SCMI under the First Amended and Restated Secured Variable Amount Promissory Note to the Company dated as of October 1, 2007 with a then current principal balance of $3,472,073 and is secured by an assignment of 3,000 of Guarantor’s Class D units of partnership interest in UMT Holdings, L.P. (2) Guaranty of obligations of CRG under the First Amended and Restated Secured Variable Amount Promissory Note dated as of October 1, 2007 with a then current principal balance of $4,053,799 and is secured by a pledge of 1,355 of Guarantor’s Class D units of partnership interest in UMTH.

In addition, WLL, Ltd. has obligations to UMT Holdings under an indemnification agreement between UMT Holdings, WLL, Ltd. and William Lowe, under which UMT Holdings is indemnified for certain losses on loans and advances made to William Lowe by UMT Holdings. That indemnification agreement allows UMT Holdings to offset any amounts subject to indemnification against distributions made to WLL, Ltd. with respect to the Class C and Class D units of limited partnership interest held by WLL, Ltd. Because WLL, Ltd. has pledged these Class C and Class D units to the Company to secure its guaranty of Capital Reserve Corp.'s obligations under its Secured Note, UMT Holdings and the Company entered into an Intercreditor and Subordination Agreement under which UMT Holdings has agreed to subordinate its rights to offset amounts owed to it by WLL, Ltd. to the Company’s lien on such units.

These loans were reviewed by management and no reserves are deemed necessary at December 31, 2011.

7) On June 20, 2006, the Company entered into a Second Amended and Restated Secured Line of Credit Promissory Note as modified by an amendment effective September 1, 2006 - (the "Amendment") with UDF, a Nevada limited partnership that is affiliated with the Company's Advisor, UMTHGS. The Amendment increased an existing revolving line of credit facility ("Loan") to $45 million. The purpose of the Loan is to finance UDF's loans and investments in real estate development projects. On July 29, 2009, our trustees approved an amendment to increase the revolving line of credit facility to an amount not to exceed $60,000,000. Effective December 31, 2010, the loan was extended for a period of one year and the loan amount was increased from $60,000,000 to $75,000,000. Effective December 31, 2011, the loan was extended for a period of one year and matures on December 31, 2012.

The Loan interest rate is the lower of 15% or the highest rate allowed by law, further adjusted with the addition of a credit enhancement to a minimum of 14%.

On September 19, 2008, UMT entered into an Economic Interest Participation Agreement with UDF III pursuant to which UDF III purchased (i) an economic interest in the $45,000,000 revolving credit facility (“Loan”) from UMT to UDF I and (ii) a purchase option to acquire a full ownership participation interest in the Loan (the “Option”). On July 29, 2009, our trustees approved an amendment to increase the revolving line of credit facility to an amount not to exceed $60,000,000. Effective December 31, 2010, the loan was extended for a period of one year and the loan amount was increased from $60,000,000 to $75,000,000. Effective December 31, 2011, the loan was extended for a period of one year and matures on December 31, 2012.

8) Loans made to affiliates of the Advisor. Below is a table of the aggregate principal amount of mortgages funded each year indicated, from the companies affiliated with the Advisor, and named in the table and aggregate amount of draws made by UDF under the line of credit, during the three years indicated:

Affiliated Company	2011		2010		2009
RAFC	$	1,000	$	549,000	$	2,708,000
UMTHLC	$	947,000	$	1,598,000	$	8,195,000
UDF	$	720,000	$	5,143,000	$	2,231,000

9) As of August 1, 2006, (now subject to an Advisory Agreement effective January 1, 2009) the Company entered into an Advisory Agreement with UMTHGS. Under the terms of the agreement, UMTHGS is paid a monthly trust administration fee. The fee is calculated monthly depending on the Company’s annual distribution rate, ranging from 1/12th of 1% up to 1/12th of 2% of the amount of average invested assets per month. During 2011, 2010, and 2009 the expenses for the Company’s Advisor were approximately $1,000,000, $1,138,000, and $1,042,000, respectively, and actual payments made were approximately $1,808,000, $424,000, and $1,119,000, respectively. The Advisor and its affiliates are also entitled to reimbursement of costs of goods, materials and services obtained from unaffiliated third parties for the Company’s benefit, except for note servicing and for travel and expenses incurred in connection with efforts to acquire investments for the Company or to dispose of any of its investments. The Company paid the Advisor $76,000 as reimbursement for costs associated with providing shareholder relations activities during 2011, 2010, and 2009.

The agreement also provides for a subordinated incentive fee equal to 25% of the amount by which the Company’s net income for a year exceeds a 10% per annum non-compounded cumulative return on its adjusted contributions. No incentive fee was paid during 2011, 2010 or 2009. In addition, for each year in which it receives a subordinated incentive fee, the Advisor will receive a 5-year option to purchase 10,000 Shares at a price of $20.00 per share (not to exceed 50,000 shares). As of December 31, 2011 and 2010, the Advisor has not received options to purchase shares under this arrangement.

The Advisory Agreement provides for the Advisor to pay all of the Company’s expenses and for the Company to reimburse the Advisor for any third-party expenses that should have been paid by the Company but which were instead paid by the Advisor. However, the Advisor remains obligated to pay: (1) the employment expenses of its employees, (2) its rent, utilities and other office expenses and (3) the cost of other items that are part of the Advisor's overhead that is directly related to the performance of services for which it otherwise receives fees from the Company.

The Advisory Agreement also provides for the Company to pay to the Advisor, or an Affiliate of the Advisor, a debt placement fee. The Company may engage the Advisor, or an Affiliate of the Advisor, to negotiate lines of credit on behalf of the Company. UMT shall pay a negotiated fee, not to exceed 1% of the amount of the line of credit secured, upon successful placement of the line of credit. In 2011, the Company paid debt placement fees of approximately $43,000 and $50,000 to an affiliate of the Advisor in June and October 2011, respectively, while expensing approximately $25,000. These fees are amortized monthly, as an adjustment to interest expense, over the term of the credit facility agreements described in Note D.

10) The Company pays loan servicing fees to PSC, a subsidiary of UMTH, under the terms of a Mortgage Servicing Agreement. The Company paid loan servicing fees of approximately $21,000, $24,000, and $11,000 during 2011, 2010, and 2009, respectively.

11) The Company pays “guarantee” credit enhancement fees to UDF III, affiliate of PSC and UDF, as specified under the terms of the UDF Guarantee agreement. In years 2011, 2010, and 2009, the company made cash payments in the amount of $64,000, $50,000, and $50,000, as compensation of said guarantee fees. In the years ended 2011, 2010 and 2009, the related credit enhancement expenses were $80,000, $60,000, and $6,000, respectively.

12) Affiliates UDF LOF, UDF IV and UDF X, are reimbursed for their degree of invested “participatory” interest in the Company’s construction loans, the degree of invested interest is not to succeed $2,000,000. The company made payments of such participation interest, as a net amount against the construction loan interest, in 2011, 2010, and 2009, in the amounts of $979,000, $800,000, and $191,000, respectively.

13) The Company pays UMTH LD, administrative and origination fees, for the construction loans in which UDF affiliates take an invested interest in. The fees are withheld from construction draws funded to the borrower, and are in turn paid directly to UMTH LD. In years 2011, 2010, and 2009, payments were made for the above administrative and origination fees in the amounts of $130,000, $163,000, and $58,000, respectively.

The chart below summarizes the approximate payments associated with related parties for the twelve months ended December 31, 2011, 2010 and 2009:

Related Party Payments:

		For Twelve Months Ended
Payee	Purpose	December 31, 2011				December 31, 2010				December 31, 2009
UMTHGS	Trust administration fees	$	1,808,000	96	%	$	424,000	88	%	$	1,119,000	90	%
UMTHGS	General & administrative - Shareholder Relations		76,000	4	%		76,000	12	%		76,000	6	%
UMTHGS	General & administrative –Misc.		3,000	0	%		3,000	0	%		45,000	4	%
		$	1,887,000	100	%	$	503,000	100	%	$	1,240,000	100	%

PSC	Loan Servicing Fee	$	21,000	75	%	$	24,000	92	%	$	11,000	10	%
PSC	General & Administrative – Misc.		7,000	25	%		2,000	8	%		95,000	90	%
		$	28,000	100	%	$	26,000	100	%	$	106,000	100	%

UMTH	Debt Placement Fees		93,000	100	%		-	-			-	-

UDF III	Credit Enhancement Fees		64,000	100	%		50,000	100	%		50,000	100	%

UDF LOF	Participation Interest Paid		313,000	100	%		253,000	100	%		-	-

UDF IV	Participation Interest Paid		540,000	100	%		434,000	100	%		-	-

UDF X	Participation Interest Paid		126,000	100	%		113,000	100	%		191,000	100	%

UMTH LD	Admin and Origination Fees Paid		130,000	100	%		163,000	100	%		58,000	100	%

The chart below summarizes the approximate expenses associated with related parties for the twelve months ended December 31, 2011, 2010 and 2009:

Related Party Expenses:

		For Twelve Months Ended
Payee	Purpose	December 31, 2011				December 31, 2010				December 31, 2009
UMTHGS	Trust administration fees	$	1,000,000	93	%	$	1,138,000	94	%	$	1,042,000	93	%
UMTHGS	General & administrative - Shareholder Relations		76,000	7	%		76,000	6	%		76,000	7	%
UMTHGS	General & administrative –Misc.		3,000	0	%		3,000	0	%		1,000	0	%
		$	1,079,000	100	%	$	1,217,000	100	%	$	1,119,000	100	%

PSC	Loan Servicing Fee	$	21,000	75	%	$	24,000	92	%	$	11,000	10	%
PSC	General & Administrative – Misc.		7,000	25	%		2,000	8	%		95,000	90	%
		$	28,000	100	%	$	26,000	100	%	$	106,000	100	%

UMTH	Debt Placement Fees		25,000	100	%		17,000	100	%		17,000	100	%

UDF III	Credit Enhancement Fees		80,000	100	%		60,000	100	%		6,000	100	%

G. COMMITMENTS AND CONTINGENCIES

The Company’s shares are not traded on an exchange. Below is a description of the Company’s Share Redemption Plan (“SRP”) and Dividend Reinvestment Plan (“DRIP”).

On March 18, 2009, the Board approved certain modifications to the Company’s SRP and its DRIP. Pursuant to the requirements of the SRP and the DRIP, the Company sent its shareholders notice of amendment of the SRP and the DRIP, both of which became effective on May 1, 2009. The modifications consisted of the following:

Modifications to the Share Redemption Plan

The redemption price is equal to the “Net Asset Value” (NAV) as of the end of the month prior to the month in which the redemption is made. The NAV will be established by the Board of Trustees no less frequently than each calendar quarter. For reference, at December 31, 2011 the NAV was $15.39 per share. Under the prior SRP, the redemption price was $20.00 per share. The Company will waive the one-year holding period ordinarily required for eligibility for redemption and will redeem shares for hardship requests. A “hardship” redemption is (i) upon the request of the estate, heir or beneficiary of a deceased shareholder made within two years of the death of the shareholder; (ii) upon the disability of a shareholder or such shareholder’s need for long-term care, providing that the condition causing such disability or need for long term care was not pre-existing at the time the shareholder purchased the shares and that the request is made within 270 days after the onset of disability or the need for long term care; and (iii) in the discretion of the Board of Trustees, due to other involuntary exigent circumstances of the shareholder, such as bankruptcy, provided that that the request is made within 270 days after of the event giving rise to such exigent circumstances. Previously, there was no hardship exemption. Shares will be redeemed quarterly in the order that they are presented. Any shares not redeemed in any quarter will be carried forward to the subsequent quarter unless the redemption request is withdrawn by the shareholder. Previously, shares were redeemed monthly. Repurchases are subject to cash availability and Trustee discretion. Previously, the SRP provided that repurchases were subject to the availability of cash from the DRIP or the Company’s credit line.

Modifications to the Dividend Reinvestment Plan (DRIP)

Effective May 1, 2009, our DRIP share purchase price was set at the NAV. Previously, the share purchase price was $20.00 per share.

H. CONCENTRATION OF CREDIT

Financial instruments that potentially expose the Company to concentrations of credit risk are primarily temporary cash equivalents, mortgage notes receivable, investment in trust receivable, line of credit receivable, deficiency notes and recourse obligations from affiliates. The Company maintains deposits in financial institutions that may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses related to amounts in excess of FDIC limits.

At December 31, 2011, 2010, and 2009, 41%, 37%, and 36%, respectively, of the Company’s interim mortgage investments were secured by property located in Texas. All of the Company’s mortgage investments are in the United States.

Interim loans made to affiliates of the Company’s Advisor, lines of credit receivable, deficiency notes and recourse obligations are monitored by the Company for collectability, and the Company believes the unreserved amounts will be fully collectible.

I. QUARTERLY FINANCIAL DATA (UNAUDITED)

Selected financial data (unaudited) for the years ended December 31, 2011, 2010 and 2009 is set forth below:

2011	Revenues		Net Income		Net Income (Loss) Per Share Basic/Diluted		Weighted Average Shares Outstanding
First quarter	$	1,356,812	$	574,999	$	0.09		6,429,327
Second quarter		1,334,183		315,133		0.05		6,431,577
Third quarter		1,246,677		347,656		0.05		6,434,600
Fourth quarter		1,191,839		354,365		0.06		6,435,619

For the year	$	5,129,511	$	1,592,153	$	0.25		6,432,781

2010	Revenues		Net Income		Net Income (Loss) Per Share Basic/Diluted		Weighted Average Shares Outstanding
First quarter	$	2,259,568	$	1,232,382	$	0.19		6,421,129
Second quarter		2,227,647		840,090		0.13		6,421,833
Third quarter		1,382,104		314,128		0.05		6,422,762
Fourth quarter		1,499,388		585,428		0.09		6,424,049

For the year	$	7,368,707	$	2,972,028	$	0.46		6,422,407

2009	Revenues		Net Income		Net Income (Loss) Per Share Basic/Diluted		Weighted Average Shares Outstanding
First quarter	$	2,137,989	$	1,176,221	$	0.18		6,417,020
Second quarter		2,362,607		1,124,767		0.18		6,416,625
Third quarter		2,286,378		1,117,150		0.17		6,417,973
Fourth quarter		2,284,698		778,255		0.12		6,419,831

For the year	$	9,071,672	$	4,196,393	$	0.65		6,417,813

J. SECURITIZATION AND SALE OF CLASS A NOTES

In April 2004, but effective January 1, 2004, United Mortgage Trust transferred certain residential mortgages and contracts for deed to a wholly-owned special purpose entity called UMT LT Trust (”UMTLT”), a Maryland real estate investment trust.

On April 13, 2004, through UMTLT (“Seller”) and another newly created, wholly-owned subsidiary, UMT Funding Trust, a Maryland real estate investment trust, as the “Depositor”, the Company completed a securitization of $12,593,587 principal amount of mortgage loans through the private issuance of $9,455,520 in 9.25% Class A Notes (”Notes”.) The Notes, together with $3,138,067 in Class B Certificates (the “Certificates”), (collectively referred to as the 'Securities') were issued by Wachovia Bank as Trustee pursuant to a Trust Agreement dated as of April 1, 2004 between the Bank and the Depositor. The Securities evidence the entire beneficial ownership interest in a Trust Fund created under the Trust Agreement, which consists of a pool of performing first lien residential mortgage loans (the “Mortgage Loans”) with an aggregate principal balance of $12,593,587 as of April 13, 2004. The Company transferred the Mortgage Loans to the Seller as a capital contribution and the Seller sold the Mortgage Loans to the Depositor pursuant to a Mortgage Loan Sale Agreement dated as of April 1, 2004. The Notes were sold pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended.

The Depositor then sold the $9,455,520 of the 9.25% Class A Notes to Bayview Financial Trading Group, L.P. (“Bayview”), at one hundred percent (100%) of the original balance of the Senior Security (the Class A Notes) plus accrued interest from the cut-off date to the date of purchase pursuant to a Purchase Agreement dated as of April 13, 2004 between Bayview, the Depositor and us. The Company accounted for this transaction as an asset sale at par value. The Notes were sold pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended. The Class B certificates were retained by the Depositor.

The Mortgage Loan Sale Agreement includes a right on the part of the Depositor to require the Seller to repurchase certain Mortgage Loans upon the Seller's breach of a representation or warranty with respect to certain characteristics of the Mortgage Loans. The Company agreed to guarantee the obligations of the Seller under the Mortgage Loan Sale Agreement, including the obligation of the Seller to repurchase Mortgage Loans as to which the Seller has breached a representation or warranty. The Class B Certificates give the Depositor the right to receive all remaining monthly interest after all payments due on the Class A Notes and all principal and interest on the Mortgage Loans after retirement of the Class A Notes. The securitization was not an off balance sheet transaction since the Depositor retained the Class B Certificates and the Class B Certificates are carried on the balance sheet.

Simultaneously with the Depositor’s conveyance of the Mortgage Loans to the Trustee and pursuant to the terms of a Servicing Rights Transfer Agreement dated as of April 1, 2004 the Company, as owner of the servicing rights to the Mortgage Loans, transferred the servicing rights to the Mortgage Loans to Bayview; and, pursuant to a Sub Servicing Agreement dated as of April 1, 2004 Prospect Service Corp. agreed to act as sub-servicer of the Mortgage Loans.

The purpose for the securitization and sale was to 1) increase the yield on the residential mortgages and 2) realize cash to invest in interim loans and UDF.

On January 28, 2005, UMTLT and UMT Funding Trust simultaneously entered into agreements for the securitization of $9,700,797 principal amount of our mortgage loans through the private issuance of $7,275,598 in 9.25% Class A Notes. The purpose for the securitization was to 1) increase the yield on the residential mortgages and 2) realize cash to invest in interim loans and UDF. The Notes, together with $2,425,199 in Class B Certificates, (collectively referred to as the “Securities”) were issued by Wachovia Bank as Trustee pursuant to a Trust Agreement dated as of January 1, 2005 between the Bank and the Depositor, UMT Funding Trust. The Securities evidence the entire beneficial ownership interest in a Trust Fund created under the Trust Agreement, which consists of a pool of Mortgage Loans with an aggregate principal balance of $9,700,797 as of January 1, 2005. We transferred the Mortgage Loans (excluding the servicing rights) to the Seller as a capital contribution and the Seller sold the Mortgage Loans to the Depositor pursuant to a Mortgage Loan Sale Agreement dated as of January 1, 2005.

The Depositor then sold the $7,275,598 of the 9.25% Class A Notes to Bayview Financial, L.P. (“Investor”), at one hundred percent of the Senior Security (Class A Notes) plus accrued interest from the cut-off date to the date of purchase pursuant to a Purchase Agreement dated as of January 26, 2005 between the Investor, the Depositor and us. We accounted for this transaction as an asset sale at par value. The Notes were sold pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended. The Class B certificates were retained by the Depositor.

The Mortgage Loan Sale Agreement includes a right on the part of the Depositor to require the Seller to repurchase certain Mortgage Loans upon the Seller’s breach of a representation or warranty with respect to certain characteristics of the Mortgage Loans. The Company agreed to guarantee the obligations of the Seller under the Mortgage Loan Sale Agreement, including the obligation of the Seller to repurchase Mortgage Loans as to which the Seller has breached a representation or warranty. The Class B Certificates give the Depositor the right to receipt all remaining monthly interest after all payments due on the Class A Notes and all principal and interest on the Mortgage Loans after retirement of the Class A Notes. The securitization was not an off balance sheet transaction since the Depositor retained the Class B certificates and the Class B certificates are carried on the balance sheet.

Simultaneously with the Depositor’s conveyance of the Mortgage Loans to the Trustee and pursuant to the terms of a Servicing Rights Transfer Agreement dated as of January 1, 2005 the Company, as owner of the servicing rights to the Mortgage Loans, transferred the servicing rights to the Mortgage Loans to the Investor and, pursuant to a Sub Servicing Agreement dated as of January 1, 2005 Prospect Service Corp. agreed with the Investor to act as sub-servicer of the Mortgage Loans.

The Company has rights to future cash flows arising after the Investor in the securitization trust has received the return for which they contracted, 9.25%.

Gain or loss on the sale of the mortgage loans depends in part on the previous carrying value of the loans involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair market value at the date of transfer. To obtain fair values, quoted market prices are used if available. However, quotes were not available for the Company’s retained interests, so the Company estimated fair value based on the present value of future expected cash flows using management’s best estimate of the key assumptions: credit losses, prepayment rates and discount rates commensurate with the risks involved. The Company used an expected weighted-average life of 7.2 years. Based on expected credit losses of 2.4%, prepayment rate of 3.7% and a discount rate of 11.0%, no gain or loss was recognized related to the sale of these mortgage loans as the carrying value approximated the fair value at the date of the securitization.

The sensitivity to an immediate 10% and 20% adverse change in the assumptions used to measure fair value of the securitized mortgage loans is as follows:


FOR THE 2004 SECURITIZATION
Prepayment speed assumption (annual rate):
Impact on fair value of 10% adverse change			81,000
Impact on fair value of 20% adverse change			162,000

Expected credit losses (over remaining life of loans):
Impact on fair value of 10% adverse change			128,000
Impact on fair value of 20% adverse change			257,000

Residual cash flows discount rate (annual):
Impact on fair value of 10% adverse change			71,000
Impact on fair value of 20% adverse change			137,000

Because the Company’s carrying value of the 2005 securitization was fully amortized as of December 31, 2010, the adverse change assumptions have no impact on the carrying value of this securitization at December 31, 2011. These sensitivities are hypothetical and should be used with caution. Changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

K. SHARE REDEMPTION PROGRAM

There is currently no established public trading market for our shares. As an alternative means of providing limited liquidity for our shareholders, we maintain a Share Redemption Program. Our trustees have the discretion to modify or terminate the SRP upon 30 days’ notice. Under the terms of our plan as modified and effective on May 1, 2009 (see below for a further description of the plan modifications), shareholders who have held their shares for at least one year are eligible to request that we repurchase their shares. In any consecutive 12 month period we may not repurchase more than 5% of the outstanding shares at the beginning of the 12 month period. The repurchase price is based on the NAV as of the end of the month prior to the month in which the redemption is made. The NAV will be established by our Board of Trustees no less frequently than each calendar quarter. For reference, at December 31, 2011 and 2010 the NAV was $15.39 and $15.74 per share, respectively. Under the prior SRP terms, the redemption price was $20.00 per share. The Company will waive the one-year holding period ordinarily required for eligibility for redemption and will redeem shares for hardship requests. A “hardship” redemption is (i) upon the request of the estate, heir or beneficiary of a deceased shareholder made within two years of the death of the shareholder; (ii) upon the disability of a shareholder or such shareholder’s need for long-term care, providing that the condition causing such disability or need for long term care was not pre-existing at the time the shareholder purchased the shares and that the request is made within 270 days after the onset of disability or the need for long term care; and (iii) in the discretion of the Board of Trustees, due to other involuntary exigent circumstances of the shareholder, such as bankruptcy, provided that the request is made within 270 days after of the event giving rise to such exigent circumstances. Previously, there was no hardship exemption. Shares will be redeemed quarterly in the order that they are presented. Any shares not redeemed in any quarter will be carried forward to the subsequent quarter unless the redemption request is withdrawn by the shareholder. Previously, shares were redeemed monthly. Repurchases are subject to cash availability and Trustee discretion. Previously, the SRP provided that repurchases were subject to the availability of cash from the DRIP or the Company’s credit line. We have also purchased a limited number of shares outside of our SRP from shareholders with special hardship considerations.

Share repurchases have been at prices of $15.50 to $20.00 through our SRP. Shares repurchased for less than $20 per share were 1) shares held by shareholders for less than 12 months 2) shares purchased outside of our Share Redemption Program prior to the May 1, 2009 modifications to our SRP or 3) shares purchased under our SRP subsequent to the May 1, 2009 modifications to our SRP.

The Company complies with Distinguishing Liabilities from Equity topic of FASB ASC, which requires, among other things, that financial instruments that represent a mandatory obligation of the Company to repurchase shares be classified as liabilities and reported at settlement value. The Company believes that shares tendered for redemption by the shareholder under the Company’s share redemption program do not represent a mandatory obligation until such redemptions are approved at the discretion of our board of trustees. At such time, the Company will reclassify such obligations from equity to an accrued liability based upon their respective settlement values. As of December 31, 2011, the Company had approximately $56,000 of approved redemption requests included in liabilities. These shares were redeemed in February 2012.

The following table summarizes the share repurchases made in 2011:

Month	Total number of shares repurchased		Average Purchase Price		Total number of shares purchased as part of a publicly announced plan		Total number of shares purchased outside of plan
January		-		-		-		-
February		2,574	$	15.79		2,574		-
March		-		-		-		-
April		2,516	$	15.74		2,516		-
May		893	$	15.67		893
June		-		-		-		-
July		1,012	$	15.67		1,012
August		2,505	$	15.67		2,505		-
September		361	$	15.58		361
October		3,857	$	15.58		3,857		-
November		143	$	15.50		143		-
December		272	$	15.50		272		-
Totals		14,133	$	15.55		14,133		-

L. SUBSEQUENT EVENTS

In February 2012 UMT HF II, L.P. sold an additional $1,000,000 of Secured Subordinated Notes and an additional $75,000 in March 2012. Through March 31, 2012, approximately $1,375,000 had been raised through this private placement.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2011 was performed by the Company’s Principal Executive Officer and Principal Financial Officer. Based on such evaluation, management has concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

The Company does not control the financial reporting process, and is solely dependent on UMTHGS, its Advisor, who is responsible for providing the Company with financial statements in accordance with generally accepted accounting principles in the United States. The Advisor’s disclosure controls and procedures were effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

Management’s Report on Internal Control over Financial Reporting

The Management of UMTHGS, the Company’s Advisor, is responsible for establishing and maintaining adequate internal control over financial reporting as that term is defined in Exchange Act Rule 13a-15(f) for the Company, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2011. The internal control process of UMTHGS, as is applicable to the Company, was designed to provide reasonable assurance to Management regarding the preparation and fair presentation of published financial statements, and includes those policies and procedures that:

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles in the United States, and that the Company’s receipts and expenditures are being made only in accordance with authorization of management, and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

All internal control processes, no matter how well designed, have inherent limitations. Therefore, even those processes determined to be effective can provide only reasonable assurance with respect to the reliability of financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

Management assessed the effectiveness of its internal control over financial reporting, as is applicable to the Company, as of December 31, 2011. In making this assessment, it used the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, management concluded that the Advisor’s internal control over financial reporting, as is applicable to the Company, was effective as of December 31, 2011.

The Company is a “smaller reporting company” for the 2011 fiscal year. Accordingly, the Company’s independent registered public accounting firm is not currently required to issue an audit report on the Company’s internal control over financial reporting.

Changes in Internal Controls Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter of 2011, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

We do not have any employees. The trustees are responsible for the overall management and control of the Company’s business. The Advisor manages the day-to-day operations and The Company has retained the Advisor to use its best efforts to seek out and present to management suitable and a sufficient number of investment opportunities that are consistent with the Company’s investment policies and objectives.

The Company’s Declaration of Trust provides for not less than three or more than nine trustees, a majority of which must be independent trustees, except for a period of 60 days after the death, removal or resignation of an independent trustee. Each trustee serves for a one-year term. There are currently five trustees, four of which are independent trustees.

THE COMPANY’S TRUSTEES AND OFFICERS

The Company’s trustees and officers are as follows:

Name	Age	Offices Held
Stuart Ducote	65	President
Michele A. Cadwell	60	Independent Trustee
Charles Michael Gillis, JDs	61	Independent Trustee
Phillip K. Marshall	62	Independent Trustee
Roger C. Wadsworth	64	Independent Trustee
Leslie Wylie	60	Independent Trustee

Stuart Ducote became a director and President of United Mortgage Trust on July 29, 2009. Mr. Ducote has served as the Chief Executive and Chief Financial Officer of numerous public and privately held companies. From 2006 through 2008, he was the co-owner of Ultra Realty, a privately held company involved with the acquisition, rehabilitation and development of residential properties and residential / commercial brokerage. From 2003 – 2006, he served as Chief Financial Officer for Humitech International Group, Inc., a rapidly growing international franchise operation, where he was responsible for systems implementation, franchisee contracts, all regulatory matters, debt financing to acquire mining operations and oversight of facilities operations. From 2001 – 2003 he served as Chief Financial Officer of People Solutions, Inc., where he structured the company in preparation for a capital raise and merger activity. From 1997 – 2000, he was the Chief Financial Officer of Jobs.Com, an Internet-based recruiting and on-line job marketing company, where he raised over $110 million in venture capital, built national brand recognition and positioned the company for an initial public offering. From 1994 – 1997 he served as a Trustee, Chief Executive and Chief Financial Officer for a private family trust and related operating companies, where he had oversight responsibilities for operating companies in the oil and gas, manufacturing, real estate acquisition and development, and power generation industries. From 1980 – 1994, he served as Chief Executive and Chief Financial Officer of Provident Bancorp of Texas, Inc., where he directed the formation, acquisition, and operation of numerous financial institutions, and successfully merged banks into a multi-bank holding company. Prior to 1984, Mr. Ducote worked in public accounting for approximately twelve years. He is a graduate of the University of Texas.

On July 29, 2009, the board of trustees appointed Leslie Wylie as a member of the board of trustees to fill the remaining term of Ms. Griffin.

Leslie Wylie has served as an independent trustee of the Company since July 29, 2009. Ms. Wylie brings extensive experience in general corporate business and contractual matters, in the acquisition and divestiture of assets and in complex transactions to the Company’s board. Since 2006, she has served as Sr. Vice President and General Counsel for Trek Resources, Inc., a Dallas based oil and gas producer, where she is responsible for all legal, land and land administration functions. From 2003-2006, she was Vice president – Legal, Land and Regulatory for Crosstex Energy Services, LP, a mid-stream oil and gas company. Ms. Wylie has held land and legal managerial and/or officer positions with ENSERCH Corporation, EEX Corporation, PGS Reservoir Consultants, Inc. Hilcorp Energy Company, and various other oil and gas independents. She has been involved in the acquisition and divestiture of over 1.6 billion dollars of assets and has worked on several international projects for her employers. Ms. Wylie is licensed by the State Bars of Oklahoma and Texas, is a Certified Professional Landman and holds a B.A. degree from Oklahoma State University and a J.D. degree from the University of Tulsa College of Law.

Michele A. Cadwell has been one of the Company’s trustees since August 1997. She was a fee attorney for Commonwealth Land Title of Dallas, Texas, from 1999 until May, 2006, when she returned to private practice as an attorney for the oil and gas industry. From 1998 to 1999, Ms. Cadwell was Manager – Onshore Land Operations with EEX Corp. Her primary responsibilities included drafting and negotiating exploration and marketing agreements, analysis of legislation and regulatory proposals, researching complex mineral titles, organization and management of non-core property divestitures, settlement of land owner disputes and advising and testifying on matters before the Oklahoma Corporation Commission. From 1980 until 1998 she was employed with Enserch Exploration, Inc. as Senior Land Representative. Ms. Cadwell is a 1974 graduate of the University of Oklahoma with a Bachelors of Arts Degree in English and a Juris Doctor Degree in 1978. She is admitted to both the Oklahoma and Texas bars. Ms. Cadwell is a member of the Investment Committee, Business Model Committee, and Liquidity Committee.

Phillip K. Marshall has served as one of the Company’s independent trustees since September, 2006. Mr. Marshall is a certified public accountant in the State of Texas. From May, 2007 to the present, Mr. Marshall has served as Chief Financial Officer of Rick’s Cabaret International, Inc., a publicly traded restaurant and entertainment company. From 2003 to May 2007, he has served as Chief Financial Officer of CDT Systems, Inc., a publicly-held company located in Addison, Texas that is engaged in water technology. From 2001 to 2003, he was a principal of Whitley Penn, independent certified public accountants. Prior to 2001, Mr. Marshall served as Director of Audit Services at Jackson & Rhodes PC and was previously an audit partner at Toombs, Hall and Foster and at KPMG Peat Marwick. Mr. Marshall received a BBA in Accounting, Texas State University in 1972. He is a Certified Public Accountant. Mr. Marshall is Chairman of the Audit Committee. Mr. Marshall is a member of the Audit Committee, Financial Reporting Committee, and Liquidity Committee.

Roger C. Wadsworth has served as one of the Company’s independent trustees since September 2006. Mr. Wadsworth has been the Chief Operating Officer of IMS Securities, Inc., a Financial Industry Regulatory Authority (“FINRA”) member firm, since 2002. He holds a Series 7, 24, and FINRA 66 and 77 License and is a licensed insurance agent in the State of Texas. Since 2003, he has also served as the National Director and Board Member of The National Due Diligence Alliance, Inc., a non-profit trade association of Independent FINRA Broker-Dealer firms. From 1988 to 2002, he served as the Senior Vice President & Chief Administrative Officer of INVESTools, Inc. NASDAQ: SWIM (formerly Telescan, Inc.), a publicly-held company in the financial data, information, and analysis industry. INVESTools is now a part of TD AMERITRADE. Prior to 1988, he was the Co-Founder and Vice President of Information Management Services, Inc., a financial consulting and management firm. Mr. Wadsworth received a Bachelor of Business Administration in Finance from the University of Houston in 1971. Mr. Wadsworth is a member of the Investment Committee, Business Model Committee, and Audit Committee.

Charles Michael Gillis has served as an independent trustee of the Company since April 2008. He is an attorney who has been in private practice since 1978. From 1988 through 2000, Mr. Gillis was a partner in the law firm of Gillis & Slogar. From 2000 through the present, Mr. Gillis is a partner at the law firm of Gillis, Paris & Heinrich, PLLC in Houston, Texas. Mr. Gillis practices in the area of Federal income tax with an emphasis on real estate, mergers and acquisitions and international taxation. Mr. Gillis has been an expert witness in legal matters involving Federal income tax and securities. Mr. Gillis is a 1971 graduate of the University of California at Los Angeles, a 1974 graduate of Bates College of Law, University of Houston (and a member of its honor society) and a 1975 Masters of Law (In Taxation) graduate of New York University. He is admitted to both the Texas and California bars. Mr. Gillis has been frequently listed in The Bar Register of Preeminent Lawyers published by Martindale-Hubbell.

THE ADVISOR

Effective on August 1, 2006, (now subject to an Advisory Agreement effective January 1, 2010) the Company entered into an Advisory Agreement with UMTHGS (“Advisor”) to manage the Company’s affairs and to select the investments the Company purchases. The Advisor is controlled by UMT Services, Inc., the general partner of UMT Holdings, L.P. Todd F. Etter, Hollis M. Greenlaw and Michael K. Wilson are directors of UMT Services, Inc.

The directors and officers of UMT Services, Inc. and UMTHGS are set forth below.

Name	Age	Offices Held
Todd F. Etter	62	Chairman and Director of UMT Services, Inc.
Hollis M. Greenlaw	47	Director and Chief Executive Officer of UMT Services, Inc.
Michael K. Wilson	49	Director of UMT Services, Inc.
David A. Hanson	49	President of UMTHGS and CFO of UMTH

Todd F. Etter. Mr. Etter is a founding partner of UMT Holdings, LP (“UMTH”) and has served as director, partner and Chairman of UMT Services, Inc. the general partner of UMTH, UMTH General Services, LP (“UMTHGS”) and UMTH Land Development, LP (“UMTHLD”) and Executive Vice President of UMTHLD since March 2003. UMT Holdings, LP originates, purchases, sells, and services loans for the development of single-family lots and loans for the construction of single-family homes through its subsidiary UMTHLD. UMT Holdings, LP also provides real estate-related corporate finance services through its subsidiary UMTHGS. UMTHGS serves as the advisor to UDF IV and United Mortgage Trust. Mr. Etter serves as Chairman of the general partner of UDF I and UDF II and Executive Vice President of the general partner of UDF III, each of which are limited partnerships formed to originate, purchase, sell, and service land development loans and/or equity participations. Since 2000, Mr. Etter has been the Chairman of UMT Advisors, Inc., which served as the advisor to United Mortgage Trust from 2000 through July 31, 2006, and since 1996, he has been Chairman of Mortgage Trust Advisors, Inc., which served as the advisor to United Mortgage Trust from 1996 to 2000. Subsequent to the completion of the terms of their advisory agreements with United Mortgage Trust, neither UMT Advisors, Inc. nor Mortgage Trust Advisors, Inc. has been engaged in providing advisory services. Mr. Etter has overseen the growth of United Mortgage Trust from its inception in 1997 to over $160 million in capital. Since 1998, Mr. Etter has been a 50% owner of and has served as a director of Capital Reserve Corp. Since 2002, he has served as an owner and director of Ready America Funding Corp. Both Capital Reserve Corp. and Ready America Funding Corp. are Texas corporations that originate, sell, and service mortgage loans for the purchase, renovation, and construction of single-family homes. In 1992, Mr. Etter formed, and since that date has served as President of, South Central Mortgage, Inc. (“SCMI”), a Dallas, Texas-based mortgage banking firm. In July 2003, Mr. Etter consolidated his business interests in Capital Reserve Corp., Ready America Funding Corp. and SCMI into UMTH. From 1980 through 1987, Mr. Etter served as a Principal of South Central Securities, an NASD member firm. In 1985, he formed South Central Financial Group, Inc., a Dallas, Texas-based investment banking firm, and he continues to serve as its President; however, since 1992, South Central Financial Group, Inc. has not actively engaged in investment banking activities. From 1974 through 1981, he was Vice President of Crawford, Etter and Associates, a residential development, marketing, finance, and construction company. Mr. Etter currently serves as a member of the Advisory Board of Community Trust Bank, Plano, Texas. Mr. Etter received a Bachelor of Arts degree from Michigan State University in 1972.

Hollis M. Greenlaw. Mr. Greenlaw has served as partner, Vice Chairman and Chief Executive Officer of UMT Holdings, L.P. (“UMTH”) and as President, Chief Executive Officer and a director of UMT Services, Inc. (“UMT Services”) since March 2003. He has also served as President and Chief Executive Officer of UMTH Land Development, L.P. (“UMTH LD”) since March 2003. Mr. Greenlaw is also the co-founder and Chief Executive Officer of UDF I, UDF II, and UDF III, affiliated real estate finance companies that provide custom financing and make opportunistic purchases of land for residential lot development and home construction. As Chief Executive Officer of the United Development Funding family of entities, Mr. Greenlaw has directed the funding of more than $1 billion in loans and equity investments through United Development Funding products, receiving more than $600 million in repayments to date, most notably through UDF III. From March 1997 until June 2003, Mr. Greenlaw served as Chairman, President, and Chief Executive Officer of a multi-family real estate development and management company owned primarily by The Hartnett Group, Ltd., a closely-held private investment company managing more than $40 million in assets. There he developed seven multi-family communities in Arizona, Texas, and Louisiana with a portfolio value exceeding $80 million. Prior to joining The Hartnett Group, Mr. Greenlaw was an attorney with the Washington, D.C. law firm, Williams & Connolly, where he practiced business and tax law. Mr. Greenlaw was a member of Phi Beta Kappa at Bowdoin College and received his Juris Doctorate from the Columbia University School of Law in 1990. Mr. Greenlaw is a member of the Maine, District of Columbia, and Texas bars.

Michael K. Wilson. Mr. Wilson has served as Executive Vice President and a director of UMT Services, Inc. since August 2005, President of UMTH since June 2009, and has been a partner of UMTH since January 2007. Mr. Wilson leads the marketing, sales, distribution and investor relations efforts for UMTH platform companies. From August 2005 through June 2009 Mr. Wilson served as President of UMTH Funding Services, where he was responsible for day-to-day distribution activities, including sales planning and execution, platform design and management, sales technology development and implementation. During his tenure Mr. Wilson directed the capital raise of over $330 million in United Development Funding securities through independent FINRA-member broker-dealers. From January 2004 through July 2005, Mr. Wilson served as Senior Vice President of Marketing for UMTH. From January 2003 through January 2004, Mr. Wilson served as Senior Vice President of Operations of Interelate, Inc., a marketing services business process outsourcing firm. From September 2001 to December 2002, Mr. Wilson was the sole principal of Applied Focus, LLC, an independent management consulting company that provided management consulting services to executives of private technology companies. Mr. Wilson continues to serve as a consultant for Applied Focus, LLC. From April 1998 to September 2001, Mr. Wilson served as Senior Director and Vice President of Matchlogic, the online database marketing division of Excite@Home, where he directed outsourced ad management and database marketing services for Global 500 clients. From July 1985 to April 1998, Mr. Wilson was employed with Electronic Data Systems in Detroit, Michigan where he led several multi-million dollar IT services engagements in the automotive industry. Mr. Wilson graduated from Oakland University in 1985 with a Bachelor of Science degree in Management Information Systems and earned a Master of Business Administration degree from Wayne State University in 1992. Mr. Wilson also attended the Thunderbird School of Global Management executive development program.

David A. Hanson. Mr. Hanson has served as President of UMTHGS since joining the company in June 2007. He also serves as Chief Financial Officer of UMT Holdings and UMT Services. Mr. Hanson has over 22 years of experience as a financial executive, principally in the in the residential housing industry and as an accountant with an international public accounting firm. From 2006 to 2007, he was a Director of Land Finance for the Central/Eastern Region at Meritage Homes Corporation (“Meritage”), the twelfth largest publicly-traded homebuilder. While at Meritage, Mr. Hanson handled all aspects of establishing, financing, administering and monitoring off-balance sheet FIN 46 compliant entities for the Central/Eastern Region. From 2001 to 2006, he was employed with Lennar Corporation, a national homebuilding company, serving in various capacities including Regional Finance Manager, acting homebuilding Division President, Regional Controller, and Controller for both homebuilding and land divisions. From 1999 to 2001, Mr. Hanson was the Director, Finance and Administration for One, Inc., a technology consulting firm. From 1996 to 1999, Mr. Hanson was the Vice President, Finance and Accounting for MedicalControl, Inc., a publicly-traded managed healthcare company. Prior to 1996, he was employed with Arthur Andersen LLP, an international accounting and consulting firm, for approximately nine years. He graduated from the University of Northern Iowa in 1984 with a Bachelor of Arts degree in Financial Management/Economics and in 1985 with a Bachelor of Arts degree in Accounting. He is a Certified Public Accountant and Certified Management Accountant.

SUMMARY OF THE ADVISORY AGREEMENT

With the approval of the Company’s trustees, including all of the Independent trustees, the Company entered into a contract with the Advisor (the “Advisory Agreement”) effective on August 1, 2006, under which the Advisor provides the Company with the Company’s day-to-day administrative services. In addition, the Advisor is obligated to use its best efforts to develop and present to management, whether through its own efforts or those of third parties retained by it, a sufficient number of suitable investment opportunities that are consistent with the Company’s investment policies and objectives as well as any investment programs that the trustees may adopt from time to time in conformity with the Declaration of Trust.

Although the Company’s trustees retain exclusive authority over the Company’s management, the conduct of the Company’s affairs and the management and disposition of the Company’s assets, the trustees have initially delegated to the Advisor, subject to the supervision and review of the trustees and consistent with the provisions of the Company’s Declaration of Trust, the following responsibilities:

develop underwriting criteria and a model for the Company’s investment portfolio;

acquire, retain or sell the Company’s mortgage investments;

seek out, present and recommend investment opportunities consistent with the Company’s investment policies and objectives, and negotiate on the Company’s behalf with respect to potential investments or the disposition thereof;

pay the Company’s debts and fulfill the Company’s obligations, and handle, prosecute and settle any of the Company’s claims, including foreclosing and otherwise enforcing mortgages and other liens securing investments;

obtain such services as may be required by the Company for mortgage brokerage and servicing and other activities relating to the Company’s investment portfolio;

evaluate, structure and negotiate prepayments or sales of mortgage investments;

manage the structuring and registration of additional shares for the Company’s offering;

develop the Company’s administrative budget;

administer the Company’s day-to-day operations;

coordinate marketing and sales of the Company’s shares;

develop and maintain the Company’s web site;

administer the Company’s Share Repurchase and Dividend Reinvestment Programs;

coordinate engagement of market makers and listing of the Company’s shares at the appropriate time;

develop institutional and retail secondary market interest for the Company’s shares;

arrange the Company’s note warehousing credit facility and provide required financial guarantees;

negotiate the Company’s loan purchases;

develop and monitor the Company’s investment policies;

develop a high yield loan acquisition program;

oversee loan servicing for the Company’s portfolio;

oversee acquisition and disposition of the Company’s investments;

manage the Company’s assets; and from time to time, or as requested by the trustees, make reports to the Company regarding the Advisor's performance of the foregoing services.

The Advisory Agreement had an initial term of one year and is subject to an annual evaluation of the performance of the Advisor by the trustees. The Advisory Agreement may be terminated (1) without cause by the Advisor or (2) with or without cause by a majority of the independent trustees. Termination under either of those provisions may be made without penalty and upon 60 days' prior written notice to the non-terminating party.

The Advisor may engage in other business activities related to real estate, mortgage investments or other investments whether similar or dissimilar to those made by the Company or act as advisor to any other person or entity having investment policies whether similar or dissimilar to ours (including other REITs). Except for the allocation of investments between the Company and other affiliated programs as described in related party transactions, the officers and directors of the Advisor and all persons controlled by the Advisor and its officers and directors may take advantage of an opportunity for their own account or present or recommend it to others, however, they are obligated to present an investment opportunity to the Company if (1) that opportunity is of a character which could be taken by the Company, (2) that opportunity is compatible with the Company’s investment objectives and policies and (3) the Company has the financial resources to take advantage of that opportunity.

The Declaration of Trust provides that the independent trustees are to determine, at least annually, that the amount of compensation the Company pays the Advisor is reasonable in relation to the nature and quality of the services performed, based on the factors set forth in the Declaration of Trust and such other factors as they deem relevant, including the size of the fee in relation to the size, composition and profitability of the Company’s investment portfolio, the success of the Advisor in generating opportunities that meet the Company’s investment objectives, the rates charged to other REITs and to investors other than REITs by advisors performing similar services, the amount of additional revenues realized by the Advisor and its Affiliates for other services performed for the Company, the quality and extent of service and advice furnished by the Advisor, the performance of the Company’s investment portfolio and the quality of the Company’s investment portfolio in relationship to the investments generated by the Advisor for its own account.

The Advisory Agreement provides for the Advisor to pay all of the Company’s expenses and for the Company to reimburse the Advisor for any third-party expenses that should have been paid by the Company but which were instead paid by the Advisor. However, the Advisor remains obligated to pay: (1) the employment expenses of its employees, (2) its rent, utilities and other office expenses (except those relating to office space occupied by the Advisor that is maintained by the Company) and (3) the cost of other items that generally fall under the category of the Advisor's overhead that is directly related to the performance of services for which it is otherwise receiving fees from the Company.

CODE OF ETHICS

The Company’s Board of Trustees has adopted a Code of Conduct and Business Ethics that is applicable to all trustees, officers and employees of the company. You may obtain a copy of this document free of charge by mailing a written request to: Investor Relations, United Mortgage Trust, 1301 Municipal Way, Suite 220, Grapevine, TX 76051. You may also access the Company’s Code of Conduct through the Company’s website: www.unitedmortgagetrust.com

ITEM 11. EXECUTIVE COMPENSATION

The Company has no employees. The Company’s operations are maintained by the Company’s Advisor, under the guidance of the Company’s trustees.

Compensation of Trustees and Executives

Trustees who are not independent trustees do not receive any compensation for acting as trustees. During 2006 and prior, Independent trustees were entitled to receive the greater of $1,000 per meeting or a minimum of $15,000 per year. During 2007, Independent trustees were entitled to receive $1,000 per regular meeting or committee meeting attended. For each year in which they serve, each Independent Trustee will also receive 5-year options to purchase 2,500 shares at an exercise price of $20 per share (not to exceed 12,500 shares per Trustee). In addition, independent trustees, serving prior to the Company’s merger termination have received compensation for their activities as part of the independent committee formed to evaluate and negotiate the proposed merger.

The table below provides information on Trustee Compensation:

Name/Year	Fees Earned		Stock Awarded		Value of Options Awarded if Exercised(5)		Non-Equity Incentive Plan Comp.(1)		Change in Pension Value and Non- Qualified Deferred Comp. Earnings (2)		All other Comp.		Total
2011
Stuart Ducote (7)		—		—		—		—		—	$	60,000	$	60,000
Michele A. Cadwell	$	16,000		—		—		—		—		—	$	16,000
Phillip K. Marshall	$	20,000		—		—		—		—		—	$	20,000
Roger C. Wadsworth	$	16,000		—		—		—		—		—	$	16,000
Chuck Gillis (4)	$	16,000		—		—		—		—		—	$	16,000
Leslie Wylie (6)	$	16,000		—		—		—		—		—	$	16,000

2010
Stuart Ducote (7)		—		—		—		—		—	$	60,000	$	60,000
Michele A. Cadwell	$	16,000		—		—		—		—		—	$	16,000
Phillip K. Marshall	$	20,000		—		—		—		—		—	$	20,000
Roger C. Wadsworth	$	16,000		—		—		—		—		—	$	16,000
Chuck Gillis (4)	$	16,000		—		—		—		—		—	$	16,000
Leslie Wylie (6)	$	16,000		—		—		—		—		—	$	16,000

2009
Stuart Ducote (7)		—		—		—		—		—	$	30,000	$	30,000
Christine Griffin (3) (6)		—		—		—		—		—	$	36,000	$	36,000
Michele A. Cadwell	$	16,000		—		—		—		—		—	$	16,000
Phillip K. Marshall	$	16,000		—		—		—		—		—	$	16,000
Roger C. Wadsworth	$	16,000		—		—		—		—		—	$	16,000
Chuck Gillis (4)	$	16,000		—		—		—		—		—	$	16,000
Leslie Wylie (6)	$	6,000		—		—		—		—		—	$	6,000

(1) The Company does not have an incentive plan.

(2) The Company does not have a pension plan.

(3) Denotes a Trustee who is not considered an Independent Trustee. Ms. Griffin is not independent because she is an officer of the Company. She therefore is not eligible for options or trustee fees. She has received compensation on a consulting basis, subsequent to her retirement from day-to-day operations.

(4) Denotes a Trustee who served less than a full year. Mr. Evans resigned from the board effective, April 2, 2008. Mr. Gillis was appointed to the board in April 2008, following the resignation of Mr. Evans.

(5) All options are priced at the greater of the Company’s initial offering price of $20 per share or the then current market value and therefore carry no intrinsic value.

(6) Christine Griffin resigned from the board effective, August 14, 2009. Ms. Wylie was appointed to the board effective August 14, 2009, following the resignation of Ms. Griffin

(7) On July 29, 2009, the Board of Trustees appointed Stuart Ducote as President of United Mortgage Trust effective with Ms. Griffin’s resignation. The Company paid a monthly fee of $5,000 to a third party firm to retain Mr. Ducote’s services as President of UMT beginning in July 2009.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of December 31, 2011 by each person who is known to the Company to be the beneficial owner of more than 5% of the Company’s shares and the beneficial ownership of all trustees and officers as a group as of such date.

Name	Number of Shares (1)		Percent of Class
Michele A. Cadwell (2)	12,500	(3)		0.19	%
Phillip K. Marshall (2)	12,500	(3)		0.19	%
Roger C. Wadsworth (2)	12,500	(3)		0.19	%
Chuck Gillis (2)	10,000	(3)		0.16	%
Leslie Wylie	7,500	(3)		0.12	%
All Trustees and Executive Officers as a Group (5 persons)	55,000	(4)		0.86	%

(1)

For purposes of this table, shares indicated as being owned beneficially include shares that the beneficial owner has the right to acquire within 60 days of March 1, 2011. For the purpose of computing the percentage of the outstanding shares owned by a shareholder, shares that may be acquired during the 60 days following March 1, 2012 are deemed to be outstanding securities of the class owned by that shareholder but are not deemed to be outstanding for the purpose of computing the percentage by any other person.

(2)

A trustee and/or executive officer of the Company. The address of all trustees and officers is c/o United Mortgage Trust, 1301 Municipal Way, Suite 220, Grapevine, TX 76051, telephone (214) 237-9305 or (800)955-7917, facsimile (214) 237-9304.

(3)

Includes shares issuable upon the exercise of stock options at an exercise price of $20.00 per share.

(4)

Includes the shares described in footnote (3) above.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

1) UMTH is a Delaware limited partnership which is in the real estate finance business. UMTH holds a 99.9% limited partnership interest in UMTHLC, which originates interim loans that the Company is assigned, UMTH Land Development, L.P., which holds a 50% profit interest in UDF and acts as UDF's asset manager, and PSC, which services the Company’s residential mortgages and contracts for deed and manages the Company’s real estate owned (“REO”). In addition, UMTH has a limited guarantee of the obligations of Capital Reserve Group (“CRG”), Ready America Funding Corp (“RAFC”), and South Central Mortgage, Incorporated (“SCMI”), a Texas corporation that sold mortgage investments to the Company, under the Secured Notes. United Development Funding III, L.P., (“UDF III”) which is managed by UMTH Land Development, L.P., has previously provided a limited guarantee of the UDF line of credit and has purchased an economic participation in a revolving credit facility we have provided to UDF.

See Note C above for discussion of additional related party transactions with UMTHLC.

Name	Initial principal amount		Balance at December 31, 2011		Promissory Note principal amount (2)		Units pledged as security	C Units distributed during 2011		Units remaining	Estimated Collateral Value (3)
CRG	$	2,725,442	$	4,470,793	$	4,300,000	4,984 Class C and 2,710 Class D		-	2,880 Class C and 2,710 Class D	$	4,785,770
RAFC	$	3,243,369	$	8,451,488	$	7,100,000	11,165Class C, 6,659 Class D & 1,066 Class EIA		-	8,391 Class C, 6,659 Class D & and 1,066 EIA	$	13,786,203
SCMI	$	3,295,422	$	3,480,792	$	3,488,643	4,545 Class C and 3,000 Class D		-	3,013 Class C and 3,000 Class D	$	5,574,161
RAFC / Wonder(1)	$	1,348,464	$	1,958,637	$	1,400,000	1,657 Class C		-	1,238 Class C	$	1,238,000
Wonder Indemnification (1)		n/a		n/a		n/a	$1,134,000		-	n/a	$	822,000
Totals	$	10,612,697	$	18,361,710	$	16,288,643					$	26,206,134

(1)

(2)

(3)

The Secured Notes have also been guaranteed by the following entities under the arrangements described below, all of which are dated effective December 31, 2005:

UMT Holdings. This guaranty is limited to a maximum of $10,582,336 of all amounts due under the Secured Notes.

SCMC. This guaranty is limited to a maximum of $2,213,000 due under the Secured Note from RAFC and is secured by an assignment of 2,213 Class C units of limited partnership interest of UMT Holdings.

KLA, Ltd. KLA has given the following guaranties: (1) Guaranty of obligations of SCMI under the First Amended and Restated Secured Variable Amount Promissory Note to the Company dated as of October 1, 2007 with a then current principal balance of $3,472,073 and is secured by an assignment of 3,000 of Guarantor’s Class D units of partnership interest in UMT Holdings, L.P. (2) Guaranty of obligations of CRG under the First Amended and Restated Secured Variable Amount Promissory Note dated as of October 1, 2007 with a then current principal balance of $4,053,799 and is secured by a pledge of 1,355 of Guarantor’s Class D units of partnership interest in UMTH.

In addition, WLL, Ltd. has obligations to UMT Holdings under an indemnification agreement between UMT Holdings, WLL, Ltd. and William Lowe, under which UMT Holdings is indemnified for certain losses on loans and advances made to William Lowe by UMT Holdings. That indemnification agreement allows UMT Holdings to offset any amounts subject to indemnification against distributions made to WLL, Ltd. with respect to the Class C and Class D units of limited partnership interest held by WLL, Ltd. Because WLL, Ltd. has pledged these Class C and Class D units to the Company to secure its guaranty of Capital Reserve Corp.'s obligations under its Secured Note, UMT Holdings and the Company entered into an Intercreditor and Subordination Agreement under which UMT Holdings has agreed to subordinate its rights to offset amounts owed to it by WLL, Ltd. to the Company’s lien on such units.

These loans were reviewed by management and no reserves are deemed necessary at December 31, 2011.

The Loan interest rate is the lower of 15% or the highest rate allowed by law, further adjusted with the addition of a credit enhancement to a minimum of 14%.

Affiliated Company	2011		2010		2009
RAFC	$	1,000	$	549,000	$	2,708,000
UMTHLC	$	947,000	$	1,598,000	$	8,195,000
UDF	$	720,000	$	5,143,000	$	2,231,000

The chart below summarizes the approximate payments associated with related parties for the twelve months ended December 31, 2011, 2010 and 2009:

Related Party Payments:

		For Twelve Months Ended
Payee	Purpose	December 31, 2011				December 31, 2010				December 31, 2009
UMTHGS	Trust administration fees	$	1,808,000	96	%	$	424,000	88	%	$	1,119,000	90	%
UMTHGS	General & administrative - Shareholder Relations		76,000	4	%		76,000	12	%		76,000	6	%
UMTHGS	General & administrative –Misc.		3,000	0	%		3,000	0	%		45,000	4	%
		$	1,887,000	100	%	$	503,000	100	%	$	1,240,000	100	%

PSC	Loan Servicing Fee	$	21,000	75	%	$	24,000	92	%	$	11,000	10	%
PSC	General & Administrative – Misc.		7,000	25	%		2,000	8	%		95,000	90	%
		$	28,000	100	%	$	26,000	100	%	$	106,000	100	%

UMTH	Debt Placement Fees		93,000	100	%		-	-			-	-

UDF III	Credit Enhancement Fees		64,000	100	%		50,000	100	%		50,000	100	%

UDF LOF	Participation Interest Paid		313,000	100	%		253,000	100	%		-	-

UDF IV	Participation Interest Paid		540,000	100	%		434,000	100	%		-	-

UDF X	Participation Interest Paid		126,000	100	%		113,000	100	%		191,000	100	%

UMTH LD	Admin and Origination Fees Paid		130,000	100	%		163,000	100	%		58,000	100	%

The chart below summarizes the approximate expenses associated with related parties for the twelve months ended December 31, 2011, 2010 and 2009:

Related Party Expenses:

		For Twelve Months Ended
Payee	Purpose	December 31, 2011				December 31, 2010				December 31, 2009
UMTHGS	Trust administration fees	$	1,000,000	93	%	$	1,138,000	94	%	$	1,042,000	93	%
UMTHGS	General & administrative - Shareholder Relations		76,000	7	%		76,000	6	%		76,000	7	%
UMTHGS	General & administrative –Misc.		3,000	0	%		3,000	0	%		1,000	0	%
		$	1,079,000	100	%	$	1,217,000	100	%	$	1,119,000	100	%

PSC	Loan Servicing Fee	$	21,000	75	%	$	24,000	92	%	$	11,000	10	%
PSC	General & Administrative – Misc.		7,000	25	%		2,000	8	%		95,000	90	%
		$	28,000	100	%	$	26,000	100	%	$	106,000	100	%

UMTH	Debt Placement Fees		25,000	100	%		17,000	100	%		17,000	100	%

UDF III	Credit Enhancement Fees		80,000	100	%		60,000	100	%		6,000	100	%

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Whitley Penn LLP has served as the Company’s independent registered public accounting firm since July 2002. The Board of Trustees approves all audits, non-audit, tax and other fees payable to the Company’s auditors.

The following table reflects fees incurred to Whitley Penn LLP for services rendered to the Company in 2011, 2010 and 2009:

Nature of Service	2011		2010		2009		Purpose
Audit fees	$	144,500	$	140,000	$	164,000	For audit of the Company’s annual financial statements, review of Quarterly financial statements included in the Company’s Forms 10-Q and review of other SEC filings
Tax fees	$	9,500	$	8,000	$	10,000	For preparation of tax returns and tax compliance
All other fees		—		—		—

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) List of documents filed:

(1) Financial Statements of the Company are included in Item 8.

(2) Financial Statement Schedules – all schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements or the notes thereto included in Item 8.

(3) Exhibits. See the Exhibit Index following for a list of the exhibits that are filed as part of this report.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 30, 2012.

	UNITED MORTGAGE TRUST

	By:	/S/STUART DUCOTE
		Stuart Ducote, President

Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/S/CHUCK GILLIS	Independent Trustee	March 30, 2012
Chuck Gillis

/S/MICHELE A. CADWELL	Independent Trustee	March 30, 2012
Michele A. Cadwell

/S/PHILLIP K. MARSHALL	Independent Trustee	March 30, 2012
Phillip K. Marshall

/S/ROGER C. WADSWORTH	Independent Trustee	March 30, 2012
Roger C. Wadsworth

/S/LESLIE WYLIE	Independent Trustee	March 30, 2012
Leslie Wylie

Exhibit Number	Description
2.1	Agreement and Plan of Merger, dated as of September 1, 2005, among the Company, UMT Holdings, L.P. and UMT Services, Inc. (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K/A filed February 12, 2006.
2.2	First Amendment to Agreement and Plan of Merger, entered into as of February 10, 2006, by and among the Company, UMT Holdings, L.P. and UMT Services, Inc. (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed on February 16, 2006.)
3.1	Form of Second Amended Restated Declaration of Trust	*
3.2	Bylaws of the Company	*
4.1	Form of certificate representing the shares	*
4.2	Dividend Reinvestment Plan (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed on March 19, 2009.	**
4.3	Description of Share Repurchase Program (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed on March 19, 2009)	**
4.4	Amended Share Redemption Plan and Dividend Reinvestment Plan (filed as Exhibit 99.1 to Form 8-K filed June 1, 2010 and incorporated herein by reference)
10.1	Advisory Agreement dated August 14, 2006 between the Company and UMTH General Services, L.P. (incorporated by reference from the Company’s Current Report on Form 8-K filed August 16, 2006)
10.5	Form of Mortgage Servicing Agreement between the Company and South Central Mortgage, Inc., at a later date assigned to Prospect Service Corp.	*
10.7	Revolving Loan Agreement dated November 8, 2004 between the Company and Texas Capital Bank, N.A.	##
10.8	Fourth Amendment to Revolving Loan Agreement dated November 8, 2004 between the Company and Texas Capital Bank, N.A. together with Promissory Note and Amended and Restated Guaranty (incorporated by reference from the Company’s Current Report on Form 8-K/A filed August 2, 2006.)
10.9	Second Amended Secured Line of Credit Promissory Note and Security Agreement between the Company and United Development Funding, L.P. dated June 20, 2006 (incorporated by reference from the Company’s Current Report on Form 8-K filed June 21, 2006)
10.10	Subordination Agreement between the Company and Textron Financial Corporation dated as of June 14, 2006 incorporated by Reference from the Company’s Current Report on Form 8-K filed June 21, 2006)
10.11	Secured Variable Amount Promissory Note dated December 31, 2005 issued by Capital Reserve Group, Inc. (incorporated by reference from the Company’s Current Report on Form 8-K filed March 31, 2006)
10.12	Secured Variable Amount Promissory Note dated December 31, 2005 issued by South Central Mortgage, Inc. (incorporated by reference from the Company’s Current Report on Form 8-K filed March 31, 2006)
10.13	Secured Variable Amount Promissory Note dated December 31, 2005 issued by Ready America Funding Corp. (incorporated by reference from the Company’s Current Report on Form 8-K filed March 31, 2006)
10.14	Form of Assignment of Limited Partnership Interest as Collateral Dated December 31, 2005 between the Company and Capital Reserve Group, Inc., South Central Mortgage, Inc., Ready America Funding Corp. and WLL, L.P. (incorporated by reference from the Company’s Current Report on Form 8-K filed March 31, 2006)
10.15	Guaranty dated December 31, 2005 between the Company and Ready Mortgage Corp. (incorporated by reference from the Company’s Current Report on Form 8-K filed March 31, 2006)
10.16	Guaranty dated December 31, 2005 between the Company and WLL, L.P. (incorporated by reference from the Company’s Current Report on Form 8-K filed March 31, 2006)
10.17	Guaranty dated December 31, 2005 between the Company and UMT Holdings, L.P. (incorporated by reference from the Company’s Current Report on Form 8-K filed March 31, 2006)
10.18	Intercreditor and Subordination Agreement dated December 31, 2005 between the Company and UMT Holdings, L.P. (incorporated by reference from the Company’s Current Report on Form 8-K filed March 31, 2006)
21	Subsidiaries of the Registrant
23	Consent of Independent Registered Public Accounting Firm (filed herewith)
31	Certification pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)
32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith)

101.INS**	XBRL Instance Document (furnished herewith)
101.SCH**	XBRL Taxonomy Extension Schema Document (furnished herewith)
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith)
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document (furnished herewith)
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith)

The exhibits marked with “*” are incorporated by reference from the Company's Registration Statement on Form S-11 (File No. 333-10109) that was declared effective on March 5, 1997. The exhibit marked with “**” is incorporated by reference from the Company's registration statement on Form S-11 (File No. 333-56520) that was declared effective on June 4, 2001. The exhibit marked “***” is incorporated by reference from the Company’s Report on Form 10-K for the period ending December 31, 2000. The exhibit marked “#” is incorporated by reference from the Company’s Report on Form 10-Q for the period ending June 30, 2001. The Exhibit marked “##” is incorporated by reference from the Company’s Report on Form 10-K for the period ending December 31, 2004.

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

UNITED MORTGAGE TRUST - FORM 10-K - March 30, 2012

Attached files

UNITED MORTGAGE TRUST Reports