UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED MANAGEMENT
INVESTMENT COMPANY
Investment Company Act file number 811-21727
-----------
First Trust Mortgage Income Fund
-------------------------------------------------------
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
-------------------------------------------------------
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
-------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 630-765-8000
--------------
Date of fiscal year end: October 31
------------
Date of reporting period: January 31, 2015
------------------
Form N-Q is to be used by management investment companies, other than small
business investment companies registered on Form N-5 (ss.ss. 239.24 and 274.5 of
this chapter), to file reports with the Commission, not later than 60 days after
the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under
the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use
the information provided on Form N-Q in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-Q, and
the Commission will make this information public. A registrant is not required
to respond to the collection of information contained in Form N-Q unless the
Form displays a currently valid Office of Management and Budget ("OMB") control
number. Please direct comments concerning the accuracy of the information
collection burden estimate and any suggestions for reducing the burden to the
Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC
20549. The OMB has reviewed this collection of information under the clearance
requirements of 44 U.S.C. ss. 3507.
ITEM 1. SCHEDULE OF INVESTMENTS. The Schedule of Investments is attached
herewith.
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS
JANUARY 31, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES - 80.2%
COLLATERALIZED MORTGAGE OBLIGATIONS - 59.9%
ACE Securities Corp. Home Equity Loan Trust
$ 1,230,515 Series 2006-ASAP6, Class A2D (a) ....... 0.39% 12/25/36 $ 658,406
Banc of America Mortgage Trust
56,994 Series 2002-L, Class 1A1 (a) (b) ....... 2.11% 12/25/32 52,118
Bear Stearns Adjustable Rate Mortgage
Trust
613,786 Series 2004-9, Class 12A1 (a) .......... 2.78% 11/25/34 613,932
490,055 Series 2005-5, Class A2 (a) ............ 2.38% 08/25/35 494,191
Chase Mortgage Finance Trust
432,042 Series 2007-A1, Class 1A3 (a) .......... 2.53% 02/25/37 427,258
Countrywide Alternative Loan Trust
631,947 Series 2006-41CB, Class 2A17 ........... 6.00% 01/25/37 562,378
76,115 Series 2007-11T1, Class A37 (b) (c) .... 39.01% 05/25/37 134,937
Countrywide Home Loan Mortgage
Pass-Through Trust
1,065,227 Series 2003-46, Class 2A1 (a) .......... 2.72% 01/19/34 1,062,005
590,945 Series 2006-21, Class A8 ............... 5.75% 02/25/37 557,878
916,197 Series 2006-HYB5, Class 3A1A (a) ....... 2.54% 09/20/36 784,440
Credit Suisse First Boston Mortgage
Securities Corp.
415,420 Series 2004-AR2, Class 1A1 (a) (b) ..... 2.92% 03/25/34 407,301
1,289,653 Series 2004-AR8, Class 6A1 (a) ......... 2.39% 09/25/34 1,287,215
DSLA Mortgage Loan Trust
1,174,776 Series 2004-AR3, Class 2A2A (a) ........ 0.54% 07/19/44 1,141,914
1,145,816 Series 2007-AR1, Class 2A1A (a) ........ 0.31% 04/19/47 951,427
GMAC Mortgage Corporation Loan Trust
226,602 Series 2004-AR1, Class 22A (a) ......... 2.92% 06/25/34 218,999
GSR Mortgage Loan Trust
338,585 Series 2005-AR1, Class 4A1 (a) ......... 2.24% 01/25/35 332,931
Harborview Mortgage Loan Trust
171,159 Series 2004-1, Class 2A (a) ............ 2.32% 04/19/34 171,439
783,191 Series 2004-6, Class 3A1 (a) ........... 2.63% 08/19/34 756,644
JP Morgan Mortgage Trust
1,969,028 Series 2005-ALT1, Class 4A1 (a) ........ 5.14% 10/25/35 1,849,071
1,067,931 Series 2006-A2, Class 4A1 (a) .......... 2.50% 08/25/34 1,073,124
170,881 Series 2006-A2, Class 5A3 (a) .......... 2.43% 11/25/33 171,671
JP Morgan Re-REMIC
1,256,674 Series 2009-7, Class 12A1 (d) .......... 6.25% 01/27/37 1,328,838
MASTR Asset Backed Securities Trust
1,174,996 Series 2006-HE5, Class A3 (a) .......... 0.33% 11/25/36 804,219
242,218 Series 2006-HE5, Class A4 (a) (b) ...... 0.39% 11/25/36 167,253
1,687,414 Series 2006-NC2, Class A3 (a) .......... 0.28% 08/25/36 919,341
770,224 Series 2006-NC2, Class A5 (a) .......... 0.41% 08/25/36 429,699
Mellon Residential Funding Corp. Mortgage
Pass-Through Trust
639,692 Series 2001-TBC1, Class A1 (a) ......... 0.87% 11/15/31 623,633
676,305 Series 2002-TBC2, Class A (a) .......... 1.03% 08/15/32 644,560
See Notes to Quarterly Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JANUARY 31, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Merrill Lynch Mortgage Investors Trust
$ 649,510 Series 2004-HB1, Class A3 (a) .......... 2.13% 04/25/29 $ 642,588
Morgan Stanley Mortgage Loan Trust
485,027 Series 2004-7AR, Class 2A6 (a) ......... 2.42% 09/25/34 486,017
Provident Funding Mortgage Loan Trust
278,903 Series 2005-1, Class 1A1 (a) ........... 2.49% 05/25/35 279,534
Residential Accredit Loans, Inc.
242,670 Series 2006-QO1, Class 2A1 (a) ......... 0.44% 02/25/46 143,712
Residential Funding Mortgage Securities I
17,029 Series 2005-S5, Class A5 (b) ........... 5.25% 07/25/35 17,041
Securitized Asset Backed Receivables LLC
1,200,573 Series 2007-BR2, Class A2 (a) .......... 0.40% 02/25/37 720,430
Structured Adjustable Rate Mortgage Loan
Trust
751,330 Series 2004-2, Class 4A2 (a) ........... 2.51% 03/25/34 741,302
Thornburg Mortgage Securities Trust
635,716 Series 2003-4, Class A1 (a) ............ 0.81% 09/25/43 611,574
550,054 Series 2005-1, Class A3 (a) ............ 2.22% 04/25/45 553,973
Wachovia Mortgage Loan Trust, LLC
545,135 Series 2006-A, Class 3A1 (a) ........... 2.66% 05/20/36 526,174
WaMu Mortgage Pass-Through Certificates
853,522 Series 2004-AR1, Class A (a) ........... 2.42% 03/25/34 857,438
901,573 Series 2004-AR10, Class A1B (a) ........ 0.59% 07/25/44 870,306
689,766 Series 2004-AR13, Class A1A (a) ........ 0.89% 11/25/34 659,848
961,478 Series 2005-AR1, Class A1A (a) ......... 0.49% 01/25/45 908,473
1,327,177 Series 2005-AR11, Class A1A (a) ........ 0.49% 08/25/45 1,263,389
101,032 Series 2005-AR2, Class 2A21 (a) ........ 0.50% 01/25/45 93,769
1,111,416 Series 2005-AR2, Class 2A23 (a) ........ 0.55% 01/25/45 1,036,192
1,249,672 Series 2005-AR6, Class 2A1A (a) ........ 0.40% 04/25/45 1,171,559
574,485 Series 2005-AR9, Class A1A (a) ......... 0.49% 07/25/45 552,798
934,949 Series 2006-AR2, Class 1A1 (a) ......... 2.32% 03/25/36 872,544
Washington Mutual Alternative Mortgage
Pass-Through Certificates
44,602 Series 2007-5, Class A11 (b) (c) ....... 38.47% 06/25/37 88,174
Washington Mutual MSC Mortgage Pass-Through
Certificates
745,322 Series 2004-RA1, Class 2A .............. 7.00% 03/25/34 792,085
Wells Fargo Mortgage Backed Securities
Trust
680,357 Series 2003-H, Class A1 (a) ............ 2.62% 09/25/33 690,385
523,875 Series 2004-A, Class A1 (a) ............ 2.64% 02/25/34 526,327
1,835,978 Series 2004-R, Class 1A1 (a) ........... 2.62% 09/25/34 1,867,365
503,115 Series 2004-S, Class A1 (a) ............ 2.62% 09/25/34 514,017
934,530 Series 2004-Y, Class 1A2 (a) ........... 2.61% 11/25/34 931,075
483,448 Series 2005-AR10, Class 2A17 (a) ....... 2.61% 06/25/35 486,438
1,033,207 Series 2005-AR16, Class 1A1 (a) ........ 2.59% 08/25/33 1,056,717
421,378 Series 2005-AR3, Class 2A1 (a) ......... 2.60% 03/25/35 425,223
752,128 Series 2005-AR8, Class 1A1 (a) ......... 2.61% 06/25/35 768,143
See Notes to Quarterly Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JANUARY 31, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Wells Fargo Mortgage Backed Securities
Trust (Continued)
$ 966,814 Series 2006-AR10, Class 5A2 (a) ........ 2.61% 07/25/36 $ 937,282
383,150 Series 2007-16, Class 1A1 .............. 6.00% 12/28/37 397,112
506,667 Series 2007-2, Class 1A13 .............. 6.00% 03/25/37 495,245
120,956 Series 2007-8, Class 2A2 ............... 6.00% 07/25/37 119,906
------------
41,730,977
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 20.3%
Banc of America Commercial Mortgage Trust
1,000,000 Series 2006-6, Class AJ ................ 5.42% 10/10/45 1,040,214
650,000 Series 2007-3, Class AJ, STRIP ......... 5.58% 06/10/49 679,800
Bayview Commercial Asset Trust
765,845 Series 2004-2, Class A (a) (d) ......... 0.60% 08/25/34 735,565
Carefree Portfolio Trust
1,250,000 Series 2014-CARE, Class B (a) (d) ...... 2.02% 11/15/19 1,256,995
Citigroup Commercial Mortgage Trust
1,525,000 Series 2014-388G, Class B (a) (d) ...... 1.22% 06/15/33 1,527,871
COMM Mortgage Trust
1,000,000 Series 2014-KYO, Class B (a) (d) ....... 1.47% 06/11/27 995,883
Commercial Mortgage Trust
950,000 Series 2005-GG5, Class AM .............. 5.28% 04/10/37 969,831
Greenwich Capital Commercial Funding Corp.
650,000 Series 2007-GG11, Class AJ, STRIP ...... 6.07% 12/10/49 687,132
Hyatt Hotel Portfolio Trust
1,040,000 Series 2015-HYT, Class B (a) (d) ....... 1.87% 11/15/29 1,042,600
LB-UBS Commercial Mortgage Trust
835,000 Series 2007-C1, Class AM ............... 5.46% 02/15/40 895,082
440,000 Series 2007-C2, Class AM ............... 5.49% 02/15/40 466,142
Mid-State Capital Corp. Trust
587,306 Series 2004-1, Class M1 ................ 6.50% 08/15/37 634,520
409,338 Series 2005-1, Class A ................. 5.75% 01/15/40 444,318
UBS-Barclays Commercial Mortgage Trust
15,416,837 Series 2013-C5, Class XA, IO (a) (d) ... 1.12% 03/10/46 1,017,180
VNDO Mortgage Trust
990,000 Series 2012-6AVE, Class A (d) .......... 3.00% 11/15/30 1,024,437
Wachovia Bank Commercial Mortgage Trust
650,000 Series 2007-C33, Class AJ, STRIP ....... 5.94% 02/15/51 686,152
------------
14,103,722
------------
TOTAL MORTGAGE-BACKED SECURITIES .......... 55,834,699
(Cost $54,926,341) ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 24.0%
COLLATERALIZED MORTGAGE OBLIGATIONS - 7.6%
Federal Home Loan Mortgage Corp.
1,864,727 Series 2807, Class SB, IO (c) ......... 7.28% 11/15/33 230,103
See Notes to Quarterly Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JANUARY 31, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal Home Loan Mortgage Corp.
(Continued)
$ 13,874 Series 3195, Class SX (b) (c) .......... 45.07% 07/15/36 $ 45,347
222,638 Series 3562, Class KI, IO (b) .......... 4.50% 11/15/22 2,902
2,041,507 Series 3619, Class EI, IO (b) .......... 4.50% 05/15/24 93,652
1,584,329 Series 3692, Class PS, IO (b) (c) ...... 6.43% 05/15/38 97,352
3,543,128 Series 3726, Class KI, IO .............. 3.50% 04/15/25 207,561
2,609,494 Series 3870, Class WS, IO (c) .......... 6.43% 06/15/31 321,541
1,545,425 Series 4206, Class IA, IO (b) .......... 3.00% 03/15/33 209,775
Federal National Mortgage Association
664,955 Series 2005-122, Class SN (c) .......... 27.93% 01/25/36 754,765
147,344 Series 2008-50, Class AI, IO (b) ....... 5.50% 06/25/23 7,584
3,781,445 Series 2010-103, Class ID, IO (b) ...... 5.00% 09/25/40 541,698
6,473,008 Series 2010-139, Class KI, IO (b) ...... 1.09% 12/25/40 295,336
601,246 Series 2010-142, Class PS, IO (b) (c) .. 5.88% 05/25/40 36,645
921,237 Series 2010-145, Class TI, IO (b) ...... 3.50% 12/25/20 56,493
2,531,949 Series 2010-40, Class MI, IO (b) ....... 4.50% 08/25/24 115,281
3,904,060 Series 2012-112, Class BI, IO .......... 3.00% 09/25/31 378,634
2,902,980 Series 2012-125, Class MI, IO (b) ...... 3.50% 11/25/42 428,562
4,034,436 Series 2013-32, Class IG, IO (b) ....... 3.50% 04/25/33 559,789
Federal National Mortgage Association, STRIP
2,725,788 Series 406, Class 6, IO (b) ............ 4.00% 01/25/41 237,808
Government National Mortgage Association
849,531 Series 2009-65, Class NJ, IO (b) ....... 5.50% 07/20/39 74,016
2,942,415 Series 2010-115, Class IQ, IO .......... 4.50% 11/20/38 229,666
5,962,664 Series 2011-131, Class EI, IO .......... 4.50% 08/20/39 355,529
809,694 Series 2011-69, Class CI, IO (b) ....... 5.00% 03/20/36 15,376
------------
5,295,415
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 3.7%
Government National Mortgage Association
15,085,411 Series 2011-152, Class IO, IO (a) ...... 1.21% 08/16/51 770,306
8,357,861 Series 2012-100, Class IO, IO (a) (e) .. 0.83% 08/16/52 529,713
10,942,541 Series 2012-70, Class IO, IO (a) (e) ... 0.91% 08/16/52 648,668
6,934,339 Series 2012-78, Class IO, IO (a) (e) ... 1.02% 06/16/52 462,004
2,466,759 Series 2012-95, Class IO, IO (a) (e) ... 0.90% 02/16/53 178,109
------------
2,588,800
------------
PASS-THROUGH SECURITIES - 12.7%
1,000,000 Fannie Mae Pool ........................... 4.00% 01/31/45 1,070,937
Fannie Mae REMICs
926,416 Series 2005-83, Class LZ ............... 5.50% 10/25/35 955,904
Federal Home Loan Mortgage Corp.
1,671,728 Pool A94738 (e) ........................ 4.50% 11/01/40 1,817,926
756,658 Pool K36017 (e) ........................ 5.00% 09/01/47 820,762
See Notes to Quarterly Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JANUARY 31, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
PASS-THROUGH SECURITIES (CONTINUED)
Federal National Mortgage Association
$ 1,865,731 Pool 831145 (e) ........................ 6.00% 12/01/35 $ 2,142,049
1,820,335 Pool 843971 (e) ........................ 6.00% 11/01/35 2,059,607
------------
8,867,185
------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES ................. 16,751,400
(Cost $22,309,673) ------------
ASSET-BACKED SECURITIES - 0.3%
Green Tree Financial Corp.
48,985 Series 1997-2, Class A6 (b) ............ 7.24% 06/15/28 51,015
64,885 Series 1997-3, Class A6 (b) ............ 7.32% 03/15/28 69,016
71,127 Series 1997-7, Class A6 (b) ............ 6.76% 07/15/28 73,760
------------
TOTAL ASSET-BACKED SECURITIES ........................................... 193,791
(Cost $194,545) ------------
TOTAL INVESTMENTS - 104.5% .............................................. 72,779,890
(Cost $77,430,559) (f) ------------
PRINCIPAL
VALUE DESCRIPTION AMOUNT
---------------- ------------------------------------------------------------------------- ------------
REVERSE REPURCHASE AGREEMENTS - (11.8%)
(4,192,000) With JP Morgan 0.37% dated 01/05/15, to be repurchased at
$4,195,921 on 04/06/15 ............................................... (4,192,000)
(1,158,000) With JP Morgan 1.02% dated 01/07/15, to be repurchased at
$1,159,081 on 02/09/15 ............................................... (1,158,000)
(2,511,000) With JP Morgan 0.36% dated 01/12/15, to be repurchased at
$2,513,285 on 04/13/15 ............................................... (2,511,000)
(368,000) With JP Morgan 1.02% dated 01/29/15, to be repurchased at
$368,334 on 03/02/15 ................................................. (368,000)
------------
TOTAL REVERSE REPURCHASE AGREEMENTS ..................................... (8,229,000)
------------
NET OTHER ASSETS AND LIABILITIES - 7.3% ................................. 5,083,093
------------
NET ASSETS - 100.0% ..................................................... $ 69,633,983
============
---------------------------------------
(a) Floating or variable rate security. The interest rate shown reflects the
rate in effect at January 31, 2015.
(b) Pursuant to procedures adopted by the Fund's Board of Trustees, this
security has been determined to be illiquid by Brookfield Investment
Management Inc. ("Brookfield"), the Fund's sub-advisor.
(c) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at January 31, 2015.
See Notes to Quarterly Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JANUARY 31, 2015 (UNAUDITED)
(d) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Fund's Board of Trustees, this security has been
determined to be liquid by Brookfield. Although market instability can
result in periods of increased overall market illiquidity, liquidity for
each security is determined based on security specific factors and
assumptions, which require subjective judgment. At January 31, 2015,
securities noted as such amounted to $8,929,369, or 12.82% of net assets.
(e) This security or a portion of this security is segregated as collateral
for reverse repurchase agreements.
(f) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of January 31, 2015,
the aggregate gross unrealized appreciation for all securities in which
there was an excess of value over tax cost was $2,932,041 and the
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $7,582,710.
IO Interest-Only Security - Principal amount shown represents par value on
which interest payments are based.
STRIP Separate Trading of Registered Interest and Principal of Securities
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of January 31,
2015 is as follows (see Note 2A - Portfolio Valuation in the Notes to Quarterly
Portfolio of Investments):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 1/31/2015 PRICES INPUTS INPUTS
------------------------------------------------ ------------- ----------- ------------- ------------
Mortgage-Backed Securities ..................... $ 55,834,699 $ -- $ 55,834,699 $ --
U.S. Government Agency Mortgage-Backed
Securities ................................... 16,751,400 -- 16,751,400 --
Asset-Backed Securities ........................ 193,791 -- 193,791 --
------------- ----------- ------------- ------------
Total Investments .............................. $ 72,779,890 $ -- $ 72,779,890 $ --
============= =========== ============= ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
1/31/2015 PRICES INPUTS INPUTS
------------- ----------- ------------- ------------
Reverse Repurchase Agreements .................. $ (8,229,000) $ -- $ (8,229,000) $ --
============= =========== ============= ============
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at January 31, 2015.
See Notes to Quarterly Portfolio of Investments
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS
FIRST TRUST MORTGAGE INCOME FUND (FMY)
JANUARY 31, 2015 (UNAUDITED)
1. ORGANIZATION
First Trust Mortgage Income Fund (the "Fund") is a diversified, closed-end
management investment company organized as a Massachusetts business trust on
February 22, 2005, and is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
trades under the ticker symbol FMY on the New York Stock Exchange ("NYSE").
2. VALUATION AND INVESTMENT PRACTICES
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The NAV per Common Share
is calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in absence of market
value with respect to any portfolio securities, at fair value. Market value
prices represent last sale or official closing prices from a national or foreign
exchange (i.e., a regulated market) and are primarily obtained from third party
pricing services. Fair value prices represent any prices not considered market
value prices and are either obtained from a third party pricing service or are
determined by the Pricing Committee of the Fund's investment advisor, First
Trust Advisors L.P. ("First Trust" or the "Advisor"), in accordance with
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with provisions of the 1940 Act. Investments valued by the Advisor's Pricing
Committee, if any, are footnoted as such in the footnotes to the Portfolio of
Investments. The Fund's investments are valued as follows:
U.S. government securities, mortgage-backed securities, asset-backed
securities and other debt securities are fair valued on the basis of
valuations provided by dealers who make markets in such securities or by
an independent pricing service approved by the Fund's Board of Trustees,
which may use the following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or
its delegate, the Advisor's Pricing Committee, at fair value. These
securities generally include, but are not limited to, restricted
securities (securities which may not be publicly sold without registration
under the Securities Act of 1933, as amended) for which a pricing service
is unable to provide a market price; securities whose trading has been
formally suspended; a security whose market or fair value price is not
available from a pre-established pricing source; a security with respect
to which an event has occurred that is likely to materially affect the
value of the security after the market has closed but before the
calculation of the Fund's NAV or make it difficult or impossible to obtain
a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a
general principle, the current fair value of a security would appear to be
the amount which the owner might reasonably expect to receive for the
security upon its current sale. When fair value prices are used, generally
they will differ from market quotations or official closing prices on the
applicable exchanges. A variety of factors may be considered in
determining the fair value of such securities, including, but not limited
to, the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in
which these securities are purchased and sold;
3) the type, size and cost of security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities
(or equity securities) of the issuer/borrower, or comparable
companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any,
securing the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management;
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS (CONTINUED)
FIRST TRUST MORTGAGE INCOME FUND (FMY)
JANUARY 31, 2015 (UNAUDITED)
11) the prospects for the issuer's industry, and multiples (of
earnings and/or cash flows) being paid for similar businesses
in that industry; and
12) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of January 31, 2015, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
The Fund invests in certain securitized assets (for example, asset-backed
securities, collateralized mortgage obligations and commercial mortgage-backed
securities), as well as interest-only securities, that have contractual cash
flows. For these securities, if there is a change in the estimated cash flows,
based on an evaluation of current information, then the estimated yield is
adjusted. Additionally, if the evaluation of current information indicates a
permanent impairment of the security, the cost basis of the security is written
down and a loss is recognized. Debt obligations may be placed on non-accrual
status and the related interest income may be reduced by ceasing current
accruals and writing off interest receivables when the collection of all or a
portion of interest has become doubtful based on consistently applied
procedures. A debt obligation is removed from non-accrual status when the issuer
resumes interest payments or when collectability of interest is reasonably
assured.
Securities purchased or sold on a when-issued, delayed-delivery or forward
purchase commitment basis may have extended settlement periods. The value of the
security so purchased is subject to market fluctuations during this period. The
Fund maintains liquid assets with a current value at least equal to the amount
of its when-issued, delayed-delivery or forward purchase commitments until
payment is made. At January 31, 2015, the Fund had no when-issued,
delayed-delivery or forward purchase commitments.
C. REVERSE REPURCHASE AGREEMENTS:
Reverse repurchase agreements were utilized as leverage for the Fund. A reverse
repurchase agreement, although structured as a sale and repurchase obligation,
acts as financing under which Fund assets are pledged as collateral to secure a
short-term loan. Generally, the other party to the agreement makes the loan in
an amount equal to a percentage of the market value of the pledged collateral.
At the maturity of the reverse repurchase agreement, the loan will be repaid and
the collateral will correspondingly be received back by the Fund. While used as
collateral, the assets continue to pay principal and interest which are for the
benefit of the Fund.
Information for the fiscal period ended January 31, 2015:
Maximum amount outstanding during the period.................. $8,471,000
Average amount outstanding during the period*................. $8,380,380
Average Common Shares outstanding during the period........... 4,213,115
Average debt per Common Share outstanding during the period... $1.99
* The average amount outstanding during the period was calculated by adding
the borrowings at the end of each day and dividing the sum by the number
of days in the fiscal period ended January 31, 2015.
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS (CONTINUED)
FIRST TRUST MORTGAGE INCOME FUND (FMY)
JANUARY 31, 2015 (UNAUDITED)
During the fiscal period ended January 31, 2015, the interest rates ranged from
0.34% to 1.06%, with a weighted average interest rate of 0.49%, on borrowings by
the Fund under reverse repurchase agreements, which had interest expense that
aggregated $10,401.
D. INVERSE FLOATING-RATE SECURITIES:
An inverse floating-rate security is one where the coupon is inversely indexed
to a short-term floating interest rate multiplied by a specific factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. The price of these securities may be more
volatile than the price of a comparable fixed-rate security. These instruments
are typically used to enhance the yield of the portfolio. These securities, if
any, are identified on the Portfolio of Investments.
E. STRIPPED MORTGAGE-BACKED SECURITIES:
Stripped Mortgage-Backed Securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage securities may be partially stripped so
that each investor class receives some interest and some principal. When
securities are completely stripped, however, all of the interest is distributed
to holders of one type of security known as an interest-only security ("IO
Security") and all of the principal is distributed to holders of another type of
security known as a principal-only security. These securities, if any, are
identified on the Portfolio of Investments.
F. INTEREST-ONLY SECURITIES:
An IO Security is the interest-only portion of a mortgage-backed security that
receives some or all of the interest portion of the underlying mortgage-backed
security and little or no principal. A reference principal value called a
notional value is used to calculate the amount of interest due to the IO
Security. IO Securities are sold at a deep discount to their notional principal
amount. Generally speaking, when interest rates are falling and prepayment rates
are increasing, the value of an IO Security will fall. Conversely, when interest
rates are rising and prepayment rates are decreasing, generally the value of an
IO Security will rise. These securities, if any, are identified on the Portfolio
of Investments.
ITEM 2. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's last fiscal quarter
that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
ITEM 3. EXHIBITS.
Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of
the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) First Trust Mortgage Income Fund
--------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: March 20, 2015
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: March 20, 2015
------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: March 20, 2015
------------------
* Print the name and title of each signing officer under his or her signature.