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
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First Trust Mortgage Income Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(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
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(Name and address of agent for service)
Registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: October 31
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Date of reporting period: July 31, 2015
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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
JULY 31, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES - 78.4%
COLLATERALIZED MORTGAGE OBLIGATIONS - 57.3%
ACE Securities Corp. Home Equity Loan Trust
$ 1,190,970 Series 2006-ASAP6, Class A2D (a)........ 0.41% 12/25/36 $ 648,758
Banc of America Mortgage Trust
56,651 Series 2002-L, Class 1A1 (a) (b)........ 2.38% 12/01/32 49,373
Chase Mortgage Finance Trust
382,309 Series 2007-A1, Class 1A3 (a)........... 2.58% 02/01/37 377,946
Countrywide Alternative Loan Trust
71,719 Series 2007-11T1, Class A37 (b) (c)..... 38.88% 05/25/37 161,249
Countrywide Home Loan Mortgage Pass-Through
Trust
1,015,718 Series 2003-46, Class 2A1 (a)........... 2.72% 01/01/34 1,010,739
529,027 Series 2006-21, Class A8 ............... 5.75% 02/01/37 501,984
884,168 Series 2006-HYB5, Class 3A1A (a)........ 2.60% 09/01/36 763,640
Credit Suisse First Boston Mortgage
Securities Corp.
407,758 Series 2004-AR2, Class 1A1 (a) (b)...... 3.25% 03/01/34 399,752
1,170,718 Series 2004-AR8, Class 6A1 (a).......... 2.42% 09/01/34 1,167,274
Credit Suisse Mortgage Trust
978,000 Series 10-20R, Class 7A4 (a) (d)........ 3.50% 03/01/37 933,093
DSLA Mortgage Loan Trust
1,142,898 Series 2004-AR3, Class 2A2A (a)......... 0.56% 07/19/44 1,111,379
1,110,511 Series 2007-AR1, Class 2A1A (a)......... 0.33% 04/19/47 929,499
GMAC Mortgage Corporation Loan Trust
223,837 Series 2004-AR1, Class 22A (a).......... 2.97% 06/01/34 217,442
GSR Mortgage Loan Trust
332,933 Series 2005-AR1, Class 4A1 (a).......... 2.26% 01/01/35 324,609
Harborview Mortgage Loan Trust
711,096 Series 2004-6, Class 3A1 (a)............ 2.91% 08/01/34 690,907
JP Morgan Mortgage Trust
1,818,356 Series 2005-ALT1, Class 4A1 (a)......... 3.38% 10/01/35 1,697,439
984,355 Series 2006-A2, Class 4A1 (a)........... 2.71% 08/01/34 988,480
153,535 Series 2006-A2, Class 5A3 (a)........... 2.67% 11/01/33 154,155
JP Morgan Re-REMIC
971,335 Series 2009-7, Class 12A1 (d)........... 6.25% 01/01/37 1,018,315
MASTR Adjustable Rate Mortgages Trust
1,144,524 Series 04-13, Class 3A7 (a)............. 2.74% 11/01/34 1,175,440
MASTR Asset Backed Securities Trust
1,128,525 Series 2006-HE5, Class A3 (a)........... 0.35% 11/25/36 784,742
232,638 Series 2006-HE5, Class A4 (a) (b)....... 0.41% 11/25/36 163,147
1,629,746 Series 2006-NC2, Class A3 (a)........... 0.30% 08/25/36 857,568
743,901 Series 2006-NC2, Class A5 (a)........... 0.43% 08/25/36 400,609
Mellon Residential Funding Corp. Mortgage
Pass-Through Trust
613,478 Series 2001-TBC1, Class A1 (a).......... 0.89% 11/15/31 603,335
586,314 Series 2002-TBC2, Class A (a)........... 1.05% 08/15/32 558,858
Morgan Stanley Mortgage Loan Trust
452,375 Series 2004-7AR, Class 2A6 (a).......... 2.45% 09/01/34 452,857
See Notes to Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Nomura Resecuritization Trust
$ 1,242,525 Series 15-6R, Class 2A4 (d)............. 7.98% 01/02/37 $ 996,381
Provident Funding Mortgage Loan Trust
273,576 Series 2005-1, Class 1A1 (a)............ 2.50% 05/01/35 274,185
Residential Accredit Loans, Inc.
231,735 Series 2006-QO1, Class 2A1 (a).......... 0.46% 02/25/46 137,853
Securitized Asset Backed Receivables LLC
1,163,669 Series 2007-BR2, Class A2 (a)........... 0.42% 02/25/37 669,168
Structured Adjustable Rate Mortgage Loan
Trust
695,456 Series 2004-2, Class 4A2 (a)............ 2.50% 03/01/34 683,316
Thornburg Mortgage Securities Trust
569,089 Series 2003-4, Class A1 (a)............. 0.83% 09/25/43 552,630
471,593 Series 2005-1, Class A3 (a)............. 2.23% 04/01/45 474,002
Towd Point Mortgage Trust
1,183,329 Series 15-2, Class 2A1 (a) (d).......... 3.75% 11/01/57 1,230,313
Wachovia Mortgage Loan Trust, LLC
504,569 Series 2006-A, Class 3A1 (a)............ 2.68% 05/01/36 484,999
WaMu Mortgage Pass-Through Certificates
784,127 Series 2004-AR1, Class A (a)............ 2.44% 03/01/34 787,887
848,742 Series 2004-AR10, Class A1B (a)......... 0.61% 07/25/44 819,824
648,878 Series 2004-AR13, Class A1A (a)......... 0.91% 11/25/34 620,779
899,300 Series 2005-AR1, Class A1A (a).......... 0.51% 01/25/45 851,180
1,257,547 Series 2005-AR11, Class A1A (a)......... 0.51% 08/25/45 1,189,072
92,450 Series 2005-AR2, Class 2A21 (a)......... 0.52% 01/25/45 85,977
1,170,779 Series 2005-AR6, Class 2A1A (a)......... 0.42% 04/25/45 1,112,819
537,638 Series 2005-AR9, Class A1A (a).......... 0.51% 07/25/45 517,838
883,180 Series 2006-AR2, Class 1A1 (a).......... 2.32% 03/01/36 821,384
Washington Mutual Alternative Mortgage
Pass-Through Certificates
42,439 Series 2007-5, Class A11 (b) (c)........ 38.34% 06/25/37 98,123
Washington Mutual MSC Mortgage Pass-Through
Certificates
612,880 Series 2004-RA1, Class 2A .............. 7.00% 03/01/34 651,885
Wells Fargo Mortgage Backed Securities
Trust
611,941 Series 2003-H, Class A1 (a)............. 2.63% 09/01/33 620,496
447,688 Series 2004-A, Class A1 (a)............. 2.64% 02/01/34 448,992
1,699,918 Series 2004-R, Class 1A1 (a)............ 2.62% 09/01/34 1,727,290
443,979 Series 2004-S, Class A1 (a)............. 2.65% 09/01/34 455,240
901,512 Series 2004-Y, Class 1A2 (a)............ 2.61% 11/01/34 897,185
428,378 Series 2005-AR10, Class 2A17 (a)........ 2.67% 06/01/35 437,363
889,387 Series 2005-AR16, Class 1A1 (a)......... 2.68% 08/01/33 908,151
432,079 Series 2005-AR3, Class 2A1 (a).......... 2.67% 03/01/35 437,619
654,208 Series 2005-AR8, Class 1A1 (a).......... 2.70% 06/01/35 668,141
891,563 Series 2006-AR10, Class 5A2 (a)......... 2.74% 07/01/36 866,164
315,673 Series 2007-16, Class 1A1 .............. 6.00% 12/04/37 326,790
438,984 Series 2007-2, Class 1A13 .............. 6.00% 03/01/37 432,845
See Notes to Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 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)
$ 108,218 Series 2007-8, Class 2A2 ............... 6.00% 07/01/37 $ 106,767
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39,535,247
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COMMERCIAL MORTGAGE-BACKED SECURITIES - 21.1%
Banc of America Commercial Mortgage Trust
1,000,000 Series 2006-6, Class AJ ................ 5.42% 10/01/45 1,024,341
650,000 Series 2007-3, Class AJ, STRIP ......... 5.74% 06/01/49 675,865
Bayview Commercial Asset Trust
702,394 Series 2004-2, Class A (a) (d).......... 0.62% 08/25/34 671,360
BXHTL Mortgage Trust
800,000 Series 2015-JWRZ, Class B (a) (d)....... 1.90% 05/15/29 803,395
Carefree Portfolio Trust
1,250,000 Series 2014-CARE, Class B (a) (d)....... 2.04% 11/15/19 1,259,193
Citigroup Commercial Mortgage Trust
1,525,000 Series 2014-388G, Class B (a) (d)....... 1.24% 06/15/33 1,516,248
COMM Mortgage Trust
1,000,000 Series 2014-KYO, Class B (a) (d)........ 1.49% 06/11/27 999,933
Commercial Mortgage Trust
950,000 Series 2005-GG5, Class AM .............. 5.28% 04/01/37 953,100
Greenwich Capital Commercial Funding Corp.
650,000 Series 2007-GG11, Class AJ, STRIP ...... 6.25% 12/01/49 676,689
Hyatt Hotel Portfolio Trust
1,040,000 Series 2015-HYT, Class B (a) (d)........ 1.89% 11/15/29 1,045,320
LB-UBS Commercial Mortgage Trust
835,000 Series 2007-C1, Class AM ............... 5.46% 02/11/40 878,542
440,000 Series 2007-C2, Class AM ............... 5.49% 02/11/40 462,837
Mid-State Capital Corp. Trust
559,432 Series 2004-1, Class M1 ................ 6.50% 08/01/37 603,291
395,234 Series 2005-1, Class A ................. 5.75% 01/01/40 428,179
UBS-Barclays Commercial Mortgage Trust
15,300,902 Series 2013-C5, Class XA, IO (a) (d).... 1.23% 03/01/46 934,288
VNDO Mortgage Trust
990,000 Series 2012-6AVE, Class A (d)........... 3.00% 11/01/30 996,476
Wachovia Bank Commercial Mortgage Trust
650,000 Series 2007-C33, Class AJ, STRIP ....... 6.15% 02/01/51 673,274
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14,602,331
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TOTAL MORTGAGE-BACKED SECURITIES......................................... 54,137,578
(Cost $53,605,528) ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 19.4%
COLLATERALIZED MORTGAGE OBLIGATIONS - 7.9%
Federal Home Loan Mortgage Corp.
1,620,258 Series 2807, Class SB, IO (c)........... 7.26% 11/15/33 281,583
13,874 Series 3195, Class SX (b) (c)........... 44.93% 07/15/36 42,906
See Notes to Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 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)
$ 69,172 Series 3562, Class KI, IO (b)........... 4.50% 11/01/22 $ 219
1,609,574 Series 3619, Class EI, IO (b)........... 4.50% 05/01/24 76,889
1,171,406 Series 3692, Class PS, IO (b) (c)....... 6.41% 05/15/38 80,285
3,057,878 Series 3726, Class KI, IO .............. 3.50% 04/01/25 221,433
2,220,708 Series 3870, Class WS, IO (c)........... 6.41% 06/15/31 322,081
1,467,563 Series 4206, Class IA, IO (b)........... 3.00% 03/01/33 210,533
Federal National Mortgage Association
512,093 Series 2005-122, Class SN (c)........... 27.84% 01/25/36 555,441
95,947 Series 2008-50, Class AI, IO (b)........ 5.50% 06/01/23 4,154
3,456,703 Series 2010-103, Class ID, IO (b)....... 5.00% 09/01/40 572,599
5,574,910 Series 2010-139, Class KI, IO (b)....... 1.09% 12/01/40 296,484
357,029 Series 2010-142, Class PS, IO (b) (c)... 5.86% 05/25/40 14,194
800,588 Series 2010-145, Class TI, IO (b)....... 3.50% 12/01/20 48,753
1,962,648 Series 2010-40, Class MI, IO (b)........ 4.50% 08/01/24 84,970
3,596,452 Series 2012-112, Class BI, IO .......... 3.00% 09/01/31 395,651
2,738,707 Series 2012-125, Class MI, IO (b)....... 3.50% 11/01/42 573,337
3,788,480 Series 2013-32, Class IG, IO (b)........ 3.50% 04/01/33 589,283
Federal National Mortgage Association, STRIP
2,301,389 Series 406, Class 6, IO (b)............. 4.00% 01/01/41 496,678
Government National Mortgage Association
641,000 Series 2009-65, Class NJ, IO (b)........ 5.50% 07/01/39 53,954
2,461,424 Series 2010-115, Class IQ, IO .......... 4.50% 11/01/38 229,877
4,594,218 Series 2011-131, Class EI, IO .......... 4.50% 08/01/39 297,098
353,668 Series 2011-69, Class CI, IO (b)........ 5.00% 03/01/36 3,507
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5,451,909
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PASS-THROUGH SECURITIES - 11.5%
Fannie Mae REMICs
926,416 Series 2005-83, Class LZ ............... 5.50% 10/01/35 972,751
Federal Home Loan Mortgage Corp.
1,000,000 Gold Pool .............................. 3.50% 08/01/45 1,035,875
1,280,210 Pool A94738 (e)......................... 4.50% 11/01/40 1,392,243
751,679 Pool K36017 (e)......................... 5.00% 09/01/47 814,449
Federal National Mortgage Association
1,631,048 Pool 831145 (e)......................... 6.00% 12/01/35 1,870,857
1,621,471 Pool 843971 (e)......................... 6.00% 11/01/35 1,868,071
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7,954,246
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TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES............... 13,406,155
(Cost $18,878,964) ------------
ASSET-BACKED SECURITIES - 0.2%
Green Tree Financial Corp.
36,564 Series 1997-2, Class A6 (b)............. 7.24% 06/15/28 37,748
53,846 Series 1997-3, Class A6 (b)............. 7.32% 03/15/28 56,753
See Notes to Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
ASSET-BACKED SECURITIES (CONTINUED)
Green Tree Financial Corp. (Continued)
$ 54,678 Series 1997-7, Class A6 (b)............. 6.76% 07/15/28 $ 56,291
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TOTAL ASSET-BACKED SECURITIES............................................ 150,792
(Cost $152,342) ------------
TOTAL INVESTMENTS - 98.0%................................................ 67,694,525
(Cost $72,636,834) (f) ------------
PRINCIPAL
VALUE DESCRIPTION AMOUNT
---------------- ------------------------------------------------------------------------- ------------
REVERSE REPURCHASE AGREEMENTS - (8.3%)
(2,108,000) With JP Morgan 0.42% dated 06/11/15, to be repurchased at
$2,110,213 on 09/09/15............................................... (2,108,000)
(3,634,000) With JP Morgan 0.43% dated 07/06/15, to be repurchased at
$3,637,950 on 10/05/15............................................... (3,634,000)
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TOTAL REVERSE REPURCHASE AGREEMENTS...................................... (5,742,000)
------------
NET OTHER ASSETS AND LIABILITIES - 10.3%................................. 7,083,084
------------
NET ASSETS - 100.0%...................................................... $ 69,035,609
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(a) Floating or variable rate security. The interest rate shown reflects the
rate in effect at July 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 July 31, 2015.
(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 July 31, 2015,
securities noted as such amounted to $12,404,315, or 17.97% 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 July 31, 2015, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $2,536,368 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $7,478,677.
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
See Notes to Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2015 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of July 31, 2015
is as follows (see Note 2A - Portfolio Valuation in the Notes to Portfolio of
Investments):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 7/31/2015 PRICES INPUTS INPUTS
------------------------------------------------ ------------- ----------- ------------- ------------
Mortgage-Backed Securities...................... $ 54,137,578 $ -- $ 54,137,578 $ --
U.S. Government Agency Mortgage-Backed
Securities................................... 13,406,155 -- 13,406,155 --
Asset-Backed Securities......................... 150,792 -- 150,792 --
------------- ----------- ------------- ------------
Total Investments............................... $ 67,694,525 $ -- $ 67,694,525 $ --
============= =========== ============= ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
7/31/2015 PRICES INPUTS INPUTS
------------- ----------- ------------- ------------
Reverse Repurchase Agreements .................. $ (5,742,000) $ -- $ (5,742,000) $ --
============= =========== ============= ============
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 July 31, 2015.
See Notes to Portfolio of Investments
NOTES TO PORTFOLIO OF INVESTMENTS
FIRST TRUST MORTGAGE INCOME FUND (FMY)
JULY 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").
The Fund, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies."
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 the 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.
Fixed income and other debt securities having a remaining maturity of
sixty days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes
thereto;
2) the liquidity conditions in the relevant market and changes
thereto;
3) the interest rate conditions in the relevant market and
changes thereto (such as significant changes in interest
rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing
Committee may use last-obtained market-based data to assist it
when valuing portfolio securities using amortized cost.
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
NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED)
FIRST TRUST MORTGAGE INCOME FUND (FMY)
JULY 31, 2015 (UNAUDITED)
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;
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 July 31, 2015, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
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 interest-only securities. 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 July 31, 2015, the Fund had no when-issued, delayed-delivery
or forward purchase commitments.
NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED)
FIRST TRUST MORTGAGE INCOME FUND (FMY)
JULY 31, 2015 (UNAUDITED)
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 year-to-date period (November 1, 2014 through July
31, 2015) was as follows:
Maximum amount outstanding during the period................... $8,471,000
Average amount outstanding during the period*.................. $7,369,040
Average Common Shares outstanding during the period............ 4,213,115
Average debt per Common Share outstanding during the period.... $1.75
* 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 year-to-date period ended July 31, 2015.
During the fiscal year-to-date period ended July 31, 2015, the interest rates
ranged from 0.34% to 1.06%, with a weighted average interest rate of 0.46%, on
borrowings by the Fund under reverse repurchase agreements, which had interest
expense that aggregated $25,623.
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.
3. SUBSEQUENT EVENT
The Board of Trustees of the Fund has approved certain changes to the Fund's
investment strategy that will be implemented on or around October 5, 2015, as
described below.
CURRENT INVESTMENT STRATEGY
The Fund may invest up to 25% of its managed assets in securities that at the
time of investment are rated below "A" (at or below the investment grade ratings
of "Baa," "BBB," and "BBB" by Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group, a division of the McGraw-Hill Companies, Inc.
("S&P") and Fitch Ratings, Inc. ("Fitch")), each a nationally recognized
statistical rating organization ("NRSRO"), or were unrated but judged to be of
comparable quality by Brookfield Investment Management Inc. ("Brookfield"), the
Fund's investment sub-advisor.
NEW INVESTMENT STRATEGY
The Fund may invest up to 35% of its managed assets in securities that at the
time of investment are rated below "BBB-" or the equivalent (i.e. below
investment grade rating) by NRSROs such as Moody's, S&P, Fitch, DBRS, Inc.,
Kroll Bond Rating Agency, Inc., or Morningstar Credit Ratings, LLC, or were
unrated but judged to be of comparable quality by Brookfield.
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: September 22, 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: September 22, 2015
----------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: September 22, 2015
----------------------
* Print the name and title of each signing officer under his or her signature.