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
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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, 2011
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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
PORTFOLIO OF INVESTMENTS (a)
JULY 31, 2011 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES - 52.6%
COLLATERALIZED MORTGAGE OBLIGATIONS - 41.2%
Adjustable Rate Mortgage Trust
$ 372,228 Series 2004-5, Class 1A1 (b)........... 2.97% 04/25/35 $ 326,849
Banc of America Funding Corp.
1,039,310 Series 2005-F, Class 4A1 (b)........... 2.94% 09/20/35 771,965
Banc of America Mortgage Securities
110,976 Series 2002-L, Class 1A1 (b)........... 2.78% 12/25/32 86,210
151,552 Series 2004-K, Class 4A1 (b)........... 5.25% 12/25/34 143,166
1,509,000 Series 2007-1, Class 1A26 ............. 6.00% 03/25/37 1,359,467
3,152,640 Series 2007-3, Class 2A3 .............. 7.00% 09/25/37 491,101
Bear Stearns Adjustable Rate Mortgage
Trust
1,040,347 Series 2004-10, Class 12A3 (b)......... 2.91% 11/25/34 848,066
1,192,796 Series 2004-9, Class 12A3 (b).......... 3.12% 01/25/35 1,068,346
Chase Mortgage Finance Corp.
724,340 Series 2007-A3, Class 3A1 (b).......... 5.88% 12/25/37 629,920
Countrywide Alternative Loan Trust
408,294 Series 2004-14T2, Class A6 ............ 5.50% 08/25/34 409,477
74,783 Series 2004-1T1, Class A1 ............. 5.00% 02/25/34 74,903
1,463,500 Series 2005-J1, Class 2A1 ............. 5.50% 02/25/25 1,422,491
Countrywide Home Loans
344,426 Series 2004-HYB1, Class 2A (b)......... 2.86% 05/20/34 292,312
224,777 Series 2005-20, Class A7 .............. 5.25% 12/25/27 212,321
1,250,327 Series 2005-J4, Class A4 .............. 5.50% 11/25/35 1,249,163
Credit Suisse First Boston Mortgage
Securities Corp.
2,317,970 Series 2004-AR2, Class 1A1 (b)......... 2.69% 03/25/34 1,725,672
First Horizon Mortgage Trust
1,034,917 Series 2005-8, Class 1A5 .............. 5.75% 02/25/36 1,029,105
766,068 Series 2006-2, Class 1A3 .............. 6.00% 08/25/36 746,972
GMAC Mortgage Corporation Loan Trust
385,400 Series 2004-AR1, Class 22A (b)......... 2.96% 06/25/34 324,903
GSR Mortgage Loan Trust
325,562 Series 2005-AR2, Class 5A1 (b)......... 2.80% 04/25/35 277,042
2,937,694 Series 2007-1F, Class 3A10, IO ........ 6.00% 01/25/37 304,764
Harborview Mortgage Loan Trust
314,791 Series 2004-1, Class 2A (b)............ 2.71% 04/19/34 303,941
1,263,980 Series 2004-6, Class 3A1 (b)........... 2.81% 08/19/34 936,024
JP Morgan Mortgage Trust
2,796,844 Series 2005-ALT1, Class 4A1 (b)........ 5.37% 10/25/35 2,184,623
JP Morgan Re-REMIC
3,014,187 Series 2009-7, Class 12A1 (b) (c) ..... 6.25% 01/27/37 3,080,582
MASTR Alternative Loan Trust
664,841 Series 2004-8, Class 5A1............... 6.00% 09/25/34 681,468
Merrill Lynch Mortgage Investors Trust
1,593,138 Series 2005-A7, Class 2A1 (b).......... 5.29% 09/25/35 1,366,459
Morgan Stanley Mortgage Loan Trust
256,107 Series 2004-7AR, Class 2A6 (b)......... 2.48% 09/25/34 230,235
Provident Funding Mortgage Loan Trust
489,411 Series 2005-1, Class 1A1 (b)........... 2.67% 05/25/35 425,592
See Notes to Quarterly Portfolio of Investments Page 1
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (Continued)
JULY 31, 2011 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES - (Continued)
COLLATERALIZED MORTGAGE OBLIGATIONS - (Continued)
Residential Accredit Loans, Inc.
$ 118,412 Series 2002-QS18, Class A1 ............ 5.50% 12/25/17 $ 121,187
1,191,685 Series 2004-QS2, Class CB ............. 5.75% 02/25/34 1,205,619
Residential Funding Mortgage Securities I
518,783 Series 2005-S5, Class A5............... 5.25% 07/25/35 502,587
Sequoia Mortgage Trust
3,079,099 Series 2007-1, Class 2A1 (b)........... 4.56% 02/20/47 2,494,686
Wachovia Mortgage Loan Trust, LLC
1,126,703 Series 2006-A, Class 3A1 (b) .......... 4.97% 05/20/36 1,049,042
Washington Mutual Msc Mortgage Pass-Through
786,713 Series 2004-RA1, Class 2A ............. 7.00% 03/25/34 814,797
Wells Fargo Mortgage Backed Securities
Trust
694,775 Series 2005-AR16, Class 1A1 (b)........ 2.76% 10/25/35 686,504
321,262 Series 2006-AR10, Class 5A2 (b)........ 2.73% 07/25/36 267,831
1,762,415 Series 2007-16, Class 1A1 ............. 6.00% 12/28/37 1,842,434
733,823 Series 2007-8, Class 2A7 .............. 6.00% 07/25/37 727,458
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32,715,284
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COMMERCIAL MORTGAGE-BACKED SECURITIES - 11.4%
Banc of America Merrill Lynch Commercial
Mortgage, Inc.
1,000,000 Series 2007-2, Class A4 (b)............ 5.82% 04/10/49 1,075,494
Citigroup/Deutsche Bank Commercial Mortgage
Trust
1,000,000 Series 2007-CD4, Class A4 ............. 5.32% 12/11/49 1,057,119
Greenwich Capital Commercial Funding Corp.
1,000,000 Series 2007-GG11, Class A4 ............ 5.74% 12/10/49 1,076,084
LB-UBS Commercial Mortgage Trust
1,200,000 Series 2007-C7, Class A3............... 5.87% 09/15/45 1,320,608
Merrill Lynch/Countrywide Commercial
Mortgage Trust
1,200,000 Series 2007-7, Class A4 (b)............ 5.81% 06/12/50 1,292,815
Morgan Stanley Capital I, Inc.
1,000,000 Series 2007-IQ14, Class A4............. 5.69% 04/15/49 1,076,013
Wachovia Bank Commercial Mortgage Trust
1,000,000 Series 2007-C30, Class A5 ............. 5.34% 12/15/43 1,062,859
1,000,000 Series 2007-C32, Class A3 (b).......... 5.93% 06/15/49 1,074,377
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9,035,369
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TOTAL MORTGAGE-BACKED SECURITIES ................................... 41,750,653
(Cost $40,737,911) ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 71.8%
COLLATERALIZED MORTGAGE OBLIGATIONS - 37.7%
Federal Home Loan Mortgage Corp.
1,473,521 Series 2641, Class SC (d).............. 13.53% 07/15/33 $ 1,647,020
6,832,972 Series 2807, Class SB, IO (d).......... 7.26% 11/15/33 1,227,132
Page 2 See Notes to Quarterly Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (Continued)
JULY 31, 2011 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - (Continued)
COLLATERALIZED MORTGAGE OBLIGATIONS - (Continued)
Federal Home Loan Mortgage Corp.
(Continued)
$ 394,596 Series 2870, Class JI, IO ............. 5.00% 10/15/27 $ 594
51,603 Series 2888, Class OI, IO ............. 5.00% 01/15/27 58
643,939 Series 2921, Class IQ, IO ............. 5.00% 01/15/29 7,359
292,379 Series 2938, Class PI, IO ............. 5.00% 11/15/28 4,073
600,832 Series 3000, Class SU (d).............. 22.61% 04/15/35 744,352
624,099 Series 3069, Class LI, IO ............. 5.50% 08/15/32 50,445
8,988 Series 3171, Class CS (d).............. 38.18% 06/15/36 9,116
268,044 Series 3195, Class SX (d).............. 44.94% 07/15/36 506,442
2,676,118 Series 3562, Class KI, IO ............. 4.50% 11/15/22 275,231
57,689 Series 3569, Class SN (d).............. 13.53% 08/15/39 58,287
2,523,800 Series 3593, Class IP, IO ............. 5.00% 06/15/36 282,892
10,321,860 Series 3619, Class EI, IO ............. 4.50% 05/15/24 1,354,990
4,735,439 Series 3692, Class PS, IO (d).......... 6.41% 05/15/38 823,851
2,573,078 Series 3702, Class SK (d).............. 14.14% 08/15/40 2,608,156
12,877,161 Series 3726, Class KI, IO ............. 3.50% 04/15/25 1,624,051
5,968,676 Series 3870, Class WS, IO (d).......... 6.41% 06/15/31 1,052,711
Federal Home Loan Mortgage Corp., STRIP
9,852,437 Series 227, Class IO, IO .............. 5.00% 12/01/34 2,130,473
4,828,384 Series 232, Class IO, IO .............. 5.00% 08/01/35 993,403
Federal National Mortgage Association
2,224,835 Series 2005-122, Class SN (d).......... 27.85% 01/25/36 3,275,339
229,883 Series 2005-39, Class BI, IO .......... 5.00% 06/25/28 2,221
324,038 Series 2005-91, Class SH (d)........... 23.15% 05/25/33 448,584
3,267,563 Series 2008-50, Class AI, IO .......... 5.50% 06/25/23 227,280
1,316,310 Series 2009-111, Class SB (d).......... 7.70% 04/25/35 1,208,691
3,772,627 Series 2009-56, Class PI, IO .......... 5.00% 11/25/30 46,522
6,309,540 Series 2010-103, Class ID, IO ......... 5.00% 09/25/40 972,047
9,440,609 Series 2010-139, Class KI, IO ......... 1.09% 12/25/40 480,874
5,000,000 Series 2010-142, Class PS, IO (d)...... 5.86% 05/25/40 768,406
3,683,867 Series 2010-145, Class TI, IO ......... 3.50% 12/25/20 351,131
13,530,656 Series 2010-40, Class MI, IO .......... 4.50% 08/25/24 1,631,459
Federal National Mortgage Association, STRIP
5,203,214 Series 360, Class 2, IO ............... 5.00% 08/01/35 1,067,712
7,872,317 Series 406, Class 6, IO (b)............ 4.00% 01/25/41 1,698,449
Government National Mortgage Association
3,170,939 Series 2009-65, Class NJ, IO .......... 5.50% 07/20/39 429,341
5,395,642 Series 2010-115, Class IQ, IO ......... 4.50% 11/20/38 1,041,333
5,850,076 Series 2011-69, Class CI, IO .......... 5.00% 03/20/36 816,871
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29,866,896
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See Notes to Quarterly Portfolio of Investments Page 3
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (Continued)
JULY 31, 2011 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - (Continued)
PASS-THROUGH SECURITIES - 34.1%
Federal Home Loan Mortgage Corp.
$ 2,721,147 Pool A94738 (e)........................ 4.50% 11/01/40 $ 2,843,538
1,491,902 Pool K36017 (e)........................ 5.00% 09/01/47 1,580,500
Federal National Mortgage Association
3,392,700 Pool 256182 (e)........................ 6.00% 03/01/36 3,711,011
3,279,853 Pool 256328 (e)........................ 6.50% 07/01/36 3,614,354
3,994,888 Pool 831145 (e)........................ 6.00% 12/01/35 4,431,494
4,349,551 Pool 843971 (e)........................ 6.00% 11/01/35 4,843,948
1,684,977 Pool 872303 ........................... 6.00% 05/01/36 1,862,812
3,816,094 Pool 880203 (e)........................ 6.00% 02/01/36 4,171,745
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27,059,402
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TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES ............ 56,926,298
(Cost $52,993,789) ------------
ASSET-BACKED SECURITIES - 0.4%
Green Tree Financial Corp.
143,906 Series 1997-2, Class A6 (b)............ 7.24% 06/15/28 158,230
153,332 Series 1997-3, Class A6 ............... 7.32% 03/15/28 168,993
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TOTAL ASSET-BACKED SECURITIES ...................................... 327,223
(Cost $316,428) ------------
TOTAL INVESTMENTS - 124.8% ......................................... 99,004,174
(Cost $94,048,128) (f) ------------
PRINCIPAL
VALUE DESCRIPTION AMOUNT
---------------- ------------------------------------------------------------------------- ------------
REVERSE REPURCHASE AGREEMENTS - (30.2%)
$ (7,587,500) With Credit Suisse 0.25% dated 07/05/11, to be repurchased at
$7,590,872 on 09/07/11................................................... (7,587,500)
(12,192,500) With Credit Suisse 0.24% dated 07/15/11, to be repurchased at
$12,195,020 on 08/15/11.................................................. (12,192,500)
(4,169,000) With Credit Suisse 0.26% dated 07/19/11, to be repurchased at
$4,171,740 on 10/18/11................................................... (4,169,000)
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TOTAL REVERSE REPURCHASE AGREEMENTS...................................... (23,949,000)
------------
NET OTHER ASSETS AND LIABILITIES - 5.4% ................................. 4,255,285
------------
NET ASSETS - 100.0% ..................................................... $ 79,310,459
============
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(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Floating rate security. The interest rate shown reflects the rate in
effect at July 31, 2011.
Page 4 See Notes to Quarterly Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (Continued)
JULY 31, 2011 (UNAUDITED)
(c) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. The Fund does
not have the right to demand that this security be registered. This
security is valued according to the valuation procedures as stated in the
Portfolio Valuation footnote (Note A in the Notes to Quarterly Portfolio
of Investments) and is not expressed as a discount to the carrying value
of a comparable unrestricted security. This security was acquired on
September 9, 2009, has a current carrying cost of $2,904,927, a carrying
value per share of $1.02 and represents 3.88% of net assets.
(d) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at July 31, 2011.
(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, 2011, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $9,139,821 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $4,183,775.
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
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VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of July 31, 2011
is as follows (see Note A - Portfolio Valuation in the Notes to Quarterly
Portfolio of Investments):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
7/31/2011 PRICES INPUTS INPUTS
------------- ----------- ------------- ------------
Mortgage-Backed Securities...................... $ 41,750,653 $ -- $ 41,750,653 $ --
U.S. Government Agency Mortgage-Backed
Securities.................................... 56,926,298 -- 56,926,298 --
Asset-Backed Securities......................... 327,223 -- 327,223 --
------------- ----------- ------------- ------------
TOTAL INVESTMENTS............................... $ 99,004,174 $ -- $ 99,004,174 $ --
============= =========== ============= ============
The following table presents the activity of the Fund's investments measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
for the period presented.
INVESTMENTS AT FAIR VALUE NET CHANGE IN NET
USING SIGNIFICANT REALIZED UNREALIZED BALANCE AS
UNOBSERVABLE INPUTS BALANCE AS OF TRANSFERS IN GAINS APPRECIATION NET PURCHASES OF JULY 31,
(LEVEL 3) OCTOBER 31, 2010 (OUT) OF LEVEL 3 (LOSSES) (DEPRECIATION) (SALES) 2011
--------------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities $ 3,747,608 $ (3,080,582) $ 27,328 $ (93,166) $ (601,188) $ --
=============================================================================================
See Notes to Quarterly Portfolio of Investments Page 5
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS
FIRST TRUST MORTGAGE INCOME FUND
JULY 31, 2011 (UNAUDITED)
VALUATION AND INVESTMENT PRACTICES
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of First Trust Mortgage Income
Fund (the "Fund") is determined daily, as of the close of regular trading on the
New York Stock Exchange ("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 in accordance with valuation procedures
adopted by the Fund's Board of Trustees, and in accordance with provisions of
the Investment Company Act of 1940, as amended (the "1940 Act"). Securities for
which market quotations are readily available are valued using the last reported
sale price on the business day as of which such value is being determined. If no
sales are reported on such business day (as in the case of some securities
traded over-the-counter), the last reported bid price is used, except that
certain U.S. Government securities are valued at the mean between the last
reported bid and asked prices. Mortgage-backed securities ("MBS") and other debt
securities not traded in an organized market are 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.
Debt securities having a remaining maturity of sixty days or less when purchased
are valued at cost adjusted for amortization of premiums and accretion of
discounts.
In the event that market quotations are not readily available, the pricing
service or dealer does not provide a valuation, or the valuations received are
deemed unreliable, the Fund's Board of Trustees has designated First Trust
Advisors L.P. ("First Trust") to use a fair value method to value the Fund's
securities. Additionally, if events occur after the close of the principal
markets for certain securities (e.g., domestic debt and foreign securities) that
could materially affect the Fund's NAV, First Trust may use a fair value method
to value the Fund's securities. The use of fair value pricing is governed by
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with the provisions of the 1940 Act. As a general principle, the fair value of a
security is the amount which the Fund might reasonably expect to receive for the
security upon its current sale. However, in light of the judgment involved in
fair valuations, there can be no assurance that a fair value assigned to a
particular security will be the amount which the Fund might be able to receive
upon its current sale. Fair valuation of a security is based on the
consideration of all available information, 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 a 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:
Page 6
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (Continued)
FIRST TRUST MORTGAGE INCOME FUND
JULY 31, 2011 (UNAUDITED)
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical securities. An active market is a market in which
transactions for the security 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 securities in active markets.
o Quoted prices for identical or similar securities in markets
that are non-active. A non-active market is a market where
there are few transactions for the security, 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
security (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
security.
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's investments as of July 31, 2011, 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.
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, 2011, the Fund had no when-issued, delayed-delivery
or forward purchase commitments.
C. REVERSE REPURCHASE AGREEMENTS:
Reverse repurchase agreements are utilized as leverage for the Fund. A reverse
repurchase agreement, although structured as a sale and repurchase obligation,
acts as a 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 to 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 period ended July 31, 2011:
Maximum amount outstanding during the period..................$24,495,000
Average amount outstanding during the period*.................$17,855,505
Average monthly Common Shares outstanding during the period... 4,060,219
Average debt per Common Share outstanding during the period... $4.40
* 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 period ended July 31, 2011.
During the period ended July 31, 2011, interest rates ranged from 0.08% to
0.38%, with a weighted average interest rate of 0.26%, on borrowings by the Fund
under reverse repurchase agreements, which had interest expense that aggregated
$35,322.
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
held in the Fund, are identified on the Portfolio of Investments.
Page 7
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (Continued)
FIRST TRUST MORTGAGE INCOME FUND
JULY 31, 2011 (UNAUDITED)
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 or IO security and
all of the principal is distributed to holders of another type of security known
as a principal-only or PO security. These securities, if held in the Fund, are
identified on the Portfolio of Investments.
F. INTEREST-ONLY SECURITIES:
An interest-only security ("IO Security") is the interest-only portion of a MBS
that receives some or all of the interest portion of the underlying MBS 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 held in the Fund, are identified on the
Portfolio of Investments.
Page 8
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/ James A. Bowen
--------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date September 21, 2011
----------------------
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/ James A. Bowen
--------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date September 21, 2011
----------------------
By (Signature and Title)* /s/ Mark R. Bradley
--------------------------------------------------------
Mark R. Bradley, Treasurer, Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date September 21, 2011
----------------------
* Print the name and title of each signing officer under his or her signature.