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: January 31, 2012
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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)
JANUARY 31, 2012 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ----------------------------------------- -------- --------------- -------------
MORTGAGE-BACKED SECURITIES - 67.8%
COLLATERALIZED MORTGAGE OBLIGATIONS - 47.4%
Adjustable Rate Mortgage Trust
$ 354,328 Series 2004-5, Class 1A1 (b)....... 3.03% 04/25/35 $ 302,123
Banc of America Funding Corp.
991,639 Series 2005-F, Class 4A1 (b)....... 2.79% 09/20/35 630,057
Banc of America Mortgage Securities
109,022 Series 2002-L, Class 1A1 (b)......... 2.78% 12/25/32 84,159
146,136 Series 2004-K, Class 4A1 (b)......... 5.25% 12/25/34 135,465
1,509,000 Series 2007-1, Class 1A26 ........... 6.00% 03/25/37 1,361,490
2,987,251 Series 2007-3, Class 2A3 ............ 7.00% 09/25/37 153,252
Bear Stearns Adjustable Rate Mortgage
Trust
989,082 Series 2004-10, Class 12A3 (b)....... 2.78% 01/25/35 797,265
1,126,322 Series 2004-9, Class 12A3 (b)........ 2.88% 11/25/34 997,053
Chase Mortgage Finance Corp.
634,258 Series 2007-A3, Class 3A1 (b)...... 5.80% 12/25/37 524,051
Countrywide Alternative Loan Trust
268,459 Series 2004-14T2, Class A6 .......... 5.50% 08/25/34 268,629
1,326,087 Series 2005-J1, Class 2A1 ........... 5.50% 02/25/25 1,288,876
Countrywide Home Loan Mortgage Pass
Through Trust
1,191,752 Series 2006-21, Class A8 ............ 5.75% 02/25/37 961,038
142,073 Series 2007-15, Class 2A2 ........... 6.50% 09/25/37 113,620
Countrywide Home Loans
312,627 Series 2004-HYB1, Class 2A (b)....... 2.95% 05/20/34 260,798
220,354 Series 2005-20, Class A7 ............ 5.25% 12/25/27 199,593
968,432 Series 2005-J4, Class A4 ............ 5.50% 11/25/35 973,773
Credit Suisse First Boston Mortgage
Securities Corp.
2,016,926 Series 2004-AR2, Class 1A1 (b)..... 2.91% 03/25/34 1,478,324
First Horizon Mortgage Trust
245,638 Series 2005-8, Class 1A5 ............ 5.75% 02/25/36 245,152
741,589 Series 2006-2, Class 1A3 ............ 6.00% 08/25/36 658,917
GMAC Mortgage Corporation Loan Trust
373,340 Series 2004-AR1, Class 22A (b)..... 3.06% 06/25/34 315,378
GSR Mortgage Loan Trust
318,296 Series 2005-AR2, Class 5A1 (b)....... 2.63% 04/25/35 273,472
2,399,873 Series 2007-1F, Class 3A10, IO ...... 6.00% 01/25/37 220,725
Harborview Mortgage Loan Trust
306,999 Series 2004-1, Class 2A (b).......... 2.71% 04/19/34 264,663
1,173,784 Series 2004-6, Class 3A1 (b)......... 2.77% 08/19/34 860,758
JP Morgan Mortgage Trust
2,678,946 Series 2005-ALT1, Class 4A1 (b).... 5.24% 10/25/35 1,959,705
JP Morgan Re-REMIC
2,693,106 Series 2009-7, Class 12A1 (b) (c).. 6.25% 01/27/37 2,748,458
MASTR Alternative Loan Trust
651,980 Series 2004-8, Class 5A1 .......... 6.00% 09/25/34 688,253
MASTR Asset Securitization Trust
1,150,589 Series 2006-2, Class 1A10 (b)...... 6.00% 06/25/36 1,050,947
See Notes to Quarterly Portfolio of Investments
Page 1
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JANUARY 31, 2012 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ----------------------------------------- -------- --------------- -------------
MORTGAGE-BACKED SECURITIES - (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS - (CONTINUED)
Merrill Lynch Mortgage Investors Trust
$ 1,436,517 Series 2005-A7, Class 2A1 (b)........ 5.24% 09/25/35 $ 1,240,093
Morgan Stanley Mortgage Loan Trust
246,338 Series 2004-7AR, Class 2A6 (b)....... 2.64% 09/25/34 202,744
Provident Funding Mortgage Loan Trust
482,653 Series 2005-1, Class 1A1 (b)......... 2.72% 05/25/35 410,213
Residential Accredit Loans, Inc.
104,480 Series 2002-QS18, Class A1 .......... 5.50% 12/25/17 106,789
1,124,629 Series 2004-QS2, Class CB ........... 5.75% 02/25/34 1,129,814
Residential Funding Mortgage Securities I
445,895 Series 2005-S5, Class A5 ............ 5.25% 07/25/35 441,919
Structured Asset Securities Corp.
930,000 Series 2005-16, Class 1A2 ........... 5.50% 09/25/35 810,939
Wachovia Mortgage Loan Trust, LLC
998,410 Series 2006-A, Class 3A1 (b)......... 4.84% 05/20/36 879,296
Washington Mutual Msc Mortgage Pass-Through
717,020 Series 2004-RA1, Class 2A ........... 7.00% 03/25/34 764,911
Wells Fargo Mortgage Backed Securities
Trust
2,746,000 Series 2005-9, Class 2A9 ............ 5.25% 10/25/35 2,606,089
652,999 Series 2005-AR16, Class 1A1 (b)...... 2.73% 08/25/33 631,909
495,000 Series 2006-AR1, Class 2A5 (b)....... 5.37% 03/25/36 439,886
300,620 Series 2006-AR10, Class 5A2 (b)...... 2.74% 07/25/36 220,015
1,826,043 Series 2007-10, Class 1A18 .......... 6.00% 07/25/37 1,676,784
1,485,466 Series 2007-16, Class 1A1 ........... 6.00% 12/28/37 1,549,973
1,066,950 Series 2007-2, Class 1A13 ........... 6.00% 03/25/37 945,591
265,000 Series 2007-8, Class 2A2 ............ 6.00% 07/25/37 255,745
124,234 Series 2007-8, Class 2A7 ............ 6.00% 07/25/37 123,734
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34,252,438
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COMMERCIAL MORTGAGE-BACKED SECURITIES - 20.4%
Banc of America Merrill Lynch Commercial
Mortgage, Inc.
1,000,000 Series 2006-6, Class A4 ............. 5.36% 10/10/45 1,100,641
1,000,000 Series 2007-2, Class A4 (b) (d)...... 5.43% 04/10/49 1,114,233
Citigroup/Deutsche Bank Commercial Mortgage
Trust
1,000,000 Series 2007-CD4, Class A4 ........... 5.32% 12/11/49 1,093,880
Countrywide Alternative Loan Trust
122,723 Series 2007-11T1, Class A37 (e)...... 38.36% 05/25/37 210,239
Credit Suisse Mortgage Capital Certificates
820,000 Series 2007-C2, Class A3 (b)......... 5.54% 01/15/49 888,958
Greenwich Capital Commercial Funding
Corp.
1,000,000 Series 2007-GG11, Class A4 (d)....... 5.74% 12/10/49 1,107,055
1,000,000 Series 2007-GG9, Class A4 ........... 5.44% 03/10/39 1,101,099
GS Mortgage Securities Corp II
1,000,000 Series 2007-GG10, Class A4 (b)....... 5.79% 08/10/45 1,112,333
See Notes to Quarterly Portfolio of Investments
Page 2
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JANUARY 31, 2012 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ----------------------------------------- -------- --------------- -------------
MORTGAGE-BACKED SECURITIES - (CONTINUED)
COMMERCIAL MORTGAGE-BACKED SECURITIES - (CONTINUED)
JP Morgan Chase Commercial Mortgage
Securities Corp
$ 905,000 Series 2007-CB18, Class A4 .......... 5.44% 06/12/47 $ 1,006,630
LB-UBS Commercial Mortgage Trust
1,200,000 Series 2007-C7, Class A3 (b) (d)..... 5.87% 09/15/45 1,354,073
Merrill Lynch/Countrywide Commercial
Mortgage Trust
1,200,000 Series 2007-7, Class A4 (b) (d)...... 5.75% 06/12/50 1,289,383
Morgan Stanley Capital I, Inc.
1,000,000 Series 2007-IQ14, Class A4 (b) (d)... 5.69% 04/15/49 1,105,040
Wachovia Bank Commercial Mortgage Trust
1,000,000 Series 2007-C30, Class A5 (d)........ 5.34% 12/15/43 1,073,458
1,000,000 Series 2007-C32, Class A3 (b) (d).... 5.74% 06/15/49 1,082,009
Washington Mutual Alternative Mortgage
Pass-Through Certificates
75,967 Series 2007-5, Class A11 (b)......... 37.82% 06/25/37 126,694
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14,765,725
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TOTAL MORTGAGE-BACKED SECURITIES ................................... 49,018,163
(Cost $49,619,023) -------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 51.9%
COLLATERALIZED MORTGAGE OBLIGATIONS - 26.3%
Federal Home Loan Mortgage Corp.
1,241,186 Series 2641, Class SC (e)............ 13.32% 07/15/33 1,366,699
5,722,449 Series 2807, Class SB, IO (e)........ 7.16% 11/15/33 848,103
454,118 Series 3000, Class SU (e)............ 22.21% 04/15/35 464,489
503,619 Series 3069, Class LI, IO ........... 5.50% 08/15/32 23,449
256,723 Series 3195, Class SX (e)............ 44.27% 07/15/36 484,308
2,095,688 Series 3562, Class KI, IO ........... 4.50% 11/15/22 128,490
2,103,700 Series 3593, Class IP, IO ........... 5.00% 06/15/36 138,843
8,307,870 Series 3619, Class EI, IO ........... 4.50% 05/15/24 758,524
4,531,587 Series 3692, Class PS, IO (e)........ 6.31% 05/15/38 629,008
1,965,701 Series 3702, Class SK (e)............ 13.83% 08/15/40 2,030,884
12,185,552 Series 3726, Class KI, IO ........... 3.50% 04/15/25 908,694
5,507,013 Series 3870, Class WS, IO (e)........ 6.31% 06/15/31 841,474
Federal Home Loan Mortgage Corp., STRIP
4,145,997 Series 232, Class IO, IO ............ 5.00% 08/01/35 557,699
Federal National Mortgage Association
2,153,660 Series 2005-122, Class SN (e)........ 27.49% 01/25/36 3,191,298
290,282 Series 2005-91, Class SH (e)......... 22.82% 05/25/33 348,944
2,404,804 Series 2008-50, Class AI, IO ........ 5.50% 06/25/23 119,963
176,494 Series 2009-56, Class PI, IO ........ 5.00% 11/25/30 23
6,076,389 Series 2010-103, Class ID, IO ....... 5.00% 09/25/40 1,129,277
9,023,917 Series 2010-139, Class KI, IO ....... 1.09% 12/25/40 496,048
4,495,203 Series 2010-142, Class PS, IO (e).... 5.77% 05/25/40 461,276
2,886,212 Series 2010-145, Class TI, IO ....... 3.50% 12/25/20 205,236
10,520,790 Series 2010-40, Class MI, IO ........ 4.50% 08/25/24 926,295
See Notes to Quarterly Portfolio of Investments
Page 3
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JANUARY 31, 2012 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ----------------------------------------- -------- --------------- -------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS - (CONTINUED)
Federal National Mortgage Association,
STRIP
$ 4,482,939 Series 360, Class 2, IO ............. 5.00% 08/01/35 $ 594,241
6,947,704 Series 406, Class 6, IO (e).......... 4.00% 01/25/41 771,988
Government National Mortgage Association
2,797,189 Series 2009-65, Class NJ, IO ........ 5.50% 07/20/39 343,353
5,195,633 Series 2010-115, Class IQ, IO ....... 4.50% 11/20/38 796,323
5,084,440 Series 2011-69, Class CI, IO ........ 5.00% 03/20/36 416,349
-------------
18,981,278
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COMMERCIAL MORTGAGE-BACKED SECURITIES - 2.4%
Government National Mortgage Association
13,578,923 Series 2011-131, Class EI, IO ....... 4.50% 08/20/39 1,755,087
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PASS-THROUGH SECURITIES - 23.2%
Fannie Mae REMICs
2,369,054 Series 2005-83, Class LZ (d)......... 5.50% 10/25/35 2,499,086
1,580,874 Series 2010-110, Class WG (d)........ 5.50% 09/25/40 1,621,435
Federal Home Loan Mortgage Corp.
2,511,628 Pool A94738 (d)...................... 4.50% 11/01/40 2,675,546
1,300,855 Pool K36017 (d)...................... 5.00% 09/01/47 1,390,873
Federal National Mortgage Association
3,487,862 Pool 831145 (d)...................... 6.00% 12/01/35 3,873,128
4,217,828 Pool 843971 (d)...................... 6.00% 11/01/35 4,712,063
-------------
16,772,131
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TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES ............ 37,508,496
(Cost $37,966,490) -------------
ASSET-BACKED SECURITIES - 2.7%
Green Tree Financial Corp.
128,298 Series 1997-2, Class A6 (b).......... 7.24% 06/15/28 141,141
138,642 Series 1997-3, Class A6 ............. 7.32% 03/15/28 153,125
173,650 Series 1997-7, Class A6 ............. 6.76% 07/15/29 187,454
Lehman ABS Manufactured Housing Contract
Trust
272,507 Series 2001-B, Class A4 ............. 5.27% 04/15/40 285,779
Mid-State Trust
269,623 Series 2006-1, Class A .............. 5.79% 10/15/40 281,209
Park Place Securities, Inc.
917,805 Series 2004-MHQ1, Class M1 (b)....... 0.98% 12/25/34 889,210
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TOTAL ASSET-BACKED SECURITIES ...................................... 1,937,918
(Cost $1,910,941) -------------
TOTAL INVESTMENTS - 122.4% ......................................... 88,464,577
(Cost $89,496,454) (f) -------------
See Notes to Quarterly Portfolio of Investments
Page 4
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JANUARY 31, 2012 (UNAUDITED)
PRINCIPAL
VALUE DESCRIPTION AMOUNT
---------------- ---------------------------------------------------------------------- -------------
REVERSE REPURCHASE AGREEMENTS - (30.2%)
$ (6,230,500) With Credit Suisse 1.65% dated 11/07/11, to be repurchased at
$6,256,486 on 02/06/12 $ (6,230,500)
(8,161,000) With Credit Suisse 0.39% dated 11/14/11, to be repurchased at
$8,169,134 on 02/14/12 (8,161,000)
(3,853,000) With Credit Suisse 0.32% dated 01/18/12, to be repurchased at
$3,856,117 on 04/18/12 (3,853,000)
(3,612,750) With Credit Suisse 1.00% dated 01/31/12, to be repurchased at
$3,618,671 on 03/30/12 (3,612,750)
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TOTAL REVERSE REPURCHASE AGREEMENTS ................................ (21,857,250)
NET OTHER ASSETS AND LIABILITIES - 7.8% ............................ 5,676,749
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NET ASSETS - 100.0% ................................................ $ 72,284,076
=============
(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 January 31, 2012.
(c) The Fund may invest in restricted securities. This security is restricted
and cannot be offered for public sale without first being registered under
the Securities Act of 1933, as amended. Prior to registration, restricted
securities may only be resold in transactions exempt from registration.
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) 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 $2,625,795, a carrying value per share of $1.02 and
represents 3.80% of net assets.
(d) This security or a portion of this security is segregated as collateral
for reverse repurchase agreements.
(e) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at January 31, 2012.
(f) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of January 31, 2012,
the aggregate gross unrealized appreciation for all securities in which
there was an excess of value over tax cost was $5,700,242 and the
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $6,732,119.
IO Interest-Only Security
STRIP Separate Trading of Registered Interest and Principal of Securities
See Notes to Quarterly Portfolio of Investments
Page 5
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JANUARY 31, 2012 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of January 31,
2012 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
1/31/2012 PRICES INPUTS INPUTS
--------------- ------------- --------------- --------------
Mortgage-Backed Securities..................... $ 49,018,163 $ -- $ 49,018,163 $ --
U.S. Government Agency Mortgage-Backed
Securities................................... 37,508,496 -- 37,508,496 --
Asset-Backed Securities........................ 1,937,918 -- 1,937,918 --
------------- ----------- ------------- ------------
TOTAL INVESTMENTS.............................. $ 88,464,577 $ -- $ 88,464,577 $ --
============= =========== ============= ============
See Notes to Quarterly Portfolio of Investments
Page 6
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS
FIRST TRUST MORTGAGE INCOME FUND
JANUARY 31, 2012 (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"). The Fund's
securities will be valued as follows:
U.S. Government securities, Mortgage-backed securities ("MBS"),
Asset-backed securities ("ABS") and other debt securities 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 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 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 7
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (CONTINUED)
FIRST TRUST MORTGAGE INCOME FUND
JANUARY 31, 2012 (UNAUDITED)
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 investments.
The inputs or methodology 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, 2012, 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 January 31, 2012, 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 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 period ended January 31, 2012:
Maximum amount outstanding during the period.................. $22,993,750
Average amount outstanding during the period*................. $22,630,902
Average Common Shares outstanding during the period........... 4,073,199
Average debt per Common Share outstanding during the period... $5.56
* 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 January 31, 2012.
During the period ended January 31, 2012, the interest rates ranged from 0.31%
to 1.65%, with a weighted average interest rate of 0.81%, on borrowings by the
Fund under reverse repurchase agreements, which had interest expense that
aggregated $47,105.
Page 8
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (CONTINUED)
FIRST TRUST MORTGAGE INCOME FUND
JANUARY 31, 2012 (UNAUDITED)
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 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 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 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 are identified on the Portfolio of
Investments.
Page 9
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 26, 2012
----------------------
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 26, 2012
----------------------
By (Signature and Title)* /s/ James M. Dykas
------------------------------------------------------
James M. Dykas, Treasurer, Chief Financial Officer
and Chief Accounting Officer
(principal financial officer)
Date March 26, 2012
----------------------
* Print the name and title of each signing officer under his or her signature.