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, 2016
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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, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------- ----------- -------------- ------------
MORTGAGE-BACKED SECURITIES - 70.6%
COLLATERALIZED MORTGAGE OBLIGATIONS - 53.7%
Accredited Mortgage Loan Trust
$ 432,112 Series 2003-2, Class A1 ............................ 4.98% 10/01/33 $ 442,084
ACE Securities Corp. Home Equity Loan Trust
1,085,199 Series 2006-ASAP6, Class A2D (a).................... 0.71% 12/25/36 589,992
Banc of America Mortgage Trust
54,855 Series 2002-L, Class 1A1 (a) (b).................... 2.50% 12/01/32 48,345
Chase Mortgage Finance Trust
309,216 Series 2007-A1, Class 1A3 (a)....................... 2.93% 02/01/37 306,112
Citigroup Mortgage Loan Trust
962,458 Series 2012-7, Class 10A2 (a) (c)................... 3.05% 09/01/36 881,127
Countrywide Asset-Backed Certificates
246,985 Series 2006-S8, Class A6 ........................... 5.51% 04/01/36 245,223
Countrywide Home Loan Mortgage Pass-Through Trust
679,060 Series 2003-46, Class 2A1 (a)....................... 2.88% 01/01/34 673,650
430,540 Series 2006-21, Class A8 ........................... 5.75% 02/01/37 380,457
717,722 Series 2006-HYB5, Class 3A1A (a).................... 2.87% 09/01/36 574,689
Credit Suisse First Boston Mortgage Securities Corp.
392,100 Series 2004-AR2, Class 1A1 (a)...................... 3.06% 03/01/34 385,378
872,527 Series 2004-AR8, Class 6A1 (a)...................... 2.83% 09/01/34 864,685
DSLA Mortgage Loan Trust
935,071 Series 2004-AR3, Class 2A2A (a)..................... 0.85% 07/19/44 908,136
987,167 Series 2007-AR1, Class 2A1A (a)..................... 0.62% 04/19/47 797,004
GMAC Mortgage Corporation Loan Trust
206,996 Series 2004-AR1, Class 22A (a)...................... 3.41% 06/01/34 201,777
GSR Mortgage Loan Trust
268,451 Series 2005-AR1, Class 4A1 (a)...................... 2.38% 01/01/35 255,996
Harborview Mortgage Loan Trust
580,545 Series 2004-6, Class 3A1 (a)........................ 3.40% 08/01/34 559,387
Home Equity Asset Trust
520,000 Series 2005-9, Class M1 (a)......................... 0.90% 04/25/36 469,298
Irwin Home Equity Loan Trust
370,579 Series 2006-3, Class 2A2 (c)........................ 5.83% 09/01/37 374,653
IXIS Real Estate Capital Trust
1,220,850 Series 2007-HE1, Class A3 (a)....................... 0.65% 05/25/37 466,808
JP Morgan Mortgage Trust
1,554,298 Series 2005-ALT1, Class 4A1 (a)..................... 3.01% 10/01/35 1,441,064
727,222 Series 2006-A2, Class 4A1 (a)....................... 3.17% 08/01/34 730,822
115,223 Series 2006-A2, Class 5A3 (a)....................... 2.72% 11/01/33 117,073
JP Morgan Re-REMIC
552,599 Series 2009-7, Class 12A1 (c)....................... 6.25% 01/01/37 568,322
MASTR Asset Backed Securities Trust
1,035,760 Series 2006-HE5, Class A3 (a)....................... 0.65% 11/25/36 671,267
1,529,945 Series 2006-NC2, Class A3 (a)....................... 0.60% 08/25/36 776,334
698,347 Series 2006-NC2, Class A5 (a)....................... 0.73% 08/25/36 365,898
See Notes to Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------- ----------- -------------- ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Mellon Residential Funding Corp. Mortgage Pass-Through
Trust
$ 491,519 Series 2001-TBC1, Class A1 (a)...................... 1.21% 11/15/31 $ 460,319
439,286 Series 2002-TBC2, Class A (a)....................... 1.37% 08/15/32 419,035
Morgan Stanley Mortgage Loan Trust
354,881 Series 2004-7AR, Class 2A6 (a)...................... 2.85% 09/01/34 361,677
Nomura Asset Acceptance Corporation
859,106 Series 2004-AR4, Class M1 (a)....................... 1.09% 12/25/34 804,508
Nomura Resecuritization Trust
1,263,000 Series 2015-6R, Class 2A4 (a) (c)................... 7.38% 01/02/37 997,770
Provident Funding Mortgage Loan Trust
163,449 Series 2005-1, Class 1A1 (a)........................ 2.87% 05/01/35 163,344
Residential Accredit Loans, Inc.
204,082 Series 2006-QO1, Class 2A1 (a)...................... 0.76% 02/25/46 122,296
Saxon Asset Securities Trust
1,117,907 Series 2007-2, Class A2D (a)........................ 0.79% 05/25/47 798,959
Springleaf Mortgage Loan Trust
192,889 Series 2013-3A, Class A (c)......................... 1.87% 09/01/57 193,851
850,000 Series 2013-3A, Class M3 (c)........................ 5.00% 09/01/57 854,255
Structured Adjustable Rate Mortgage Loan Trust
582,891 Series 2004-2, Class 4A2 (a)........................ 2.91% 03/01/34 585,921
Thornburg Mortgage Securities Trust
477,745 Series 2003-4, Class A1 (a)......................... 1.13% 09/25/43 462,411
Towd Point Mortgage Trust
927,206 Series 2015-2, Class 2A1 (a) (c).................... 3.75% 11/01/57 961,841
Wachovia Mortgage Loan Trust, LLC
392,712 Series 2006-A, Class 3A1 (a)........................ 2.96% 05/01/36 375,212
WaMu Mortgage Pass-Through Certificates
265,069 Series 2003-AR5, Class A7 (a)....................... 2.82% 06/01/33 268,077
649,865 Series 2004-AR1, Class A (a)........................ 2.76% 03/01/34 652,750
725,401 Series 2004-AR10, Class A1B (a)..................... 0.91% 07/25/44 693,953
566,555 Series 2004-AR13, Class A1A (a)..................... 1.21% 11/25/34 517,632
755,106 Series 2005-AR1, Class A1A (a)...................... 1.13% 01/25/45 712,811
1,082,056 Series 2005-AR11, Class A1A (a)..................... 0.81% 08/25/45 1,008,954
1,025,701 Series 2005-AR6, Class 2A1A (a)..................... 0.72% 04/25/45 969,366
456,171 Series 2005-AR9, Class A1A (a)...................... 1.13% 07/25/45 433,963
743,670 Series 2006-AR2, Class 1A1 (a)...................... 2.52% 03/01/36 693,363
Washington Mutual Alternative Mortgage Pass-Through
Certificates
37,488 Series 2007-5, Class A11 (b) (d).................... 36.55% 06/25/37 94,310
Washington Mutual MSC Mortgage Pass-Through Certificates
520,812 Series 2004-RA1, Class 2A .......................... 7.00% 03/01/34 545,870
Wells Fargo Mortgage Backed Securities Trust
520,214 Series 2003-H, Class A1 (a)......................... 2.77% 09/01/33 519,226
See Notes to Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------- ----------- -------------- ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Wells Fargo Mortgage Backed Securities Trust (Continued)
$ 640,791 Series 2004-A, Class A1 (a)......................... 2.83% 02/01/34 $ 646,369
1,353,627 Series 2004-R, Class 1A1 (a)........................ 2.76% 09/01/34 1,369,281
347,283 Series 2004-S, Class A1 (a)......................... 2.96% 09/01/34 354,341
725,626 Series 2004-Y, Class 1A2 (a)........................ 2.80% 11/01/34 718,381
334,449 Series 2005-AR10, Class 2A17 (a).................... 2.90% 06/01/35 348,940
676,743 Series 2005-AR16, Class 1A1 (a)..................... 3.02% 08/01/33 695,198
319,899 Series 2005-AR3, Class 2A1 (a)...................... 2.99% 03/01/35 322,733
534,302 Series 2005-AR8, Class 1A1 (a)...................... 3.01% 06/01/35 542,557
632,501 Series 2006-13, Class A5 ........................... 6.00% 10/01/36 644,192
221,854 Series 2007-16, Class 1A1 .......................... 6.00% 12/04/37 230,372
316,998 Series 2007-2, Class 1A13 .......................... 6.00% 03/01/37 311,881
80,582 Series 2007-8, Class 2A2 (b)........................ 6.00% 07/01/37 80,536
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35,032,036
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COMMERCIAL MORTGAGE-BACKED SECURITIES - 16.9%
Banc of America Commercial Mortgage Trust
1,000,000 Series 2006-6, Class AJ ............................ 5.42% 10/01/45 997,326
650,000 Series 2007-3, Class AJ, STRIP ..................... 5.72% 06/01/49 652,835
Bayview Commercial Asset Trust
590,695 Series 2004-2, Class A (a) (c)...................... 0.92% 08/25/34 545,795
BXHTL Mortgage Trust
800,000 Series 2015-JWRZ, Class B (a) (c)................... 1.70% 05/15/29 797,137
COMM Mortgage Trust
150,000 Series 2007-C9, Class AJ ........................... 5.65% 12/01/49 151,825
Greenwich Capital Commercial Funding Corp.
700,000 Series 2007-GG11, Class AJ ......................... 6.24% 12/01/49 702,837
Hudsons Bay Simon JV Trust
510,000 Series 2015-HBFL, Class DFL (a) (c)................. 4.15% 08/05/34 501,649
Hyatt Hotel Portfolio Trust
1,040,000 Series 2015-HYT, Class B (a) (c).................... 2.21% 11/15/29 1,040,966
JP Morgan Chase Commercial Mortgage Securities Corp
210,145 Series 2007-CB18, Class A4 ......................... 5.44% 06/01/47 212,310
LB-UBS Commercial Mortgage Trust
210,000 Series 2007-C1, Class AJ ........................... 5.48% 02/11/40 210,969
835,000 Series 2007-C1, Class AM ........................... 5.46% 02/11/40 843,005
440,000 Series 2007-C2, Class AM ........................... 5.49% 02/11/40 449,091
200,000 Series 2007-C6, Class AJ (a)........................ 6.32% 07/11/40 198,796
Morgan Stanley Capital I Trust
540,000 Series 2007-T25, Class AM .......................... 5.54% 11/01/49 547,847
UBS-Barclays Commercial Mortgage Trust
15,067,145 Series 2013-C5, Class XA, IO (a) (c)................ 1.20% 03/01/46 800,314
Wachovia Bank Commercial Mortgage Trust
740,000 Series 2007-C30, Class AJ .......................... 5.41% 12/01/43 738,876
See Notes to Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------- ----------- -------------- ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COMMERCIAL MORTGAGE-BACKED SECURITIES (CONTINUED)
Wachovia Bank Commercial Mortgage Trust (Continued)
$ 650,000 Series 2007-C33, Class AJ, STRIP ................... 6.16% 02/01/51 $ 644,890
Waldorf Astoria Boca Raton Trust
1,000,000 Series 2016-BOCA, Class E (a) (c)................... 4.82% 06/15/29 1,004,304
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11,040,772
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TOTAL MORTGAGE-BACKED SECURITIES..................................................... 46,072,808
(Cost $46,652,046) ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 15.4%
COLLATERALIZED MORTGAGE OBLIGATIONS - 5.2%
Federal Home Loan Mortgage Corp.
1,275,160 Series 2807, Class SB, IO (d)....................... 6.94% 11/15/33 177,928
13,874 Series 3195, Class SX (b) (d)....................... 42.85% 07/15/36 60,232
915,526 Series 3619, Class EI, IO (b)....................... 4.50% 05/01/24 25,238
617,653 Series 3692, Class PS, IO (b) (d)................... 6.09% 05/15/38 24,530
2,269,639 Series 3726, Class KI, IO (b)....................... 3.50% 04/01/25 110,016
1,747,202 Series 3870, Class WS, IO (d)....................... 6.09% 06/15/31 214,113
1,348,152 Series 4206, Class IA, IO .......................... 3.00% 03/01/33 170,154
Federal National Mortgage Association
409,239 Series 2005-122, Class SN (b) (d)................... 26.65% 01/25/36 478,075
24,943 Series 2008-50, Class AI, IO (b).................... 5.50% 06/01/23 913
2,754,779 Series 2010-103, Class ID, IO (b)................... 5.00% 09/01/40 396,997
4,215,050 Series 2010-139, Class KI, IO (b)................... 1.09% 12/01/40 218,128
147,007 Series 2010-142, Class PS, IO (b) (d)............... 5.56% 05/25/40 4,987
577,241 Series 2010-145, Class TI, IO (b)................... 3.50% 12/01/20 29,020
1,123,842 Series 2010-40, Class MI, IO (b).................... 4.50% 08/01/24 23,261
2,994,294 Series 2012-112, Class BI, IO ...................... 3.00% 09/01/31 221,765
2,422,850 Series 2012-125, Class MI, IO ...................... 3.50% 11/01/42 402,548
3,249,166 Series 2013-32, Class IG, IO ....................... 3.50% 04/01/33 401,269
Federal National Mortgage Association, STRIP
1,840,519 Series 406, Class 6, IO ............................ 4.00% 01/01/41 249,993
Government National Mortgage Association
363,675 Series 2009-65, Class NJ, IO (b).................... 5.50% 07/01/39 27,514
1,700,167 Series 2010-115, Class IQ, IO (b)................... 4.50% 11/01/38 82,282
2,491,701 Series 2011-131, Class EI, IO (b)................... 4.50% 08/01/39 77,832
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3,396,795
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PASS-THROUGH SECURITIES - 10.2%
Fannie Mae REMICs
915,276 Series 2005-83, Class LZ .......................... 5.50% 10/01/35 1,016,222
Federal Home Loan Mortgage Corp.
1,000,000 Gold Pool .......................................... 3.00% 08/01/46 1,040,942
749,027 Pool A94738 ........................................ 4.50% 11/01/40 816,167
742,739 Pool K36017 ........................................ 5.00% 09/01/47 805,513
See Notes to Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JULY 31, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------- ----------- -------------- ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
PASS-THROUGH SECURITIES (CONTINUED)
Federal National Mortgage Association
$ 1,344,433 Pool 831145 ........................................ 6.00% 12/01/35 $ 1,546,605
1,246,222 Pool 843971 ........................................ 6.00% 11/01/35 1,447,653
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6,673,102
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TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES.............................. 10,069,897
(Cost $13,675,195) ------------
ASSET-BACKED SECURITIES - 1.5%
Green Tree Financial Corp.
15,860 Series 1997-2, Class A6 (b)......................... 7.24% 06/15/28 15,856
31,376 Series 1997-3, Class A6 (b)......................... 7.32% 03/15/28 32,720
27,453 Series 1997-7, Class A6 (b)......................... 6.76% 07/15/28 27,912
Mid-State Capital Corp. Trust
503,777 Series 2004-1, Class M1 ............................ 6.50% 08/01/37 541,064
363,145 Series 2005-1, Class A ............................. 5.75% 01/01/40 392,114
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TOTAL ASSET-BACKED SECURITIES........................................................ 1,009,666
(Cost $1,033,733) ------------
TOTAL INVESTMENTS - 87.5%............................................................ 57,152,371
(Cost $61,360,974) (e)
NET OTHER ASSETS AND LIABILITIES - 12.5%............................................. 8,145,374
------------
NET ASSETS - 100.0%.................................................................. $ 65,297,745
============
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(a) Floating or variable rate security. The interest rate shown reflects the
rate in effect at July 31, 2016.
(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) 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, 2016,
securities noted as such amounted to $9,521,984, or 14.58% of net assets.
(d) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at July 31, 2016.
(e) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of July 31, 2016, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $1,520,458 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $5,729,061.
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, 2016 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of July 31, 2016
is as follows (see Note 2A - Portfolio Valuation in the Notes to Portfolio of
Investments):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
7/31/2016 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Mortgage-Backed Securities...................... $ 46,072,808 $ -- $ 46,072,808 $ --
U.S. Government Agency Mortgage-Backed
Securities................................... 10,069,897 -- 10,069,897 --
Asset-Backed Securities......................... 1,009,666 -- 1,009,666 --
------------- ------------- ------------- -------------
Total Investments............................... $ 57,152,371 $ -- $ 57,152,371 $ --
============= ============= ============= =============
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, 2016.
See Notes to Portfolio of Investments
NOTES TO PORTFOLIO OF INVESTMENTS
FIRST TRUST MORTGAGE INCOME FUND (FMY)
JULY 31, 2016 (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 a
third-party 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
obtain a reliable market quotation; and a security whose price, as provided by
NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED)
FIRST TRUST MORTGAGE INCOME FUND (FMY)
JULY 31, 2016 (UNAUDITED)
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, 2016, 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, 2016, 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, 2016 (UNAUDITED)
C. REVERSE REPURCHASE AGREEMENTS
During the period November 1, 2015 to July 27, 2016, 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 period during which reverse repurchase agreements were
outstanding:
Maximum amount outstanding during the period.................. $5,309,000
Average amount outstanding during the period*................. $5,031,413
Average Common Shares outstanding during the period........... 4,213,115
Average debt per Common Share outstanding during the period... $ 1.19
* 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
during which reverse repurchase agreements were outstanding in the fiscal
year-to-date period ended July 31, 2016.
During the fiscal year-to-date period ended July 31, 2016, the interest rates
ranged from 0.42% to 0.75%, with a weighted average interest rate of 0.66%, on
borrowings by the Fund under reverse repurchase agreements, which had interest
expense that aggregated $25,073.
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 and have the effect of
creating leverage. 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
Effective September 19, 2016, the portfolio management of the Fund transitioned
to the First Trust Mortgage Securities Team, led by Jim Snyder and Jeremiah
Charles. Schroder Investment Management North America Inc. acquired the
portfolio management team of Brookfield Investment Management Inc., previously
responsible for the portfolio management of the Fund, resulting in the automatic
termination of the investment sub-advisory agreement among Brookfield, First
Trust and the Fund. In connection with the change in portfolio management, First
Trust agreed to lower the investment management fee payable by the Fund to a
rate of 0.85% of the Fund's managed assets, a decrease from the Fund's previous
investment management fee of 1.00% of the Fund's managed assets.
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 M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: September 20, 2016
--------------------
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 M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: September 20, 2016
--------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: September 20, 2016
--------------------
* Print the name and title of each signing officer under his or her signature.