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, 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
JULY 31, 2012 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES - 70.6%
COLLATERALIZED MORTGAGE OBLIGATIONS - 48.8%
Adjustable Rate Mortgage Trust
$ 286,611 Series 2004-5, Class 1A1 (a)........... 3.11% 04/25/35 $ 269,596
Banc of America Funding Corp.
906,946 Series 2005-F, Class 4A1 (a)........... 2.97% 09/20/35 627,894
Banc of America Mortgage Securities
107,135 Series 2002-L, Class 1A1 (a)........... 2.78% 12/25/32 90,694
1,458,085 Series 2007-1, Class 1A26 ............. 6.00% 03/25/37 1,339,841
Bear Stearns Adjustable Rate Mortgage Trust
1,074,996 Series 2004-9, Class 12A3 (a).......... 2.96% 11/25/34 1,041,345
Countrywide Alternative Loan Trust
127,817 Series 2004-14T2, Class A6 ............ 5.50% 08/25/34 128,545
113,559 Series 2007-11T1, Class A37 (b)........ 38.54% 05/25/37 213,209
Countrywide Home Loan Mortgage Pass
Through Trust
1,087,544 Series 2006-21, Class A8 .............. 5.75% 02/25/37 903,871
130,568 Series 2007-15, Class 2A2 ............. 6.50% 09/25/37 105,841
Countrywide Home Loans
290,979 Series 2004-HYB1, Class 2A (a)......... 2.87% 05/20/34 271,184
Credit Suisse First Boston Mortgage
Securities Corp.
1,982,344 Series 2004-AR2, Class 1A1 (a)......... 2.93% 03/25/34 1,619,607
GMAC Mortgage Corporation Loan Trust
363,880 Series 2004-AR1, Class 22A (a)......... 3.26% 06/25/34 336,572
GSR Mortgage Loan Trust
379,203 Series 2005-AR2, Class 5A1 (a)......... 2.74% 04/25/35 329,467
Harborview Mortgage Loan Trust
284,134 Series 2004-1, Class 2A (a)............ 2.82% 04/19/34 271,262
1,148,551 Series 2004-6, Class 3A1 (a)........... 2.98% 08/19/34 923,812
JP Morgan Mortgage Trust
2,582,077 Series 2005-ALT1, Class 4A1 (a)........ 5.22% 10/25/35 2,071,454
974,176 Series 2006-A2, Class 4A1 (a).......... 3.01% 08/25/34 973,843
JP Morgan Re-REMIC
2,380,259 Series 2009-7, Class 12A1 (a) (c) (d).. 6.25% 01/27/37 2,434,580
MASTR Asset Securitization Trust
1,077,785 Series 2006-2, Class 1A10 (a).......... 6.00% 06/25/36 975,093
Mellon Residential Funding Corp.
520,364 Series 2001-TBC1, Class A1 (a)......... 0.95% 11/15/31 518,544
Merrill Lynch Mortgage Investors Trust
2,131,346 Series 2005-A7, Class 2A1 (a).......... 5.24% 09/25/35 1,962,307
Morgan Stanley Mortgage Loan Trust
234,851 Series 2004-7AR, Class 2A6 (a)......... 2.78% 09/25/34 213,907
Provident Funding Mortgage Loan Trust
424,380 Series 2005-1, Class 1A1 (a)........... 2.97% 05/25/35 395,371
Residential Accredit Loans, Inc.
1,070,992 Series 2004-QS2, Class CB ............. 5.75% 02/25/34 1,083,913
Residential Funding Mortgage Securities I
423,880 Series 2005-S5, Class A5 .............. 5.25% 07/25/35 422,180
Structured Asset Securities Corp.
895,724 Series 2005-16, Class 1A2 ............. 5.50% 09/25/35 860,690
See Notes to Quarterly Portfolio of Investments Page 1
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
JULY 31, 2012 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES - (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS - (CONTINUED)
Thornburg Mortgage Securities Trust
$ 1,332,863 Series 2004-3, Class A (a)............. 0.99% 09/25/44 $ 1,248,788
Wachovia Mortgage Loan Trust, LLC
919,139 Series 2006-A, Class 3A1 (a)........... 3.51% 05/20/36 850,928
WaMu Mortgage Pass Through Certificates
1,754,199 Series 2005-AR19, Class A1A2 (a)....... 0.54% 12/25/45 1,474,399
807,924 Series 2005-AR9, Class A1A (a) ........ 0.57% 07/25/45 688,329
Washington Mutual Alternative Mortgage
Pass-Through Certificates
69,228 Series 2007-5, Class A11 (b)........... 38.00% 06/25/37 112,705
Washington Mutual Msc Mortgage Pass-Through
671,935 Series 2004-RA1, Class 2A ............. 7.00% 03/25/34 712,839
Wells Fargo Mortgage Backed Securities
Trust
1,200,321 Series 2004-A, Class A1 (a)............ 4.86% 02/25/34 1,241,630
2,746,000 Series 2005-9, Class 2A9 .............. 5.25% 10/25/35 2,791,750
571,814 Series 2005-AR16, Class 1A1 (a)........ 2.75% 08/25/33 583,191
495,000 Series 2006-AR1, Class 2A5 (a)......... 5.37% 03/25/36 464,842
1,244,071 Series 2006-AR10, Class 5A2 (a)........ 2.61% 07/25/36 994,721
1,657,090 Series 2007-10, Class 1A18 ............ 6.00% 07/25/37 1,635,649
1,216,891 Series 2007-16, Class 1A1 ............. 6.00% 12/28/37 1,256,374
970,380 Series 2007-2, Class 1A13 ............. 6.00% 03/25/37 894,876
244,218 Series 2007-8, Class 2A2 .............. 6.00% 07/25/37 244,806
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35,580,449
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COMMERCIAL MORTGAGE-BACKED SECURITIES - 21.8%
Banc of America Merrill Lynch Commercial
Mortgage, Inc.
1,000,000 Series 2006-6, Class A4 ............... 5.36% 10/10/45 1,127,964
1,000,000 Series 2007-2, Class A4 (a) (d)........ 5.80% 04/10/49 1,161,393
Citigroup/Deutsche Bank Commercial Mortgage
Trust
1,000,000 Series 2007-CD4, Class A4 ............. 5.32% 12/11/49 1,126,746
Credit Suisse Mortgage Capital Certificates
820,000 Series 2007-C2, Class A3 (a)........... 5.54% 01/15/49 902,595
Greenwich Capital Commercial Funding Corp.
2,980,000 Series 2007-GG11, Class A4 (d)......... 5.74% 12/10/49 3,372,439
GS Mortgage Securities Corp II
1,000,000 Series 2007-GG10, Class A4 (a)......... 5.98% 08/10/45 1,130,174
JP Morgan Chase Commercial Mortgage
Securities Corp
905,000 Series 2007-CB18, Class A4 ............ 5.44% 06/12/47 1,036,729
LB-UBS Commercial Mortgage Trust
1,200,000 Series 2007-C7, Class A3 (a) (d)....... 5.87% 09/15/45 1,402,937
Page 2 See Notes to Quarterly Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
JULY 31, 2012 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES - (CONTINUED)
COMMERCIAL MORTGAGE-BACKED SECURITIES - (CONTINUED)
Merrill Lynch/Countrywide Commercial Mortgage
Trust
$ 1,200,000 Series 2007-7, Class A4 (a) (d)........ 5.81% 06/12/50 $ 1,311,350
Morgan Stanley Capital I, Inc.
1,000,000 Series 2007-IQ14, Class A4 (a) (d)..... 5.69% 04/15/49 1,115,706
Wachovia Bank Commercial Mortgage Trust
1,000,000 Series 2007-C30, Class A5 (d).......... 5.34% 12/15/43 1,105,133
1,000,000 Series 2007-C32, Class A3 (a).......... 5.93% 06/15/49 1,119,554
------------
15,912,720
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TOTAL MORTGAGE-BACKED SECURITIES......................................... 51,493,169
(Cost $48,370,129) ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 44.3%
COLLATERALIZED MORTGAGE OBLIGATIONS - 19.5%
Federal Home Loan Mortgage Corp.
724,657 Series 2641, Class SC (b).............. 13.40% 07/15/33 773,869
4,745,463 Series 2807, Class SB, IO (b).......... 7.20% 11/15/33 715,685
386,246 Series 3069, Class LI, IO ............. 5.50% 08/15/32 10,820
181,455 Series 3195, Class SX (b).............. 44.53% 07/15/36 283,218
1,581,621 Series 3562, Class KI, IO ............. 4.50% 11/15/22 68,705
1,486,429 Series 3593, Class IP, IO ............. 5.00% 06/15/36 78,466
6,641,674 Series 3619, Class EI, IO ............. 4.50% 05/15/24 475,798
4,283,045 Series 3692, Class PS, IO (b).......... 6.35% 05/15/38 524,797
1,379,890 Series 3702, Class SK (b).............. 13.95% 08/15/40 1,426,710
9,796,075 Series 3726, Class KI, IO ............. 3.50% 04/15/25 844,423
4,907,474 Series 3870, Class WS, IO (b).......... 6.35% 06/15/31 865,451
Federal Home Loan Mortgage Corp., STRIP
3,335,621 Series 232, Class IO, IO .............. 5.00% 08/01/35 454,884
Federal National Mortgage Association
2,036,201 Series 2005-122, Class SN (b).......... 27.62% 01/25/36 2,430,185
233,028 Series 2005-91, Class SH (b)........... 22.93% 05/25/33 271,876
1,670,943 Series 2008-50, Class AI, IO .......... 5.50% 06/25/23 88,605
5,626,702 Series 2010-103, Class ID, IO ......... 5.00% 09/25/40 945,927
8,660,294 Series 2010-139, Class KI, IO ......... 1.09% 12/25/40 353,212
3,428,168 Series 2010-142, Class PS, IO (b)...... 5.80% 05/25/40 325,523
2,537,292 Series 2010-145, Class TI, IO ......... 3.50% 12/25/20 173,402
8,182,510 Series 2010-40, Class MI, IO .......... 4.50% 08/25/24 481,744
Federal National Mortgage Association,
STRIP
3,692,327 Series 360, Class 2, IO ............... 5.00% 08/01/35 493,336
5,992,504 Series 406, Class 6, IO (a)............ 4.00% 01/25/41 793,143
Government National Mortgage Association
2,432,783 Series 2009-65, Class NJ, IO .......... 5.50% 07/20/39 270,989
4,942,994 Series 2010-115, Class IQ, IO ......... 4.50% 11/20/38 699,872
See Notes to Quarterly Portfolio of Investments Page 3
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
JULY 31, 2012 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS - (CONTINUED)
Government National Mortgage Association
(Continued)
$ 4,194,007 Series 2011-69, Class CI, IO .......... 5.00% 03/20/36 $ 325,495
------------
14,176,135
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COMMERCIAL MORTGAGE-BACKED SECURITIES - 4.3%
Government National Mortgage Association
12,633,683 Series 2011-131, Class EI, IO ......... 4.50% 08/20/39 1,573,592
8,860,713 Series 2012-100, Class IO, IO ......... 0.88% 08/30/52 673,969
12,270,882 Series 2012-70, Class IO, IO .......... 0.96% 08/16/52 863,539
------------
3,111,100
------------
PASS-THROUGH SECURITIES - 20.5%
Fannie Mae REMICs
2,051,448 Series 2005-83, Class LZ (d)........... 5.50% 10/25/35 2,200,265
862,742 Series 2010-110, Class WG (d).......... 5.50% 09/25/40 874,957
Federal Home Loan Mortgage Corp.
2,490,171 Pool A94738 (d)........................ 4.50% 11/01/40 2,682,236
1,294,861 Pool K36017 (d)........................ 5.00% 09/01/47 1,393,758
Federal National Mortgage Association
3,271,119 Pool 831145 (d)........................ 6.00% 12/01/35 3,656,498
3,708,729 Pool 843971 (d)........................ 6.00% 11/01/35 4,165,366
------------
14,973,080
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TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES ................. 32,260,315
(Cost $33,506,195) ------------
ASSET-BACKED SECURITIES - 2.9%
Green Tree Financial Corp.
112,005 Series 1997-2, Class A6 (a)............ 7.24% 06/15/28 122,435
124,292 Series 1997-3, Class A6 ............... 7.32% 03/15/28 136,810
155,445 Series 1997-7, Class A6 ............... 6.76% 07/15/29 167,373
Lehman ABS Manufactured Housing Contract
Trust
247,649 Series 2001-B, Class A4 ............... 5.27% 04/15/40 254,137
Morgan Stanley Capital, Inc.
464,451 Series 2005-HE6, Class A2C (a)......... 0.57% 11/25/35 425,391
Option One Mortgage Loan Trust
363,000 Series 2005-4, Class M1 (a)............ 0.69% 11/25/35 277,780
Park Place Securities, Inc.
737,780 Series 2004-MHQ1, Class M1 (a)......... 0.95% 12/25/34 732,381
------------
TOTAL ASSET-BACKED SECURITIES ...................................... 2,116,307
(Cost $2,050,410) ------------
TOTAL INVESTMENTS (E) - 117.8% ..................................... 85,869,791
(Cost $83,926,734) ------------
Page 4 See Notes to Quarterly Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
JULY 31, 2012 (UNAUDITED)
PRINCIPAL
VALUE DESCRIPTION AMOUNT
---------------- ------------------------------------------------------------------------- ------------
REVERSE REPURCHASE AGREEMENTS - (30.4%)
$ (706,000) With Credit Suisse 1.32% dated 06/07/12, to be repurchased at
$708,378 on 9/7/12 ................................................. $ (706,000)
(1,929,000) With Credit Suisse 1.97% dated 06/08/12, to be repurchased at
$1,938,596 on 9/7/12 ............................................... (1,929,000)
(5,590,500) With Credit Suisse 1.70% dated 07/09/12, to be repurchased at
$5,614,788 on 10/09/12 ............................................. (5,590,500)
(7,384,000) With Credit Suisse 0.43% dated 07/12/12, to be repurchased at
$7,392,114 on 10/12/12 ............................................. (7,384,000)
(3,859,000) With Credit Suisse 0.43% dated 07/17/12, to be repurchased at
$3,863,241 on 10/17/12 ............................................. (3,859,000)
(2,667,000) With Credit Suisse 0.75% dated 07/30/12, to be repurchased at
$2,668,711 on 08/30/12 ............................................. (2,667,000)
------------
TOTAL REVERSE REPURCHASE AGREEMENTS ..................................... (22,135,500)
NET OTHER ASSETS AND LIABILITIES - 12.6% ................................ 9,164,170
------------
NET ASSETS - 100.0% ..................................................... $ 72,898,461
============
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(a) Floating rate security. The interest rate shown reflects the rate in
effect at July 31, 2012.
(b) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at July 31, 2012.
(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 $2,345,085, a carrying
value per share of $1.02 and represents 3.34% of net assets.
(d) This security or a portion of this security is segregated as collateral
for reverse repurchase agreements.
(e) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of July 31, 2012, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $5,201,701 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $3,258,644.
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 Quarterly Portfolio of Investments Page 5
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
JULY 31, 2012 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of July 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
7/31/2012 PRICES INPUTS INPUTS
------------- ----------- ------------- ------------
Mortgage-Backed Securities...................... $ 51,493,169 $ -- $51,493,169 $ --
U.S. Government Agency Mortgage-Backed
Securities.................................... 32,260,315 -- 32,260,315 --
Asset-Backed Securities......................... 2,116,307 -- 2,116,307 --
------------- ----------- ------------- ------------
TOTAL INVESTMENTS............................... $ 85,869,791 $ -- $85,869,791 $ --
============= =========== ============= ============
Page 6 See Notes to Quarterly Portfolio of Investments
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS
FIRST TRUST MORTGAGE INCOME FUND
JULY 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.
Page 7
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (CONTINUED)
FIRST TRUST MORTGAGE INCOME FUND
JULY 31, 2012 (UNAUDITED)
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
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 July 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 July 31, 2012, the Fund had no when-issued, delayed-delivery
or forward purchase commitments.
C. REVERSE REPURCHASE AGREEMENTS:
Reverse repurchase agreements were utilized as leverage for the Fund. A reverse
repurchase agreement, although structured as a sale and repurchase obligation,
acts as 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, 2012:
Maximum amount outstanding during the period................... $22,993,750
Average amount outstanding during the period*.................. $21,990,894
Average Common Shares outstanding during the period............ 4,082,400
Average debt per Common Share outstanding during the period.... $5.39
* 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, 2012.
During the period ended July 31, 2012, the interest rates ranged from 0.31% to
1.97%, with a weighted average interest rate of 0.85%, on borrowings by the Fund
under reverse repurchase agreements, which had interest expense that aggregated
$144,410.
Page 8
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (CONTINUED)
FIRST TRUST MORTGAGE INCOME FUND
JULY 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
----------------------
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
----------------------
By (Signature and Title)* /s/ James M. Dykas
------------------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date
----------------------
* Print the name and title of each signing officer under his or her signature.