Except as otherwise noted, this Management's Discussion and Analysis of Financial Condition and Results of Operations describes us as we existed on December 31, 2006 and the factors that affected our operating results during 2006, 2005 and 2004. It does not take account of things that have happened since December 31, 2006, which have materially changed us and our businesses. See Item 1. Business.

General Overview

Our business activities consist primarily of making, providing and arranging investments and financing secured by, or otherwise related to, multifamily or commercial real estate, the majority of which generates tax-exempt income, tax credits or other tax benefits for investors. We have also been engaged in the financing of renewable energy projects, which also generates tax credits and other tax benefits for investors. In addition, we have provided investment management services to a limited number of institutional investors.

MuniMae was organized in 1996 as a Delaware limited liability company and became a public company in 1996. We are classified as a partnership for federal income tax purposes. We have the same limited liability, governance and management structures as a corporation, but we are treated as a pass-through entity for federal income tax purposes. Thus, our shareholders include their distributive shares of our income, deductions and credits on their tax returns. Among other things, this allows us to pass-through tax-exempt interest income to our shareholders.

Many of our subsidiaries also are pass-through entities, and our taxable income, deductions and credits that are reflected on our shareholders' tax returns include the income, deductions and credits of those subsidiaries. However, other of our subsidiaries are corporations that pay taxes on their own taxable income. Our income, deductions and credits that are reflected on our shareholders' tax returns do not include the income of those subsidiaries, but include any taxable dividends or other taxable payments we receive from them. Tax information is provided to our shareholders on Schedule K-1 rather than on Form 1099.

We generate income primarily through returns on financing we provide, and through fees and distributions from funds and other investment entities we manage.

We operate through three primary divisions as described below:

• The Affordable Housing Division conducts activities related to affordable housing and is further subdivided into three reportable segments, including:

• Tax Credit Equity which creates investment funds and finds investors for such funds that receive tax credits for investing in affordable housing partnerships;

• Affordable Bonds which originates and invests primarily in tax-exempt bonds secured by affordable housing; and

• Affordable Debt which originates and invests in loans secured by affordable housing.

• The Real Estate Division conducts real estate finance activities and is further subdivided into two reportable segments:

• Agency Lending which originates both market rate and affordable housing multifamily loans with the intention of selling them to government sponsored entities (i.e., Fannie Mae and Freddie Mac) or through programs created by them, or sells the permanent loans to third party investors, for which the loans are guaranteed by Ginnie Mae and insured by HUD; and

• Merchant Banking which provides loan and bond originations, loan servicing, asset management, investment advisory and other services to institutional investors that finance or invest in various commercial real estate projects. In some cases, we originate loans and bonds for our own investment purposes.

• The Renewable Ventures Division finances, owns and operates renewable energy and energy efficiency projects. This division, in its entirety, is considered a reportable segment.

There is a significant difference between the assets and liabilities reflected on our consolidated balance sheet prepared under GAAP and those assets that are legally owned by us or liabilities we are directly obligated on. Our December 31, 2006 consolidated balance sheet reflected consolidated total assets of $8.5 billion and consolidated shareholders' equity of $667.9 million. However, our December 31, 2006 consolidated balance sheet included $4.9 billion of assets and $2.0 billion of liabilities of over 200 funds and partnerships in which we (MuniMae and its majority owned subsidiaries) had little or no ownership interest, but the assets and liabilities of which are required to be consolidated primarily due to FIN 46(R). Although it would not be in accordance with GAAP to exclude the impact of these consolidated funds and ventures from our consolidated financial statements, we believe that explaining the effect of including these entities helps the public to understand which assets MuniMae has a direct or indirect economic interest in, and the liabilities that MuniMae or entities it owns could be required to pay. Without the assets and liabilities of these consolidated funds and ventures (but including assets that were eliminated as part of the consolidation) MuniMae had at December 31, 2006, total assets of $3.9 billion and $3.2 billion in total liabilities, including perpetual preferred stock of a subsidiary.

The consolidation of these entities also affects our reported revenues because certain fees and other payments received from the consolidated entities are not reflected as revenues but are reflected as income allocated to us in the consolidated statement of operations. We must also record losses related to these entities even though MuniMae itself has no expectation to fund those losses, other than possible losses related to the investments we actually have in those entities. We have recorded cumulative pre-tax losses related to these entities totaling approximately $90.0 million through December 31, 2006. The majority of these losses would be reversed upon a qualifying sale of our interest or other event that would allow us to deconsolidate these entities.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements is based on the selection and application of GAAP, which requires us to make certain estimates and assumptions that affect the reported amounts and classification of the amounts in our consolidated financial statements. These estimates and assumptions require us to make difficult, complex and subjective judgments involving matters that are inherently uncertain. We base our accounting estimates and assumptions on historical experience and on judgments that are believed to be reasonable under the circumstances available to us at the time. Actual results could materially differ from these estimates. We applied our critical accounting policies and estimation methods consistently in all material respects and for all periods presented, and have discussed those policies with our Audit Committee.

We believe the following accounting policies involve a higher degree of judgment and complexity and represent the critical accounting policies and estimates used in the preparation of our consolidated financial statements.

Consolidated Funds and Ventures

We are associated with numerous investments in partnerships and other entities that primarily hold or develop real estate, although some of these investments are related to the development of renewable energy projects. In most cases our direct or indirect legal interest is minimal in these entities; however, we apply Accounting Research Bulletin No. 51, "Consolidated Financial Statements" ("ARB 51"), FIN 46(R) or Emerging Issues Task Force Issue No. 04-5, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners have Certain Rights" ("EITF 04-5") in order to determine if we need to consolidate any of these entities. There is considerable judgment in assessing whether to consolidate an entity under these accounting principles. Some of the criteria we are required to consider include:

• the determination as to whether an entity is a variable interest entity ("VIE").

• if the entity is considered a VIE, then the determination of whether we are the primary beneficiary of the VIE is needed and requires us to make judgments regarding: (1) the measurement of expected losses and returns related to the VIE and which party absorbs the most variability from those expectations, as well as (2) the existence of related party relationships between us and other investors in the entity, the relationship of the VIE to the various investors in the entity, and the design of the VIE.

• if the entity is required to be consolidated, then upon initial consolidation, we record the assets, liabilities and non-controlling interests at fair value. Substantially all of our consolidated entities are investment entities that own real estate or real estate related investments and as such there are judgments related to the forecasted cash flows to be generated from the investments such as rental revenue and operating expenses, vacancy, replacement reserves and tax benefits (if any). In addition, the determination of investor discount rates and capitalization rates is needed.

We or funds we manage have investments in over 2,000 entities, the majority of which are considered to be VIEs and therefore are subject to the application of FIN 46(R). Based on the application of FIN 46(R) or similar accounting pronouncements, we have consolidated over 200 of these entities, which resulted in assets of $4.9 billion being added to our balance sheet at December 31, 2006. In addition, we recorded cumulative pre-tax losses related to these entities totaling approximately $90.0 million through December 31, 2006. The majority of these losses would be reversed upon a qualifying sale of our interest or other event that would allow us to deconsolidate these entities.

Valuation of Bonds and Retained Interests in Securitized Bonds

Bonds available-for-sale include mortgage revenue bonds, other municipal bonds and retained interests in securitized bonds. We account for investments in bonds as available-for-sale debt securities under the provisions of Statement of Financial Accounting Standards ("FASB") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115").

Accordingly, these investments in bonds are carried at fair value with changes in fair value (excluding other-than-temporary impairments) recognized in other comprehensive income. We estimate the fair value of our bonds using quoted prices, where available; however, most of our bonds do not have observable market quotes. For these bonds, we estimate the fair value of the bonds by discounting the cash flows that we expect to receive using current estimates of appropriate discount rates. For non-performing bonds, given that we have the right to foreclose on the underlying real estate property which is the collateral for the bonds, we estimate the fair value by discounting the underlying properties' expected cash flows using estimated discount and capitalization rates less estimated selling costs. There are significant judgments and estimates associated with forecasting the estimated cash flows related to the bonds or the underlying collateral for defaulted bonds, including macroeconomic conditions, interest rates, local and regional real estate market conditions and individual property performance. In addition, the discount rates applied to these cash flow forecasts involves significant judgments as to current credit spreads and investor return expectations. We had $100.9 million of net unrealized gains reflected in our bond portfolio reported at a fair value of $1.8 billion at December 31, 2006. Given the size of our portfolio, different judgments as to credit spreads and investor return expectations could result in materially different valuations.

In addition, we have to make a determination as to whether there is an other-than-temporary impairment in bonds in our bond portfolio. As such, we follow the guidance in FASB Staff Position FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("FSP FAS 115-1/124-1"). Retained interests in securitized bonds are periodically reviewed for potential impairment in accordance with Emerging Issues Task Force Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transferor in Securitized Financial Assets" ("EITF 99-20").

We evaluate our bond portfolio for other-than-temporary impairment throughout the year. Each bond with an estimated fair value less than amortized cost is reviewed on a quarterly basis by management. At a minimum,

management considers the following factors that, either individually or in combination, could indicate that the decline is other-than-temporary:

• the length of time and the extent to which the fair value has been less than amortized cost;

• the financial condition of the underlying collateral (including our intent and ability to foreclose on the property) and whether we expect to recover all amounts due on a net present value basis; and

• the intent and ability to retain our investment in the bond for a period of time sufficient to allow for any anticipated recovery in fair value.

Among the other factors that are considered in determining intent and ability is a review of our capital adequacy, interest rate risk profile and liquidity position. Declines in the fair value of the bonds below their amortized cost that are deemed to be other-than-temporary are recognized in earnings as "Impairment on bonds." The fair value of an other-than-temporarily impaired bond becomes the new cost basis of the bond and it is not adjusted for subsequent recoveries in fair value. We have recorded cumulative impairment of $43.0 million on bonds that we owned at December 31, 2006.

Allowance for Loan Losses

The allowance for loan losses represents management's best estimate of probable incurred losses attributable to loans held for investment. The allowance for loan losses is composed of two different components, including a loan-specific allowance based on the provisions of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan, an amendment of FASB Statements No. 5 and 15" ("SFAS 114") and an unallocated allowance attributable to the remaining portfolio based on the provisions of Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" ("SFAS 5").

We perform systematic reviews of our loan portfolio throughout the year to identify credit risk and to assess overall collectability. The Company's credit risk rating process (see Item 7A. Quantitative and Qualitative Disclosures about Market Risk - "Credit and Liquidity Risk") is inherently subjective and is based on judgments related to the borrower's past performance, the current status of the loan, the performance of the underlying collateral and the current condition of the loan as compared to our original underwriting. The credit risk rating process is integral to our determination of which loans are considered impaired and it also has a significant impact on the determination of our unallocated loan loss as we apply our loss experience based on our credit ratings.

For impaired loans, we determine if a specific loan loss is required. Specific impairment losses are measured based upon:

• the borrower's overall financial condition and historical payment record;

• the prospects for support from any financially responsible guarantors; and

• the net realizable value of any collateral, if appropriate.

This measurement process is judgmental and in most cases the impairment measure is based on the fair value of the underlying collateral, which is primarily real estate related assets. Real estate valuations require significant estimates and assumptions such as rental or lease revenue, operating expenses, vacancy considerations and investor discount and capitalization rates. In addition, many of our properties are low income housing apartment projects that have tax credits associated with them that we value for purposes of determining impairment. The values of these tax credits is based on the performance and compliance of the property with guidelines established to qualify for the tax credits. Future non-compliance can impact the tax credit value through loss of credits or tax credit recapture.

Valuation of Mortgage Servicing Rights

We account for purchased MSRs initially at fair value. MSRs that are retained from the sale of loans are initially recorded through an allocation of the cost of the loan between the loan sold and the retained MSR, based on their relative fair value.

As observable market prices for commercial multifamily MSRs are not available, we estimate the fair value of mortgage servicing rights by utilizing an internally developed discounted cash flow model to calculate the present value of expected future cash flows associated with servicing the loans when mortgage servicing rights are initially recorded and at each balance sheet date. This calculation uses a number of inputs and assumptions that are based on historical experience as well as external market information such as industry surveys and published market data. The assumptions used in the valuation model include borrower prepayment speeds, discount rates that are commensurate with the risk profile of the serviced assets, servicing costs, allowable fees, ancillary income, foreclosure rate, float earnings rate, escrow earning rate, and tax and insurance inflation rate.

Models used to value mortgage servicing rights are highly sensitive to changes in certain assumptions such as prepayment speeds and discount rates. Loan level prepayment curves are created for each loan to project expected prepayment behavior. Loan prepayment speeds are determined by both voluntary and involuntary factors, adjusted for market conditions. Voluntary prepayments are influenced by the call protection period, lockout period, yield maintenance, prepayment penalties and the interest rate environment. Involuntary prepayment (defaults) rates are estimated based on loan type and loan age. The discount rate represents the required rate of return that investors would expect for an asset with similar risk. The discount rates are calculated incrementally, and include a risk free rate, a base market pricing spread and additional risk premiums depending on mortgage servicing characteristics.

Impairment on Equity Method Investments and Impairment on Real Estate in Lower Tier Property Partnerships

Equity Method Investments

Our consolidated LIHTC Funds hold investments in unconsolidated Lower Tier Property Partnerships. In addition, we directly hold investments in unconsolidated Lower Tier Property Partnerships prior to placing these partnerships into LIHTC Funds. We also hold investments in other unconsolidated real estate. These investments are accounted for under the equity method and we assess our equity method investments for other-than-temporary impairment in accordance with Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock" ("APB 18") and Emerging Issues Task Force Issue No. 94-1, "Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects" ("EITF 94-1"). Depending on whether these investments are in affordable housing projects, the pertinent accounting literature will differ.

Equity method investments in affordable housing projects

In accordance with EITF 94-1, we use an undiscounted cash flow approach to identify other-than-temporary impairment related to our equity method investments in affordable housing projects. The undiscounted cash flow projections provide an estimate of:

• tax benefits associated with future federal and state tax credits;

• tax benefits associated with future net operating losses (primarily depreciation taken on the real estate asset);

• cash flows used by and generated from the multifamily housing projects; as well as

• any net cash generated from a sale or disposal of the property at the end of the investment period.

If the cash flow projection provides an estimate that is less than the carrying value of the equity investment, then the investment is written down through a current period reduction to net income, a majority of which is allocated to non-controlling interest holders.

Equity method investments that are not affordable housing projects

In accordance with APB 18, we use an undiscounted cash flow approach to identify other-than-temporary impairment. The undiscounted cash flow projection provides an estimate of the cash flows associated with the long-lived asset held by the unconsolidated real estate entity. If our equity share of the total undiscounted cash flows is less than the carrying value of the equity investment, then our investment is written down through a current period reduction to net income. However, the impairment charge is based on our equity share of the fair value of the unconsolidated entity based on discounted cash flows.

Real Estate in Lower Tier Property Partnerships

In some cases we hold real estate because we have consolidated certain Lower Tier Property Partnerships in light of the fact that we have taken back the general partner interest in such partnerships. In other cases (but more infrequent), we hold real estate through a foreclosure or deed-in-lieu of foreclosure. Generally, the real estate is low income housing assets financed with tax credit equity or tax-exempt bonds. We assess the appropriateness of the carrying value of the real estate based on the identification of triggering events as prescribed by Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). The Company uses an undiscounted cash flow approach to assess recoverability of the asset and where undiscounted cash flows are less than the carrying value of property, we measure impairment based on the fair value of the property.

In addition, with regard to the Lower Tier Property Partnerships in which we hold an equity investment, as discussed above, we also apply SFAS 144 in order to assess impairment of the real estate asset held by these entities. Given that we are recording a share of income or loss through our equity investment in these entities, we assess whether the impairment taken by the Lower Tier Property Partnership is adequate and adjust our equity in losses from these entities as needed.

The application of our accounting policies related to impairment on equity method investments and impairment on real estate in Lower Tier Property Partnerships requires judgments and estimates that are primarily related to forecasting cash flows associated with the real estate asset(s) held by these entities. In addition, fair valuing these assets is dependent on key assumptions related to discount rates and capitalization rates.

Income taxes

Municipal Mortgage & Equity, LLC is the parent entity that owns interests in various entities, some of which are corporations subject to federal and state income taxes ("C corporations") and others of which are pass-through entities for tax purposes (meaning the owners of the partnership or other equity interests are allocated the taxable income). Municipal Mortgage & Equity, LLC is itself a pass-through entity, and therefore, all the income (and loss) of our pass-through entity subsidiaries is allocated to our common shareholders. We do not have a liability for federal and state income taxes related to our income. However, we do have several business segments that operate their business through taxable C corporations; and as such a portion of our income is subject to federal and state income taxes.

Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Significant judgment is required in determining and evaluating income tax positions, including assessing the relative merits and risks of various tax treatments considering statutory, judicial and regulatory guidance available regarding the tax position. We establish additional

provisions for income taxes when there are certain tax positions that could be challenged and that may not be sustained upon review by taxing authorities.

Judgment is also required in assessing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns as well as the recoverability of our deferred tax assets. In assessing the realizability of our deferred tax assets we consider information such as forecasted earnings, future taxable income and tax planning strategies in measuring the required valuation allowance.

Restatement Changes

In September 2006, we determined that we had to restate our financial statements for 2005 and 2004. The restatement results changed our previous accounting results across many areas of our activities. However, it has not resulted in any significant adjustments to our corporate cash accounts.

The following table provides the cumulative impact of the restatement on shareholders' equity at December 31, 2005. Management has classified the accounting changes, which have all been determined to be corrections of errors, into broad categories as out lined below. The manner in which the restatement impact is attributed to the ten categories is subjective and certain changes may relate to more than one category. While such classifications are not required under GAAP, management believes these classifications may assist users in understanding the nature and impact of the changes made as part of the restatement. See "Notes to Consolidated Financial Statements-Note 2, Restatement of Previously Reported Results" included in this Report for a more detailed discussion of the accounting corrections.

  Shareholders' Equity as previously reported at December 31, 2005   $  768,319
  Cumulative impact of restatement adjustments:
  Accounting related to consolidated funds and ventures                (100,826 )
  Tax credit equity accounting                                          (41,272 )
  Bond accounting                                                        61,194
  Other restatement adjustments                                         (17,524 )

  Total pre-tax adjustments                                             (98,428 )
  Tax valuation allowance                                               (41,338 )
  Tax effects of restatement adjustments                                 36,032

  Cumulative impact of restatement adjustments                         (103,734 )

  Restated Shareholders' Equity at December 31, 2005                 $  664,585

Consolidation of Funds and Ventures

As part of the restatement process, we re-evaluated our direct or indirect . . .