SOURCE: Principal Mortgage Fund, Inc.

October 09, 2007 15:07 ET

Letter to Shareholders of Principal Mortgage Fund, Inc.

DEL MAR, CA--(Marketwire - October 9, 2007) - Principal Mortgage Fund Announces Update to Shareholders

Dear Shareholder:

In a continuing effort to inform our shareholders and other interested parties in the investment community, the Board of Directors and the management of Principal Mortgage Fund, Inc., would like to announce recent developments with our fund during our continued listing process.

First we would like to update the public about our corporate progress. On 8-9-2007 we began raising capital through a Reg.(d) 505 Private Placement Memorandum whereby we are selling 1,000,000 shares of Class A Common Stock at an aggregate purchase price of $5.00 per share. These shares are not registered as defined by the Securities and Exchange Commission but do carry "Demand" Registration Rights. As of the date of this release, investment dollars are being recorded but the offering is not fully subscribed and this offering is still open.

Second, we would like to define the process with the Securities and Exchange Commission (SEC) and the American Stock Exchange(AMEX). On 8-24-2007 the fund made notice to the SEC under form N-6f as to our intent to be elected as a Business Development Company (BDC) as defined by sections 55 through 65 of the Investment Company Act of 1940 (the Act). On 8-27-2007 the fund formalized its intent and filed form N-54A with the SEC. Currently we are in the process of completing any remaining required forms as we become notified. (Please see to review our filings) On 9-24-2007, during an investment management trip to New York, we met with Tom Rzepski, Vice President at the American Stock Exchange where we turned in our application and all supporting documentation to list our common stock. As of the date of this release, our documents are in compliance and regulatory review is in process.

On 8-23-2007 we filed our Class A Common Stock with CUSIP and our company was approved. The CUSIP number assigned to Principal Mortgage Fund, Inc. is 742533 102 and the ISIN is US7425331029.

Also on 8-23-3007, we contracted with Computershare Trust Company, NA to act as the funds Transfer Agent. Computershare will also be acting as the custodian for selling shareholders of the fund. Computershare can be contacted at 781-575-4210 in the event a shareholder has a question.

On 9-19-2007 through 9-29-2007 management scheduled several institutional investor, legal, listing and additional Board Member meetings for the benefit of the fund in New York and New Jersey. The outcome of these meetings was an overwhelming success. The goal was to bring in additional funding through our open PPM and complete negotiations to institutionally place our Form 1-E upon its approval by the SEC. Management met with several Fund to Funds and achieved our funding commitments of up to $10,000,000.00 to be invested at various benchmarks, included but not limited to listing our Class A Common Stock in the retail market with the AMEX. The fund also met with Bryan Cave, LP to act as our corporate counsel and is in process of completing our retainer agreement requirements with the firm. Lastly, we met with a retired, prominent member of the US Department of Housing and Urban Development (HUD) to act as an independent board member as required by our corporate charter. As of the date of this release, we are still in negotiations for this new appointment. It is the belief of management that we succeeded in our goals and will be making these financial and non-financial adjustments in our upcoming Registration Statement.

Joe Villa, CEO of Principal Mortgage Fund, states, "With your major investment houses such as Merrill Lynch, Bear Stearns, Morgan Stanley, Citigroup, JPMorgan Chase and Deutsche Bank, writing down a combined estimate of $20 billion of mortgage debt as according to CNN Money on 10-6- 2007, it demonstrates signs that the credit markets are going to rebalance and your credit worthy borrowers can qualify for financing at normal guidelines." He further adds, "It is our belief that if we buy low and sell high then we created a simple yet stable wealth model that works for our shareholders. We see more opportunity in the mortgage industry than we have seen in years. With companies like Luminent, which up until July was trading above $10.00 per share, now through the mortgage meltdown hit a low in September of .36 per share. When looking at a company like Luminent that has a B.V. of $10.05 per share, we now understand that it traded on rumors not fundamentals as evidenced by the fact that it revealed a Friday's close of 2.87 per share. Mortgage companies with fundamentals are beginning to rebound and swing back from the meltdown; we see explosive growth in buying mortgage companies with solid fundamentals that are trading at their lows based on fear and speculation. Luminent is not the only survivor in this sector. Accredited Home Lenders seems to have shored up its balance sheet and has seen a growth in its share price from its low of $3.77 in March to a Friday's close of $11.74. We believe more than ever that people will always need mortgages but it is about buying and funding at the correct time and not just being the only money in at the highs of the market."

Lastly, in September we launched as an information site for our shareholders. We are opening our new San Diego office in November which has a physical address of 3840 Via de la Valle, San Diego, Suite 100 & 200, CA 92014. Shareholders and interested parties may also contact us via our toll free number, 888.531.4931.

Principal Mortgage Fund, Inc. ("PMF") is a To-Be-Converted Mortgage Fund, registered as a business development company ("BDC"). PMF is currently making application to be traded on the American Stock Exchange ("AMEX"). A BDC is a public company which elects to become subject to sections 55 through 65 of the Investment Company Act of 1940. Joe Villa is both the CEO of Principal Mortgage Fund, Inc. and the majority owner (60%) of Fair Home Lending Financial, Inc. (FHL) (, a California mortgage company that is in current negotiations to be acquired by the fund. Fair Home Lending Financial, Inc. is a mortgage company that was founded in 2002. FHL's portfolio consists of roughly 96% prime borrowers and 4% are subprime.

Certain statements contained herein are "forward-looking" statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Such statements include risks and uncertainties therefore actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in filings made by the Company with the Securities and Exchange Commission.

Contact Information

    Principal Mortgage Fund, Inc.
    Joe Villa
    (888)531-4931 ext. 89