The Subprime Mortgage Loan Industry - August 15th, 2007 - 2007 Grant Thornton LLP. All rights reserved.
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The Subprime Mortgage Loan Industry
August 15th, 2007
©2007 Grant Thornton LLP. All rights reserved. 1©2007 2
©2007Grant
Grant Thornton LLP.AllAll
Thornton LLP. rights
rights reserved.
reserved.Some Recent Quotes From the Market… "We expect difficult housing and mortgage market conditions to persist"…"Softening home prices continued to affect many areas of the country and delinquencies and defaults continued to rise across all mortgage product categories.".. Countrywide Financial Corp. Chief Executive Angelo Mozilo "We are concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients,"…"We contacted the CFTC today and asked for their permission to halt redemptions until we can honor them in an orderly fashion."…Sentinel Management Group Inc. ©2007 Grant Thornton LLP. All rights reserved. 3
Discussion Topics for Today
V. Operational Due Diligence
I. Subprime Lending - Primer
Items
II. Stakeholders in the Subprime VI. Comparable Companies
Market Analysis
VII. Future Outlook – Some
III. Looking for Pockets of Value
Thoughts
IV. Financial Due Diligence VIII. Grant Thornton LLP Recovery
Items & Reorganization Service
©2007 Grant Thornton LLP. All rights reserved. 4Recent News Items In The Subprime Market
cial AHM Files for Bankruptcy
in a n
e n tu ry F u ptcy
C k r
New nters Ban United Ca
pital Asse
E
Corp e Home
Managem
ent LLC
t
hoic
People C Bankruptcy Stops its
Investors
ters From
Loan En Withdraw
ing Fund
s
Mortgage Le
nders UBS Closes Down Its
Network US
A Inc. Hedge Fund
Enters Bank
ruptcy Group Dillon Read
Bear Ste
ar
Near Clo ns Faces
ptcy
HomeBanc Files for Bankru
sure of
Its Hedg 2 of
e Funds
Ownit Mortgage Solutions
Bradrock Financial Corp
Enters Bankruptcy
Closes its $300MM
©2007 Grant Thornton LLP. All rights reserved.
©2007 Grant Thornton LLP. All rights reserved.
5 Galena Street FundI. Subprime Lending - Primer ©2007 Grant Thornton LLP. All rights reserved. 6
How is a Subprime Mortgage Loan Originated?
Residential Mortgage
Borrower Broker/Banker
(1) Subprime mortgage lender borrows from bank
to fund mortgage originations
(2) Investment bank funds mortgage originations
Subprime Mortgage
Warehouse Lender Lender
(Investment Bank) (originate, finance, sell, (3) Funds
(4) Investment bank retains mortgage as collateral securitize and service) mortgage
CASH FLOW
(5) Subprime
mortgage
(6) Proceeds repay
lender packages loans
warehouse line Trust and sells them to
(usually investment bank) Trustee
©2007 Grant Thornton LLP. All rights reserved. 7More Borrowers Have Become Seriously Delinquent
on 2006 Subprime Loans than Borrowers on Loans
Originated between 2002 -2005
Source: Moody's Investor Services; "U.S. Subprime Mortgage Market"; March 7, 2007
©2007 Grant Thornton LLP. All rights reserved. 8Capacity in the Industry Has Not Adjusted to the
Volume Reduction
Mortgage Industry Volume Staffing Trend
Mortage Volume in Trillions
5.00
Reported Avg. Staff Level
in Hundred Thousands
4.00
3.00
2.00
1.00
0.00
93
94
95
19
96
19
97
19
98
19
99
19
19
00
19
01
02
20
03
20
20
04
20
05
20
06
20
07
20
20
Source: Mortgage Bankers Association and National Mortgage News, May, 2007
©2007 Grant Thornton LLP. All rights reserved. 9Even the AAA Tranches of ABX Index Have Seen
a Steep Drop
ABX-HE-AAA 07-1 Performance
100
95
90 Ø ABX-HE-AAA-07-1
has lost 10% since
85
June 2007
6/1/07
6/4/07
6/7/07
6/10/07
6/13/07
6/16/07
6/19/07
6/22/07
6/25/07
6/28/07
7/1/07
7/4/07
7/7/07
7/10/07
7/13/07
7/16/07
7/19/07
7/22/07
7/25/07
7/28/07
7/31/07
8/3/07
8/6/07
8/9/07
ABX-HE-BBB- 07-1 Performance
Ø ABX-HE-BBB-07-1
70 has lost 44% since
63 June 2007
56
49
42
35
6/1/07
6/4/07
6/7/07
6/10/07
6/13/07
6/16/07
6/19/07
6/22/07
6/25/07
6/28/07
7/1/07
7/4/07
7/7/07
7/10/07
7/13/07
7/16/07
7/19/07
7/22/07
7/25/07
7/28/07
7/31/07
8/3/07
8/6/07
8/9/07
Note: Data as of August 9th ' 2007
Source: Markit Group
©2007 Grant Thornton LLP. All rights reserved. 10The Subprime Crisis Does Not Appear to be
Contained in the US Alone
• Cambridge Place • Nomura
• BSAM • IKB Deutsche Holdings
• New • BNP Paribas • Taiwan
Century Life Insurance
• Sowood
• AHM….
• Basis Capital
• Absolut Capital
• Macquire Fortress
Investment Ltd.
Note: This chart only highlights trouble from the subprime loans market and it
does not include the problems created by the CDOs or the credit market
Source: News Articles
©2007 Grant Thornton LLP. All rights reserved. 11The Beginning of a Recession – Mid-Cycle Growth Slowdown? ©2007 Grant Thornton LLP. All rights reserved. 12
(in '000s)
Ju
ly'
800
900
1000
1100
06
Au
gu
Se s t'0
pt 6
em
be
r'0
O 6
ct
ob
e
N r'0
ov 6
e m
be
D r' 0
6
ec
e
m
Source: National Association of Realtors
be
r' 0
Ja 6
nu
ar
y'0
Fe 7
br
ua
New Home Sales (SAR)
ry
'0
7
M
©2007 Grant Thornton LLP. All rights reserved.
ar
90.0
100.0
110.0
120.0
ch
Ju '0
l '0 7
6 Ap
ril
Au '0
g 7
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6 M
ay
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Ja
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M (in '000s)
Pending Home Sales Index (SAR)
ar
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5500
6000
6500
7000
Ap Ju
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No
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De
c
Housing Has Added to the Subprime Problem
'0
6
Ja
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'07
Fe
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'0
7
Existing Home Sales (SAR)
M
ar
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7
Ap
r'
07
M
ay
'07
Ju
n
p'0
7Housing Affordability, Consumer Confidence and
Retail Sales Have Taken a Beating in the Past Few
Months
Housing Affordability Inde x Consumer Confidence in 2007
120
112
110
108
100
104
90
100
7
6
6
7
6
7
6
6
6
7
6
7
06
p
'0
'0
'0
r'0
'0
'0
'0
l '0
'0
'0
'0
'0
07
January February March April May June
ay
ay
'
ct
ar
ec
Ap
g
ov
n
pt
b
n
n'
Ju
O
Au
M
M
M
Ju
Ja
Fe
Se
D
Ju
N
Retail Sales in 2007
380,000
375,000
(figures in $mm)
370,000
365,000
360,000
January February March April May June
Source: National Association of Realtors
©2007 Grant Thornton LLP. All rights reserved. 14Mortgage Insurers and Home Building Products
Stocks Have Been Impacted in the Recent Past
Relative Perform ance - Building Prodcuts Suppliers
120.0
100.0
80.0
60.0
7/10/2007 7/13/2007 7/16/2007 7/19/2007 7/22/2007 7/25/2007 7/28/2007 7/31/2007 8/3/2007 8/6/2007 8/9/2007
American Standard Companies, Inc. (NYSE:ASD) - Common Stock Armstrong World Industries, Inc. (NYSE:AWI)
Lennox International Inc. (NYSE:LII) Owens Corning Sales, Inc. (NYSE:OC)
USG Corp. (NYSE:USG)
Relative Performance - Mortgage Insurers
110.0
90.0
70.0
50.0
30.0
7/10/2007 7/13/2007 7/16/2007 7/19/2007 7/22/2007 7/25/2007 7/28/2007 7/31/2007 8/3/2007 8/6/2007 8/9/2007
ACA Capi tal Holdings, Inc. (NYSE:ACA) - Common Stock Assured Guaranty Ltd. (NYSE:AGO)
MGIC Investment Corp. (NYSE:MTG) Radian Group Inc. (NYSE:RDN)
Security Capital Assurance Ltd. (NYSE:SCA)
Note: Data as of August 9th ' 2007
Source: CapitalIQ
©2007 Grant Thornton LLP. All rights reserved. 15II. Stakeholders in the Subprime
Market
©2007 Grant Thornton LLP. All rights reserved. 16The Top 5 Subprime Originators for the
Year 2006 are Having Difficult Times in 2007
Top 5 Subprime Originators in 2006
80,000
60,000
(in $mm)
40,000
20,000
0
Wells Fargo HSBC Finance New Century Countrywide WMC Mortgage
Home Mortgage Financial Corp
Well Fargo shuts its Brokered Subprime Mortgage Loan HSBC Finance's loan impairment charges as a % of op.
Unit income in Q2'07 was 15% as compared to 11.3% in Q2'06
Countrywide's 2007 second quarter earnings dropped by
New Century Financial Corp. Filed for Bankruptcy
Approximately 30%
GE plans to sell the WMC mortgage business
Source: CapitaIQ, Company Press Release and Filings
©2007 Grant Thornton LLP. All rights reserved. 17Subprime Originators Have Reduced the
Origination Amounts
Subprim e Originations Over Last 5 Quarters
30,000
20,000
(in $mm)
10,000
0
Q1-2006 Q2-2006 Q3-2006 Q4-2006 Q1-2007
Wells Fargo Home Mortgage HSBC Finance Countrywide Option One Mortgage Fremont WMC Mortgage Corp
Source: National Mortgage News
©2007 Grant Thornton LLP. All rights reserved. 18Most of the Major Financial Institutions Have Been
Impacted by the Subprime Crisis
Originators Warehouse Lenders Investors
©2007 Grant Thornton LLP. All rights reserved. 19Recent Bankruptcies
Ø Filed for Chapter 11 on August 6th
Ø REIT; primarily origination and sale of securitized ARMs ,
also services mortgage loans; 7,409 employees last year
Ø Assets amounting to $20.53 Billion
Ø Liabilities amounting to $19.33 Billion
Ø DIP by WL Ross & Co, LLC's WLR Recovery Fund III LP
Ø Filed for Chapter 11 on August 9th
Ø REIT; Mortgage Banking Operations in Southeast U.S.;
1,300 employees pre-bankruptcy
Ø Assets amounting to $5.1Billion
Ø Liabilities amounting to $4.9Billion
Ø Countrywide Financial Corp agreed to acquire certain
assets related to 5 of its branches
Source: Company filings, News Releases
©2007 Grant Thornton LLP. All rights reserved. 20Auto Finance Companies Are Also Providing for
More Credit Losses
Provision of Credit Loss As % of Finance Receivables
2.00%
1.50%
1.00%
0.50%
0.00%
Consumer Americredit First Investors Credit Carmax Inc
Portfolio Financial Acceptance
Services Inc. Services Corp.
Latest Quarter -2007 Corresponding Quarter - 2006
Source: SEC Filings
©2007 Grant Thornton LLP. All rights reserved. 21III. Looking For Pockets of Value ©2007 Grant Thornton LLP. All rights reserved. 22
Portfolios with Subprime FRM Loans are Less
Risky Than Portfolios with Subprime ARM
Loans
% Increase in Subprime Delinquencies & Foreclosures in April 2007
160%
120%
80%
40%
0%
ARM ARM FRM FRM
Delinquencies Foreclosures Delinquencies Foreclosures
% Inc. MoM % Inc. YoY
Source: Bloomberg, May 2007 Data
©2007 Grant Thornton LLP. All rights reserved. 23Decline in Manufacturing Employment in
Indiana, Michigan & Ohio has Resulted in Very
High % of Foreclosures in the 3 States
% of Mortgage Loans % of Loans in Foreclosures
91%
85%
9%
15%
Indiana, Michigan, Ohio Rest of the Country
Recently California, Florida, Nevada and Arizona Experienced High Foreclosure Starts
Source: MBA National Delinquency Survey
©2007 Grant Thornton LLP. All rights reserved. 24While Looking for Value, Conduct Company Specific
Intense Due Diligence
Financial Operational
Due Diligence Due Diligence
©2007 Grant Thornton LLP. All rights reserved. 25IV. Financial Due Diligence Items ©2007 Grant Thornton LLP. All rights reserved. 26
Financial Due Diligence Should Cover All the Key
Aspects of the Financial Statements
Earnings
Analysis
Asset Financial Due Liquidity
Analysis Diligence Analysis
Liability
Analysis
Source: Grant Thornton LLP Analysis
©2007 Grant Thornton LLP. All rights reserved. 27Earnings Analysis: Growth of Spread Will Be the Key
to Improving Earnings
Earnings
Analysis
ØCompare growth over the last Financial Due
Diligence
Revenue Growth quarters
ØCompare growth with industry growth
ØEvaluate spread between interest
Spread
income and interest expense/coupon
ØAdequate provision for loan losses
Operating Margin & ØCompare growth over the last
Net Income Growth quarters
ØCompare growth with industry growth
ØComprehensive Income should be
Comprehensive Income
analyzed to capture fluctuations in the
Analysis
hedge instruments
Source: Grant Thornton LLP Analysis
©2007 Grant Thornton LLP. All rights reserved. 28Asset Analysis: Evaluate the Assumptions
Underlying Asset Valuation
ØIdentify accounting policies for Asset Financial Due
different assets – held for sale, held for Analysis Diligence
Accounting for Assets
investment, mortgage servicing rights,
derivatives etc.
ØIdentify valuation methodology for the
Valuation of Assets assets and make necessary
adjustments
Performance of Assets ØEvaluate delinquencies and
foreclosures of the asset portfolio
Source: Grant Thornton LLP Analysis
©2007 Grant Thornton LLP. All rights reserved. 29Liability Analysis: Maintaining Credit Line With the
Warehouse is Essential for Survival of the Firm
Ø Calculate the Debt/Equity Ratio and Financial Due
Debt/Equity Ratio Diligence
compare it with Industry
Liability
Analysis
Ø Evaluate debt covenants and the
Debt Covenants
firm's compliance to those covenants
ØLook for early payment defaults
Early Payment Defaults which can trigger buy back of
originated mortgages
ØAny signs of disruption of
Warehouse Credit Line warehouse credit line should be taken
seriously
Source: Grant Thornton LLP Analysis
©2007 Grant Thornton LLP. All rights reserved. 30Liquidity Analysis: Evaluate Liquidity in Current
Market Scenarios and Test it for Future Expected
Economic Conditions
Financial Due Liquidity
ØEvaluate interest coverage, quick Diligence Analysis
Ratio Analysis
ratio and current ratio
ØExclude restricted cash into account
Restricted Cash
while analyzing short term liquidity
ØLiquidity should be tested by
performing sensitivity analysis under
Sensitivity Analysis
scenarios of increase in interest rates
and default rates
ØIncrease in margin calls with
Margin Calls concurrent decrease in availability of
finance could be trouble
Source: Grant Thornton LLP Analysis
©2007 Grant Thornton LLP. All rights reserved. 31V. Operational Due Diligence Items ©2007 Grant Thornton LLP. All rights reserved. 32
Operational Due Diligence Should be Performed
Across the Value Chain of the Firm
Management Quality: Important Across All Functions
Income
Investments Borrowings
Realization
Source: Grant Thornton LLP Analysis
©2007 Grant Thornton LLP. All rights reserved. 33Investments: Identify the Processes Used in
Origination of Loans
ØInvestments in real estate: commercial,
Management Quality
home, hotels
Type of Loans ØInvestments in other ABS
ØAmount of loans held for sale or Investments
investments
ØAverage FICO score
ØWeighted average life of the loans
Characteristics ØLoan to value
Of Loans ØGeographic spread of the loans
ØAvailable documentation
ØPercentage of ARMs
ØPrepayment rates
Performance
ØHistorical foreclosures and
of Loans
delinquencies
ØLoans originated inhouse or outsourced
Loan
ØNetwork of brokers
Origination
ØEffective use of technology
Source: Grant Thornton LLP Analysis
©2007 Grant Thornton LLP. All rights reserved. 34Borrowings: Evaluate the Cost of Borrowings and
the Possibilities of Illiquidity
ØShort term – warehouse lending,
Management Quality
repurchase agreements, commercial
Type of
paper, margin lending
Borrowings
ØLong term – notes, securitization Borrowings
structured as finance
ØFind the optimal mix of borrowings for
lower interest expense
Mix of
ØNumber of funding resources
Borrowings
dependent on
ØCovenants imposed
ØNon-recourse funding vs. recourse
Ability to funding
Handle ØRelationship with lenders
Downturn ØLiquidity reserves created in order to
withstand volatility
Source: Grant Thornton LLP Analysis
©2007 Grant Thornton LLP. All rights reserved. 35Income Realization: Identify the Inefficient Income
Streams
ØIdentify the assumptions used in Management Quality
Net accounting for the interest income
Interest Income ØEffectiveness of hedges used – credit
Income
risk and interest rate risk hedges Realization
ØInhouse vs. outsource – is it a core
Loan Servicing competence
ØPerformance of loan servicing division
ØSale of Loans/Securities
ØImpact in the current scenario and
expected impact in the future
Non Interest ØSecuritization
Income ØType of special purpose entity
used for securitization
Ø Credit enhancements used
ØCounterparties involved
Source: Grant Thornton LLP Analysis
©2007 Grant Thornton LLP. All rights reserved. 36VI. Comparable Companies Analysis ©2007 Grant Thornton LLP. All rights reserved. 37
Mortgage REITS Have Been Hit Hard by Subprime;
Very Low Price to Book Ratios Imply Overvaluation
of Assets on the Books
Subprime Issuers
Market Operating Profit
1
Issuer Stock Price Capitalization 1 Revenue 2 Margin 2 Margin 2 ROE P/E P/B
($) ($mm) (%) (x)
Wells Fargo & Co 34.16 114,245 50,718 25.95% 17.54% 20.03% 13.10x 2.43x
Washington Mutual 36.76 31,298 26,532 18.69% 12.89% 12.88% 10.21x 1.33x
Countrywide Financial Corp 28.66 15,696 21,561 15.71% 10.15% 12.88% 7.63x 1.09x
IndyMac Bancorp Inc 20.58 1,462 2,801 14.63% 9.12% 8.92% 5.73x 0.71x
High 36.76 114,245 50,718 25.95% 17.54% 20.03% 13.10x 2.43x
Low 20.58 1,462 2,801 14.63% 9.12% 8.92% 5.73x 0.71x
Median 31.41 23,497 24,046 17.20% 11.52% 12.88% 8.92x 1.21x
Mean 30.04 40,675 25,403 18.75% 12.43% 13.68% 9.17x 1.39x
Mortgage REITS
Market Operating Profit
1
Issuer Stock Price Capitalization 1 Revenue 2 Margin 2 Margin 2 ROE P/E P/B
($) ($mm) (%) (x)
Impac Mortgage Holdings Inc 1.78 135 1,247 (5.40%) (5.33%) (39.73 %) NA 0.19x
Luminent Mortgage Capital Inc 0.85 48 525 15.45% 12.69% 12.73 % 0.73x 0.10x
Novastar Financial 5.53 62 498 12.51% 13.32% 3.02 % NA 0.13x
Anworth Mortgage Asset Corp 5.61 195 334 (4.65%) (4.71%) 2.63 % NA 0.46x
Hanover Capital Mortgage Holdings2.02 17 35 75.09% (10.77%) NA NA 0.35x
RAIT Investment Trust 5.61 195 334 (4.65%) (4.71%) 2.63 % NA 0.46x
High 5.61 195 1,247 75.09% 13.32% 12.73 % 0.73x 0.46x
Low 0.85 17 35 (5.40%) (10.77%) (39.73 %) 0.73x 0.10x
Median 3.78 99 416 3.93% (4.71%) 2.63 % 0.73x 0.27x
Mean 3.57 109 496 14.73% 0.08% (3.74 %) 0.73x 0.28x
Note 1: Price as of August 9th ' 2007
Note 2: Trailing 12Months Value
Source: Bloomberg
©2007 Grant Thornton LLP. All rights reserved. 38The Subprime Sector has Seen a Lot of M&A Activity
in the Recent Past
Target Name Buyers Comments Target Description Buyer Description
♦Originates, finances, securitizes,
♦Private Equity player with $13.3billion in
services and sells non-prime mortgage
assets under management
loans
Lone Star agreed to ♦Acquired Accredited Home Lenders is
Accredited Home Lenders acquire Accredited ♦Revenues primarily from whole loan being bought through Lone Star Fund V,
Lone Star Funds sales as compared to securitized sales which focuses on investments in financial
Holding Co. (NasdaqNM:LEND) Home in June; The
deal is pending and real estate assets on a global basis
♦Has investments in financial services
♦Has a REIT subsidiary companies in Germany, Japan, Korea
and the U.S.
♦Hedge fund manager which invests in
mortgage backed securities, convertible
♦Operates as a REIT
bonds, MBS derivatives and asset
Ellington purchased backed securities
$180mm worth of ♦For the last 13 years, its primary focus
New Century Financial Corp - Ellington
loan portfolio for area has been investments in mortgage
LNFA Mortgage Loan Portfolio Management ♦Currently in Chapter 11
$58mm on servicing backed securities and it is present in all
released basis sectors of the MBS market
♦Incomes from loans held in REIT trusts ♦Has partnership with an entity that
and from whole loan sales services distressed mortgage loans
♦One of the world's leading private
♦Originates, acquires, services and sells investment firms, with portfolio
Block Financial
nonprime mortgage loans companies generating more than
Group (parent of
$60Billion in revenue per year
Cerberus Capital Option One
Option One Mortgage Corp ♦Has global investments in banks and
Management Mortgage Corp) may ♦Subsidiary of H&R Block
receive future real estate financing firms
earnout payments ♦Related investments in Germany, Israel
♦One of the leading service providers
and the U.S.
Source: Company Website, CapitalIQ, PACER
©2007 Grant Thornton LLP. All rights reserved. 39Firms With Existing Investments in Real Estate and
Mortgage Loans Have Pursued Acquisitions
Target Name Buyers Comments Target Description Buyer Description
♦Provides mortgage production ♦GE Capital Solutions provides financing
(origination, purchase and sale), products and services, including
mortgage servicing and fleet equipment loans and leasing, inventory
management services and trade finance, and trade payables
GE Capital Solutions GE to sell the
♦Also provides appraisal services, credit
PHH Corp. (NYSE:PHH) The Blackstone mortgage business to ♦GE Capital Solutions is primarily buying
research, flood certification, and tax
Group Blackstone Group PHH for fleet management services
services
♦Loan servicing revenue is the majority ♦The Blackstone Group has investments
revenue contributor in the mortgage in Real Estate and Financial Services
production segment sectors
♦Privately owned hedge fund sponsor,
♦Originates, provides interim servicing of
invests in US & European converts, and
The purchase and resells subprime mortgage loans
event driven investments
included $160mm
loan portfolio (paid ♦Principal Strategies group at Citadel
Citadel Investment ♦Either sells or securitizes all the loans
ResMae Financial Corp 98.5 cents to a focuses on companies going through
Group on a servicing released basis
dollar) and Resmae transformational change
Mortgage Corp.(paid
$22.4mm) ♦Primarily utilizes network of independent
brokers for loan originations
♦A subsidiary of Citigroup, invests in
♦Operates as a REIT
mortgage companies
Citigroup Global ♦Invests primarily in residential mortgage- ♦It also has investments in First Equity
Citigroup Global related securities issued by FNMA, Card Corp. which provides credit cards
Opteum Inc. Markets Realty
Markets Realty Corp. FHLMC and GNMA for small businesses
bought 7.5% stake
♦Also originates and purchases prime, Alt
A and sub prime mortgages
Source: Company Website, CapitalIQ, PACER
©2007 Grant Thornton LLP. All rights reserved. 40Even With Acquisitions in the Subprime Space,
Deutsche Bank Came Up With Strong Second
Quarter Earnings in 2007
Target Name Buyers Comments Target Description Buyer Description
♦A subsidiary of MortgageIT Inc.,
♦Worldwide banking and services
operates as a mortgage banking
organization
company
MortgageIT Holdings
became a part of ♦Deutsche Bank has been investing in
♦Operates as a REIT
Deutsche Bank's the U.S. mortgage market
MortgageIT Holdings Inc. Deutsche Bank
Residential Mortgage ♦Loans originated are either transferred
Backed Securities ♦In recent past it acquired Chapel
to investment loan portfolio, sold to thrid
Business Funding (mortgage originator) and signed
party investors (strategy going forward),
a JV with Hispanic National Mortgage
or used in REMIC transactions to
Association
collateralize MBS
Source: Company Website, CapitalIQ, PACER
©2007 Grant Thornton LLP. All rights reserved. 41Recent M&As in the Subprime Sector Have Valued the Assets at
63% of the Book Value: Valuation Range Today Could be Very
Different from the Valuation Ranges in the Recent Past
Implied 1 Day Prior -
Transaction Announcement Price to Implied EV TEV/Interest Stock
Target Name Buyers Value ($mm) Date Status Type Book Value /LTM NI Income Premium
Accredited Home Lenders Holding
Co. (NasdaqNM:LEND) Lone Star Funds 379 6/4/2007 Pending Cash 0.52x 6.69x 13.14x 9.7%
Cash -
New Century Financial Corp - Ellington Asset
LNFA Mortgage Loan Portfolio Management 58 5/2/2007 Completed Purchase 0.32x nm nm nm
Cerberus Capital
Option One Mortgage Corp Management 800 4/17/2007 Pending Cash 0.63x nm nm nm
GE Capital
PHH Corp. (NYSE:PHH) Solutions 1775 3/14/2007 Pending Cash 1.11x nm nm 11.9%
Cash -
Citadel Investment Asset
ResMae Financial Corp Group 179 3/8/2007 Completed Purchase 0.89x nm nm nm
Citigroup Global
Markets Realty
Opteum Inc. - Sale of 7.5% Stake Corp. 4 12/21/2006 Completed Cash 0.29x nm 14.79x nm
MortgageIT Holdings Inc. Deutsche Bank 430 7/12/2006 Completed Cash 1.20x 8.89x 25.26x 20.5%
High 1775 1.20x 8.89x 25.26x 20.5%
Low 4 0.29x 6.69x 13.14x 9.7%
Mean 518 0.71x 7.79x 17.73x 14.0%
Median 379 0.63x 7.79x 14.79x 11.9%
Source: Bloomberg, CapitalIQ, Wall Street Journal
©2007 Grant Thornton LLP. All rights reserved. 42VII. Future Outlook – Some Thoughts ©2007 Grant Thornton LLP. All rights reserved. 43
What Caused the Subprime Crisis?
Decline in Housing Market Increase in Interest Rates
Subprime
Foreclosures / Delinquencies
Originators Warehouse Lenders Investors
Subprime Crisis Could Have Broader Effects
©2007 Grant Thornton LLP. All rights reserved. 44High Yield Debt Could be Re-Priced For Risk
Risk Re-pricing of Risk Premium – Junk Bonds Sell at Discount With
Aversion Less of Covenant Lite Terms
Deterioration of Health of U.S Leverage Loan Market
102.00
100.00
98.00
96.00
94.00
92.00
90.00
7
7
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Ju
Ju
u
u
u
Au
Au
M
M
-J
-J
-J
05
13
06
20
27
22
30
12
19
26
2-
9-
LCDX Price Index
Source: Markit Group
©2007 Grant Thornton LLP. All rights reserved. 45Stronger Employment Statistics Will Not Help In
Immediate Reduction of Interest Rates
With Strong
Ø No Cut in Interest Rates – Continued Foreclosures/
Employment
Delinquencies
Data
Increase in Non Farm Employment
138,200
137,800
(in '000s)
137,400
137,000
Jan Feb March April May June
Source: Bureau of Labor Statistics
©2007 Grant Thornton LLP. All rights reserved. 46Subprime Crisis Could Impact the Rating Agencies
and Could Result in Additional Regulations
Credit Ø Moody's, S&P and Fitch could become more cautious
Rating Ø S&P/ Moody's recently downgraded approx. $17Billion
Agency Subprime MBS
Regulatory Ø Bills have been introduced to protect the homeowners
Body
Spillover
To CDO Ø Lending has been tight in the corporate sector
Market
Continuing Ø The trouble in housing market to continue and could affect
Housing the building material suppliers
Trouble
Source: Wall Street Journal
©2007 Grant Thornton LLP. All rights reserved. 47Politicians Have Responded to the Subprime Crisis
by Proposing New Bills; Fed Provided Additional
Liquidity
Political Support
POLITICAL SPEAK
Ø Hillary Clinton – Proposing a $1Billion Fund to protect
homeowners…..Speaking to CNBC, August 7th 2007
Ø Senator Dodd – Laid out Statement of Principles to
Protect homeowners
Regulatory Support
Monetary Policy
Support from the Fed
FED SPEAK
Ø Downside risk to economy has increased;
Inflation is still the worry…August 7th 2007
Ø Fed provided liquidity "to facilitate the orderly working of
financial markets"…August 10th 2007
©2007 Grant Thornton LLP. All rights reserved. 48Bills Proposed Across the Country are Striving to
Protect the Homeowners
U.S. Senator Charles Schumer, Chairman of JEC and
Housing Subcommittee: Borrower's Protection Act of 2007
Ø$300mm in federal funds
ØLegislation to upgrade standards for mortgage
brokers and other non bank mortgage originators,
with regards to making new loans to borrowers
ØHolds lenders responsible
Bills Introduced Congressman Spencer Bachus, ranking member of
House Financial Services Committee introduced Fair
Mortgage Practices Act
ØMortgage lenders to weigh borrowers ability
Ø$100mm in federal funds
States are working towards amending predatory lending
acts
©2007 Grant Thornton LLP. All rights reserved. 49VIII. Grant Thornton LLP - Recovery &
Reorganization Practice
©2007 Grant Thornton LLP. All rights reserved. 50Grant Thornton’s Recovery & Reorganization Services launched its
U.S. practice a year ago and has grown to include more than 75
professionals in eight offices, serving more than three dozen
clients…
New York…Houston…Detroit…Chicago…
California…Atlanta…Boston…Dallas…Cleveland
In addition, through the firm’s membership of
Grant Thornton International, it has access to
the restructuring capabilities of member firms
in 51 countries worldwide, with dedicated
professionals in international hubs such as the
United Kingdom, France, Germany, the
Caribbean, India, Hong Kong, China,
Japan, Australia and Canada – an
international reach that is of great benefit to
clients of all sizes.
©2007 Grant Thornton LLP. All rights reserved. 51Grant Thornton's global Recovery and Reorganization services leverage world-wide co-ordination… Worldwide EMEA Asia Pacific Americas 50 territories 26 countries 15 territories 9 countries 115 partners 92 partners/directors 35 partners/directors 26 partners/directors R&R is 8% of total ©2007 Grant Thornton LLP. All rights reserved. 52
Sectors in which Grant Thornton LLP leads…
Consumer
Sectors
Construction,
& Financial Global Public
Real estate & Not-for-Profit Technology Health Care
industrial Services Sector
Hospitality
products
Industrial and Banks & thrifts Developers, Government Higher Technology Hospitals
consumer owners, contractors education services
products Broker-dealers managers Health care
manufacturing International Membership Hardware systems
Hedge funds Equity REITs development organizations
Distribution organizations Internet Nursing homes
Industries
(truck, rail, ship Specialty Hotel, resorts Religious
and air) finance & restaurants The U.S. organizations Software Assisted living
government facilities and
Warehousing Mortgage Franchises marketplace – Social service Telecomm retirement
banks civilian, organizations centers
Retail Contractors & defense & Life sciences
Mortgage related intelligence Foundations Physicians
Energy & REITs services groups
utilities Cultural
Mutual funds Sports teams & organizations Other medical
entertainment and healthcare-
facilities related entities
©2007 Grant Thornton LLP. All rights reserved. 53Recovery & Reorganization Services:
A Comprehensive Solution
Integrated
IntegratedSolutions
SolutionsThat
ThatPreserve
Preserveand
andEnhance
EnhanceEnterprise
EnterpriseValue
Value
Financial
Financial Operational
Operational Strategic
Strategic
• Business Plan Review • Interim Management • Assess Strategic
and Assessment Alternatives
• Operational
• Refinancing Turnarounds • Strategic Performance
Alternatives Reviews
• Detailed Operational
• Accelerated M&A Review • Strategic Planning
• Cash Flow and • Profit Improvement
Capital Structure and Cost Reduction
Assessment Strategies
• Financial Modeling • Supply Chain
Management
• Business Valuation
• Project Management
and Implementation
©2007 Grant Thornton LLP. All rights reserved. 54Global Recovery and Reorganization services from
Grant Thornton member firms…
Global Recovery
recovery and
& Reorganization
reorganizationcapabilities
capabilities
Financial restructuring and refinancing
Operational restructuring and turnaround
Creditor advisory
Strategic reviews
Exit strategy
Accelerated M&A
Formal insolvency – advisory and executory
Asset tracing and recovery
©2007 Grant Thornton LLP. All rights reserved. 55Grant Thornton Recovery and Reorganization
services have been of benefit in the following
industries…
Global Recovery & Reorganization industry utilization
Automotive Haulage and logistics
Aviation/airlines Healthcare
Construction and property Hospitality and leisure
Energy Natural resources
Engineering and components Retail
Financial markets Telecoms
Food and agriculture Technology
©2007 56
©2007 GrantGrant Thornton
Thornton LLP.LLP.
All All rights
rights reserved.
reserved.Whether assisting debtors, creditors or trustees,
Grant Thornton’s professionals bring years of
experience assisting clients in all phases of
bankruptcy…
• Evaluating the viability of the business and identifying restructuring
alternatives
• Assessing the feasibility of a company’s financial projections and
overall business plan
• Analyzing cash flow and developing recommendations for
enhancing liquidity
• Evaluating operations and recommending changes to improve
operating performance
• Advising constituents regarding various financing alternatives
• Advising parties in interest with regard to cash collateral
arrangements
• Identifying and evaluating potential exit strategies for the business
and its stakeholders
• Developing and evaluating proposed plans of reorganization or
liquidation
• Performing liquidation analyses and evaluating potential
recoverability of claims for various constituents
• Bankruptcy planning and compliance
• Bankruptcy litigation, preferences and fraudulent conveyance
analysis
©2007 Grant Thornton LLP. All rights reserved. 57Meet a few of our Midwest Region Recovery & Reorganization leaders… Ken Malek Timothy G. Skillman Kimberly D Rodriguez Philip J. Robinson 312-602-8150 248-233-6980 248-233-6947 312-602-8130 Stuart Kaufman Velencia L. Thompson Robert Lack Benjamin H. Mann 312-602-8252 312-602-8791 312-602-8256 312-602-8258 ©2007 Grant Thornton LLP. All rights reserved. 58
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