Chicago Bar Association

The Mortgage Crisis – Chapter 11 IssuesNovember 13, 2007

Paul Possinger, PartnerWinston & Strawn LLPppossinger@winston.com(312) 558-3717

Neil Luria, Managing DirectorNavigant Consulting, Inc.nluria@navigantcapitaladvisors.com(216) 321-5606

2

Litigation Risk

Subprime: Overview of Industry

3

What Caused the Subprime Crisis?

Foreclosures / Delinquencies

Originators Warehouse Lenders Investors

Decline in Housing Market Increase in Interest Rates

Subprime

Subprime Crisis Could Have Broader Effects

4

Mortgage Insurers and Home Building Products Stocks Have Been Impacted in the Recent Past

Note: Data as of August 9th ' 2007Source: CapitalIQ

60.0

80.0

100.0

120.0

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)

30.0

50.0

70.0

90.0

110.0

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 Capital 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)

Relative Performance – Building Products Suppliers

Relative Performance – Mortgage Insurers

5

The Top 5 Subprime Originators for theYear 2006 are Having Difficult Times in 2007

Source: CapitaIQ, Company Press Release and Filings

GE plans to sell the WMC mortgage business

New Century Financial Corp. Filed for Bankruptcy

Well Fargo shuts its Brokered Subprime Mortgage Loan Unit

HSBC Finance's loan impairment charges as a % of op.income in Q2'07 was 15% as compared to 11.3% in Q2'06

Countrywide's 2007 second quarter earnings dropped byApproximately 30%

Top 5 Subprime Originators in 2006

0

20,000

40,000

60,000

80,000

Wells FargoHome Mortgage

HSBC Finance New CenturyFinancial

Countrywide WMC MortgageCorp

(in $

mm

)

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Most of the Major Financial Institutions Have Been Impacted by the Subprime Crisis

Originators Warehouse Lenders Investors

7

Mortgage REITS Have Been Hit Hard by Subprime; Very Low Price to Book Ratios Imply Overvaluation of Assets on the Books

Source: Bloomberg

Note 1: Price as of August 9th ' 2007

Note 2: Trailing 12Months Value

Subprime Issuers

Issuer Stock Price 1Market

Capitalization 1 Revenue 2Operating Margin 2

Profit Margin 2 ROE P/E P/B

($)Wells Fargo & Co 34.16 114,245 50,718 25.95% 17.54% 20.03% 13.10x 2.43xWashington Mutual 36.76 31,298 26,532 18.69% 12.89% 12.88% 10.21x 1.33xCountrywide Financial Corp 28.66 15,696 21,561 15.71% 10.15% 12.88% 7.63x 1.09xIndyMac 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 2.43xLow 20.58 1,462 2,801 14.63% 9.12% 8.92% 5.73x 0.71xMedian 31.41 23,497 24,046 17.20% 11.52% 12.88% 8.92x 1.21xMean 30.04 40,675 25,403 18.75% 12.43% 13.68% 9.17x 1.39x

($mm) (%) (x)

Mortgage REITS

Issuer Stock Price 1Market

Capitalization 1 Revenue 2Operating Margin 2

Profit Margin 2 ROE P/E P/B

($)Impac Mortgage Holdings Inc 1.78 135 1,247 (5.40%) (5.33%) (39.73 %) NA 0.19xLuminent Mortgage Capital Inc 0.85 48 525 15.45% 12.69% 12.73 % 0.73x 0.10xNovastar Financial 5.53 62 498 12.51% 13.32% 3.02 % NA 0.13xAnworth Mortgage Asset Corp 5.61 195 334 (4.65%) (4.71%) 2.63 % NA 0.46xHanover Capital Mortgage Hol 2.02 17 35 75.09% (10.77%) NA NA 0.35xRAIT 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 0.46xLow 0.85 17 35 (5.40%) (10.77%) (39.73 %) 0.73x 0.10xMedian 3.78 99 416 3.93% (4.71%) 2.63 % 0.73x 0.27xMean 3.57 109 496 14.73% 0.08% (3.74 %) 0.73x 0.28x

($mm) (%) (x)

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Subprime Crisis Could Impact the Rating Agencies and Could Result in Additional Regulations

Source: Wall Street Journal

Credit RatingAgency

Moody's, S&P and Fitch could become more cautiousS&P/ Moody's recently downgraded approx. $17Billion Subprime MBS

RegulatoryBody

Bills have been introduced to protect the homeowners

SpilloverTo CDOMarket

Lending has been tight in the corporate sector

ContinuingHousingTrouble

The trouble in housing market to continue and could affect the building material suppliers

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Politicians Have Responded to the Subprime Crisis by Proposing New Bills; Fed Provided Additional Liquidity

Regulatory SupportMonetary Policy

Support from the Fed

Political Support

POLITICAL SPEAKHillary Clinton – Proposing a $1Billion Fund to protect

homeowners…..Speaking to CNBC, August 7th 2007Senator Dodd – Laid out Statement of Principles to

Protect homeowners

FED SPEAKDownside risk to economy has increased;

Inflation is still the worry…August 7th 2007Fed provided liquidity "to facilitate the orderly working of

financial markets"…August 10th 2007

10

Bills Proposed Across the Country are Striving to Protect the Homeowners

Bills Introduced

U.S. Senator Charles Schumer, Chairman of JEC and Housing Subcommittee: Borrower's Protection Act of 2007

$300mm in federal fundsLegislation to upgrade standards for mortgage

brokers and other non bank mortgage originators, with regards to making new loans to borrowers

Holds lenders responsible

Congressman Spencer Bachus, ranking member of House Financial Services Committee introduced Fair Mortgage Practices Act

Mortgage lenders to weigh borrowers ability$100mm in federal funds

States are working towards amending predatory lending acts

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Legal Issues: Assets and Liabilities

AssetsMortgage Loans• Mortgage• Promissory Note• Loan File, including due diligence

Servicer Agreements

Owned Real Estate ("REO Property")

Misc• Litigation• Furniture/computers/equipment• Leases• Cash on hand

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Legal Issues: Assets and Liabilities

Assets (cont.)Mortgage Loans: Generally governed by UCC• Notes are "instruments"• Loans are "general intangibles"• Perfection of liens:

• Financing statement• Possession of Loan File/Notes required

Servicer Agreements• Might not be pledged to warehouse lenders• May be valuable

13

Legal Issues: Assets and Liabilities

Assets (cont.)REO Property• Real estate foreclosed in lender's name• Not UCC collateral• Might not be subject to warehouse lender lien

Causes of Action• Many debtors have scheduled claims against

declining buyers

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Legal Issues: Assets and Liabilities

LiabilitiesWarehouse Loans

Repurchase Claims

Employees

General Trade

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Legal Issues: Assets and Liabilities

LiabilitiesWarehouse Loans• Secured by first priority liens on "warehoused" loans• May not have other collateral• Usually not secured by 2nd liens on other loans

Repurchase Claims• Buyers have right to put non-complying loans back• Obligation is not secured• Gross price vs. net actual/estimated loss

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Legal Issues: Insolvency and Bankruptcy

Creditors' Rights (Pre-Bankruptcy)UCC ForeclosureUCC Strict Foreclosure• Partial or Full• Reservation of deficiency

Repurchase Agreements• Sell Loans• Commercially reasonableness standard

Servicing: Ensure No Interruption• Transition to new servicer• Ensure continuity with 3rd party servicers

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Legal Issues: Insolvency and Bankruptcy

BankruptcyMortgage loans are property of the estate, unless: • Properly foreclosed prepetition

OR

• Debtor holds legal title only for servicing purposes (§541(d))• Repurchase Agreement vs. Warehousing Credit Agreement

Automatic Stay• Does not stay right of repo participant to terminate repurchase

agreement (§559)• But, excess proceeds of mortgage loan liquidation are property of estate

• Does not stay right of repo participant to setoff mutual debts between debtor and repo participant (i.e. liquidate repo "collateral") (§362(b)(7))

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Legal Issues: Insolvency and Bankruptcy

Bankruptcy (cont.)Financing / Use of Cash Collateral363 Sales• Servicing Rights: Valuable, can generate bidding• Mortgage Loans, if property of the estate• REO Property

Thank you

Paul Possinger, PartnerWinston & Strawn LLPppossinger@winston.com(312) 558-3717

Neil Luria, Managing DirectorNavigant Consulting, Inc.nluria@navigantcapitaladvisors.com(216) 321-5606