The document discusses the subprime mortgage crisis and its effects. It summarizes that the crisis was caused by rising foreclosures and delinquencies due to declining housing prices and rising interest rates. This impacted subprime originators, warehouse lenders, investors, and mortgage insurers. Proposed responses from politicians and regulators include new bills to protect homeowners and monetary policy support from the Federal Reserve. Legal issues for distressed subprime lenders could include determining asset and liability values and priorities in bankruptcy.

1. Chicago Bar Association
The Mortgage Crisis – Chapter 11
Issues
November 13, 2007
Paul Possinger, Partner
Winston & Strawn LLP
ppossinger@winston.com
(312) 558-3717
Neil Luria, Managing Director
Navigant Consulting, Inc.
nluria@navigantcapitaladvisors.com
(216) 321-5606

2. 2
Litigation Risk
Subprime: Overview of Industry

3. 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. 4
Mortgage Insurers and Home Building
Products Stocks Have Been Impacted in the
Recent Past
Note: Data as of August 9th ' 2007
Source: 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. 5
The Top 5 Subprime Originators for the
Year 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 by
Approximately 30%
Top 5 Subprime Originators in 2006
0
20,000
40,000
60,000
80,000
Wells Fargo
Home Mortgage
HSBC Finance New Century
Financial
Countrywide WMC Mortgage
Corp
(in$mm)

6. 6
Most of the Major Financial Institutions Have
Been Impacted by the Subprime Crisis
Originators Warehouse Lenders Investors

7. 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
1
Market
Capitalization
1
Revenue
2
Operating
Margin
2
Profit
Margin
2
ROE P/E P/B
($)
Wells Fargo & Co 34.16 114,245 50,718 25.95% 17.54% 20.03% 13.10x 2.43x
Washington Mutual 36.76 31,298 26,532 18.69% 12.89% 12.88% 10.21x 1.33x
Countrywide Financial Corp 28.66 15,696 21,561 15.71% 10.15% 12.88% 7.63x 1.09x
IndyMac Bancorp Inc 20.58 1,462 2,801 14.63% 9.12% 8.92% 5.73x 0.71x
High 36.76 114,245 50,718 25.95% 17.54% 20.03% 13.10x 2.43x
Low 20.58 1,462 2,801 14.63% 9.12% 8.92% 5.73x 0.71x
Median 31.41 23,497 24,046 17.20% 11.52% 12.88% 8.92x 1.21x
Mean 30.04 40,675 25,403 18.75% 12.43% 13.68% 9.17x 1.39x
($mm) (%) (x)
Mortgage REITS
Issuer Stock Price
1
Market
Capitalization
1
Revenue
2
Operating
Margin
2
Profit
Margin
2
ROE P/E P/B
($)
Impac Mortgage Holdings Inc 1.78 135 1,247 (5.40%) (5.33%) (39.73 %) NA 0.19x
Luminent Mortgage Capital Inc 0.85 48 525 15.45% 12.69% 12.73 % 0.73x 0.10x
Novastar Financial 5.53 62 498 12.51% 13.32% 3.02 % NA 0.13x
Anworth Mortgage Asset Corp 5.61 195 334 (4.65%) (4.71%) 2.63 % NA 0.46x
Hanover Capital Mortgage Hol 2.02 17 35 75.09% (10.77%) NA NA 0.35x
RAIT Investment Trust 5.61 195 334 (4.65%) (4.71%) 2.63 % NA 0.46x
High 5.61 195 1,247 75.09% 13.32% 12.73 % 0.73x 0.46x
Low 0.85 17 35 (5.40%) (10.77%) (39.73 %) 0.73x 0.10x
Median 3.78 99 416 3.93% (4.71%) 2.63 % 0.73x 0.27x
Mean 3.57 109 496 14.73% 0.08% (3.74 %) 0.73x 0.28x
($mm) (%) (x)

8. 8
Subprime Crisis Could Impact the Rating
Agencies and Could Result in Additional
Regulations
Source: Wall Street Journal
Credit
Rating
Agency
Moody's, S&P and Fitch could become more cautious
S&P/ Moody's recently downgraded approx. $17Billion
Subprime MBS
Regulatory
Body
Bills have been introduced to protect the homeowners
Spillover
To CDO
Market
Lending has been tight in the corporate sector
Continuing
Housing
Trouble
The trouble in housing market to continue and could affect
the building material suppliers

9. 9
Politicians Have Responded to the
Subprime Crisis by Proposing New Bills;
Fed Provided Additional Liquidity
Regulatory Support
Monetary Policy
Support from the Fed
Political Support
POLITICAL SPEAK
Hillary Clinton – Proposing a $1Billion Fund to protect
homeowners…..Speaking to CNBC, August 7th 2007
Senator Dodd – Laid out Statement of Principles to
Protect homeowners
FED SPEAK
Downside risk to economy has increased;
Inflation is still the worry…August 7th 2007
Fed provided liquidity "to facilitate the orderly working of
financial markets"…August 10th 2007

10. 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 funds
Legislation 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

11. 11
Legal Issues: Assets and Liabilities
Assets
Mortgage 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

12. 12
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. 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

14. 14
Legal Issues: Assets and Liabilities
Liabilities
Warehouse Loans
Repurchase Claims
Employees
General Trade

15. 15
Legal Issues: Assets and Liabilities
Liabilities
Warehouse 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

16. 16
Legal Issues: Insolvency and Bankruptcy
Creditors' Rights (Pre-Bankruptcy)
UCC Foreclosure
UCC 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

17. 17
Legal Issues: Insolvency and Bankruptcy
Bankruptcy
Mortgage 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))

18. 18
Legal Issues: Insolvency and Bankruptcy
Bankruptcy (cont.)
Financing / Use of Cash Collateral
363 Sales
• Servicing Rights: Valuable, can generate bidding
• Mortgage Loans, if property of the estate
• REO Property

19. Thank you
Paul Possinger, Partner
Winston & Strawn LLP
ppossinger@winston.com
(312) 558-3717
Neil Luria, Managing Director
Navigant Consulting, Inc.
nluria@navigantcapitaladvisors.com
(216) 321-5606