Subprime Lending Crisis: New Regulations and Enforcement Efforts, Business and Litigation Strategies First Day Overview

1. Subprime Lending Crisis:New Regulations and Enforcement Efforts, Business and Litigation StrategiesFirst Day Overview March 18-19, 2008 Veronica E. Rendon, Co-Chair Arnold & Porter LLP 399 Park Avenue New York, NY 10022 212.715.1165 veronica.rendon@aporter.com

2. What Happened and Why Are We Here?

3. Why the Market was Ripe for Growth • Issuance of “non agency” MBS grew from $157 billion in 2000 to $1.2 trillion in 2006 • Overall issuance of subprime non-agency MBS grew from $96 billion in 2001 to $483 billion in 2006 • Created surging demand for mortgage paper and increased competition • Originations and MBS market share have more than doubled over the last few years

4. Subprime Originations and MBS Market Share

5. Why There Is A BIG Problem • The Fed raised interest rates 17 times since 2004 • Home prices have fallen dramatically • Delinquency and default rates are high • Refinancing is difficult • Foreclosures • Warehouse lenders cut financing • Securitization ratings keep falling • Negative cycle feeds loss of value • Has created more than a subprime issue – really a credit crisis

6. Why There Is A BIG Problem • 50 percent of ARM originations over past four years have been subprime • 80 percent of 2005 subprime originations were ARMs, most were 2/28 hybrids • Nearly 2 million subprime ARMs will reset by the end of 2008, with monthly payment increases of 30 percent or more • Underwritten differently than before • No doc/low doc • Debt-to-income ratios based on teaser rates • Increasing loan-to-value ratios • Prepayment penalties

7. “[T]he turbulence originated in concerns about subprime mortgages, but the resulting global financial losses have far exceeded even the most pessimistic estimates of the credit losses on these loans.” Ben Bernanke, Chairman of the Federal Reserve, September 20, 2007 The Subprime Meltdown

8. Alliance Bancorp Choice Capital Funding Premier Mortgage Funding Stone Creek Funding FlexPoint Funding Starpointe Mortgage Freestand Financial Wells Fargo Correspondent Alternative Altivus Financial ACT Mortgage Aegis Mortgage Corp. Ownit Mortgage Solutions Quality Home Loans New Century Financial Corporation Fremont General Corp. Ameriquest Mortgage Southstar Funding Oak Street Mortgage, LLC ResMAE Mortgage Corp. People’s Choice Financial Corp. American Home Mortgage Investment LoriMac,Inc. First Magnus Financial Silver State Mortgage Sunset Direct Lending Imploded Lenders • Many lenders have already gone into bankruptcy or are near bankruptcy

9. Guaranty Insurers Are Struggling • Significant Subprime Exposure • FGIC • MBIA • Ambac • Radian • Their own ratings are at risk • Causing a lot of discomfort • Worsening market conditions

10. Plaintiff’s Perspective “The implosion of an asset price bubble … … always leads to the discovery of fraud and swindles.” - Charles P. Kindleberger, Economist

11. Lawsuits, Lawsuits, Lawsuits • Federal securities litigation filings increased in 2007 • NERA study: 38 subprime securities class actions • Concentrated in the Southern District of New York • Shareholders claiming public companies made materially false and misleading public statements overstating performance and understating risk • Press releases • Audited financial statements • Offering documents • Targets: lenders and brokers, builders, credit insurers and rating agencies

12. Lawsuits, Lawsuits, Lawsuits • Also a significant amount of borrower class actions • Alleging fraud in the borrowing process • Navigant Consulting study: Federal subprime lawsuits are outpacing S&L litigation • According to Nielsen: "This appears to be just the beginning…. We are already observing a steady acceleration of continuing litigation activity into 2008…. [T]he explosion of cases in 2007 suggests a daunting forecast of what is still to come."

13. The Industry At War With Itself?

14. Potential Legal Allegations • Claims of fraud in the underwriting and origination process and permeation downstream • Claims of misvaluation of assets • Were modeling assumptions too aggressive? • Claims of breach of securitization documents • e.g., Reps and Warranties • Claims of inadequate servicing • Claims of inaccuracies in delinquency and default reporting • Claims of omissions or materially misrepresented audited financial statements and disclosure documents

15. Potential Defenses • No industry-wide fraud • At most, sporadic instances occurring at borrower/broker level • Very difficult to value a new asset class • Easy to use 20/20 hindsight to point fingers • Assumptions in models were correct when made • Will adjust as empirical performance data is collected • Reps and warranties were complied with • Servicing complied with industry standards • Performance data and risk disclosures were accurate • Sophisticated parties capable of extensive due diligence

16. Really talking about foreseeability…

17. Christopher J. Dodd (D -Ct),Chairman, U.S. Senate Committee on Banking, Housing and Consumer Affairs “The Fed was encouraging lenders to develop and market alternative adjustable rate products, just as it was embarking on a long series of hikes in short term rates.” “In my view, these actions set the conditions for the perfect storm that is sweeping over millions of American homeowners today.” Monetary Policy

18. WEWELCOME YOUR QUESTIONS AND COMMENTS!