The housing crisis is evolving in several ways: 1) Defaults are shifting from subprime loans to prime and Alt-A loans. 2) Defaults are now driven more by job losses and falling home prices than adjustable rate resets. 3) Foreclosures are impacting many more states beyond the original "sand and rust states". 4) Future losses will come from banks' on-balance sheet loans rather than losses from securitized loans marked to market.

1. An Overview of the Housing and Economic Crisis
– and Why There Is More Pain to Come
T2 Accredited Fund, LP
Tilson Offshore Fund, Ltd.
T2 Qualified Fund, LP
November 9, 2009
The latest version of this presentation is regularly updated at www.valueinvestingcongress.com

2. The Wave of Resets from Subprime
Loans Is Mostly Behind Us
$35
We are
$30 here
$25
Loans with Payment Shock (Bn)
$20
$15
$10
$5
$0
6
7
8
9
06
07
08
09
6
7
8
9
6
7
8
9
0
10
0
0
r-0
r-0
r-0
r-0
-0
-0
-0
-0
l-0
l-0
l-0
l-0
r-1
-1
l-1
n-
n-
n-
n-
n-
ct
ct
ct
ct
ct
Ju
Ju
Ju
Ju
Ju
Ap
Ap
Ap
Ap
Ap
Ja
Ja
Ja
Ja
Ja
O
O
O
O
O
Sources: LoanPerformance, Deutsche Bank; slide from Pershing Square presentation, How to Save the Bond Insurers, 11/28/07. 35

3. The Mortgage Crisis is Shifting From One in
Which Defaults Are Driven by Resets to Borrowers
Losing Their Jobs and/or Going Underwater
60% ($250,000)
2006 Origination California Mortgages
Example:
Equity Relative to First Lien ($200,000)
First-lien (Right Axis Inverted)
50%
mortgages in
Cumulative Default (Left Axis) ($150,000)
California that
were originated in
Equity Relative To First Lien ($)
Cumulative Default %
2006 went from 40% ($100,000)
$165,000 of
equity to an ($50,000)
average negative 30%
equity of $0
$149,000 by
Sept. 2009. 20% $50,000
The cumulative
default rate $100,000
tracked this loss 10%
of equity, rising $150,000
from 1.0% to
48.5%. 0% $200,000
Jul-07
Nov-07
Jul-08
Nov-08
Jul-09
Jan-07
May-07
Jan-08
May-08
Jan-09
May-09
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Sources: Amherst Securities. 36

4. The Mortgage Meltdown Has Moved
Beyond Subprime to Five Other Areas
For further details about Jumbo Prime, HELOCs and Option ARMs, see the Appendix
Prime Mortgage
Commercial Real Estate
Alt-A
Other Corporate
Commercial & Industrial
Subprime
Subprime is only a small
High-Yield / Leveraged Loans
part of the problem
Jumbo Prime
Home Equity
Credit Card
Auto
Option ARM
Construction & Development
Other Consumer
CDO/ CLO
$0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5 $4.0 $4.5 $5.0
Amount Outstanding (Trillions)
Sources: Federal Reserve Flow of Funds Accounts of the United States, IMF Global Financial Stability Report October 2008, Goldman Sachs Global Economics
Paper No. 177, FDIC Quarterly Banking Profile, OFHEO, S&P Leverage Commentary & Data, T2 Partners estimates. 37

5. Delinquencies of Prime and Alt-A
Mortgages Are Soaring
Source: New York Times, 5/24/09.
38

6. Percent Noncurrent (60+ days)
Q
1
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
19
Q 99
3
19
Q 99
1
Are Soaring
20
Q 00
3
20
Q 00
1
20
Q 01
3
20
Q 01
1
20
Q 02
3
20
Q 02
1
20
Source: Mortgage Bankers Association National Delinquency Survey.
Q 03
3
20
Q 03
1
20
Q 04
3
20
Q 04
1
20
Q 05
3
20
Delinquencies of Prime Mortgages
Q 05
1
20
Q 06
3
20
Q 06
1
20
Q 07
3
20
Q 07
1
20
Q 08
3
20
08
39

7. Fannie Mae and Freddie Mac Serious
Delinquencies Are Soaring
4.0%
Fannie
3.5% Freddie
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
7
7
7
8
8
8
07
07
08
08
08
08
08
08
08
08
08
09
09
09
09
09
09
09
09
/0
/0
/0
/0
/0
/0
8/
9/
1/
2/
3/
4/
5/
6/
7/
8/
9/
1/
2/
3/
4/
5/
6/
7/
8/
10
11
12
10
11
12
Note: Serious delinquencies are loans that have missed three or more consecutive payments (90+ days).
Source: Company filings. 40

8. Freddie Mac’s Delinquency Rate by Vintage
Underscores the Decline in Lending Standards
Total Single-Family Portfolio Cumulative Default Rates* by Book Year
* Represents the cumulative transition rate of loans to a default event, and is calculated for each year of origination as the number of loans that have proceeded to
foreclosure, acquisition or other disposition events, excluding liquidations through voluntary pay-off, divided by the number of loans in our single-family mortgage 41
portfolio. Excludes certain Structured Transactions. Source: Company filing.

9. There Is a Surge of Notices of Default and
Foreclosures Among the GSEs
Prime Notices of Default
Subprime Notices of Default
Subprime Foreclosures
Prime Foreclosures
Source: The Field Check Group.
42

10. The Foreclosure Problem Is No Longer
Only a Bubble State Phenomenon
15 States With the Highest Prime Mortgage Foreclosure Rates
Source: New York Times, 5/24/09.
43

11. Percent Noncurrent (60+ days)
Ja
n-
10%
15%
20%
25%
0%
5%
99
Ju
l-9
Ja 9
n-
00
Ju
l-0
Ja 0
n-
01
Sources: Amherst Securities, LoanPerformance.
Ju
l-0
Ja 1
n-
02
Ju
l-0
Mortgages Are Soaring
Ja 2
n-
03
Ju
l-0
Ja 3
n-
04
Ju
l-0
Ja 4
n-
05
Ju
l-0
Delinquencies of Securitized Alt-A
Ja 5
n-
06
Ju
l-0
Ja 6
n-
07
Ju
l-0
Ja 7
n-
08
Ju
l-0
Ja 8
n-
09
44

12. Alt-A Delinquencies By Vintage Show the
Collapse in Lending Standards in 2006 and 2007
30%
2007 2006
25%
Percent Noncurrent (60+ days)
20%
15%
2005
10%
2004
5%
2003
0%
0 5 10 15 20 25 30 35 40 45 50 55 60
Months of Seasoning
Sources: Amherst Securities, LoanPerformance.
45

13. There Are $2.4 Trillion of Alt-A Mortgages
and Their Resets Are Mostly Ahead of Us
$300
$10
We are
here $9
$250
Estimated Cumulative Reset Amount (Bn)
$8
$7
$200
$6
Amount (Bn)
$150
$5
$4
$100
$3
$2
$50
$1
$0
$0
10
11
12
13
14
15
0
1
2
3
4
5
l-1
l-1
l-1
l-1
l-1
l-1
n-
n-
n-
n-
n-
n-
Ju
Ju
Ju
Ju
Ju
Ju
Ja
Ja
Ja
Ja
Ja
Ja
Sources: Credit Suisse, LoanPerformance.
46
NOTE: This chart only shows resets for a small fraction of Alt-A loans, but is representative of all of them.

14. Two Waves of Losses Are Behind Us…
But Three Are Looming
Losses Mostly Behind Us
• Wave #1: Borrowers committing (or the victim of) fraud, as well as
speculators, who defaulted quickly. Timing: beginning in late 2006 (as
soon as home prices started to fall) into 2008. Mostly behind us.
• Wave #2: Mostly subprime borrowers who defaulted when their
mortgages reset due to payment shock. Timing: early 2007 (as two-
year teaser subprime loans written in early 2005 started to reset) to the
present. Now tapering off as low interest rates mitigate payment shock.
Losses Mostly Ahead of Us
• Wave #3: Prime loans (most of which are owned or guaranteed by the
GSEs) defaulting due to job loss and home price declines (i.e.,
underwater homeowners). Timing: started to surge in early 2008 to the
present.
• Wave #4: Jumbo prime, second lien and HELOCs (most of which are
on banks’ books) defaulting due to job loss and home price declines/
underwater homeowners. Timing: started to surge in early 2008 to the
present.
• Wave #5: Losses among loans outside of the housing sector, the
largest of which will be in the $3.5 trillion area of commercial real estate.
Timing: started to surge in early 2008 to the present.
47

15. Why Won’t the System Collapse Again?
Given that the three looming waves are much larger than the two that are mostly behind us, why
won’t they trigger a collapse of our financial system similar to what happened in late 2008?
Answer: Last year’s collapse was triggered in part by the magnitude of the losses, but also
because of the suddenness. Financial institutions can withstand even large losses if they trickle in over
time because they can offset losses each quarter with profits earned during the quarter – but this isn’t
possible if losses are sudden.
The suddenness of last year’s losses was due in part to rapidly rising defaults, especially among
subprime mortgages, but in fact, realized losses were still quite low. The real culprit was the fact that
most subprime loans had been securitized into RMBSs and CDOs, turning them into tradable debt
instruments.
According to GAAP accounting rules, traded instruments like stocks and bonds have to be marked
to market, and in only a few months in 2008, the market price for hundreds of billions of dollars of AAA-
rated RMBS and CDO securities went from close to 100 cents on the dollar to the 20-30 cent range
(even though the underlying pools of mortgages hadn’t yet realized much in the way of losses). This
required every institution holding these securities to immediately book enormous losses, which caused
many of them to collapse.
Why did Merrill Lynch, Citigroup, Lehman and Bear Stearns fall, but Wells Fargo didn’t? Because
Wells had almost nothing on its balance sheet that had to be marked to market.
Big mark to market losses are now behind us, so it’s unlikely that there will be any sudden shocks
to the system. Instead, hundreds of billions of dollars of additional losses from trillions of dollars of bad
loans will be realized over many, many years.
This is both good news and bad news: the good news is that while future losses will surely
bankrupt many banks, especially smaller ones exposed to commercial real estate, they likely won’t
threaten the system because banks are earning so much money currently that most should be able to
outrun their losses.
The bad news is that very high losses will plague our financial system for many years to come –
our best guess is current extremely high levels for another two years, and then slowly declining for three
more years before finally returning to normal levels in five years. This drip torture of high losses every
quarter, year after year, will likely keep banks extremely cautious in their lending, making robust
economic growth unlikely. 48

16. The Housing Crisis is Shifting in a
Number of Ways
First Stage of Collapse Current Stage
1. Subprime & fraudulent loans 1. Prime, Alt-A and other loans to
account for most defaults better borrowers drive defaults
2. Defaults driven by loans 2. Defaults driven by job losses and
resetting underwater mortgages
3. Defaults mainly in sand and rust 3. Defaults occurring across a broad
states swath of the country
4. Mark-to-market losses due to 4. Losses from on-balance-sheet
bad loans being securitized loans (not marked to market)
5. Little government intervention 5. Massive government intervention
49

17. Current Status of the Housing Market

18. Foreclosure Filings Have Increased
Dramatically
• 343,638 foreclosure filings during September were down 4% sequentially and up 29% year-over-year.
• 1.2% of all U.S. housing units (one in 84) received at least one foreclosure filing in the first half of this year.
400,000
350,000
300,000
Number of Foreclosures
250,000
200,000
150,000
100,000
50,000
0
Au -05
Ap -06
Ap -07
Ap -08
Ju -06
Au -06
Ju -07
Au 07
Ju -08
Au 08
Ap -09
Ju -09
Au 09
O -05
Fe -05
O -06
Fe -06
O -07
Fe -07
O -08
Fe -08
09
D -05
D -06
D -07
D -08
n-
n-
n-
g-
b
b
b
b
n
r
n
r
r
r
ec
ec
ec
ec
g
ct
g
ct
g
ct
g
ct
Ju
Note: Foreclosure filings are defined as default notices, auction sale notices and bank repossessions.
Source: RealtyTrac.com U.S. Foreclosure Market Report. 51

19. The Delinquency and Foreclosure Problem
Has Spread Far Beyond the Bubble States
Source: LPS Applied Analytics, WSJ 10/22/09.
52

20. Credit Suisse Predicts More Than 6 Million
Additional Foreclosures by the End of 2012
This chart is quite dated, but
accurately shows how the
foreclosure crisis is shifting
away from subprime.
Sources: Credit Suisse, 9/08; http://calculatedrisk.blogspot.com 53

21. Existing Homes Sales Have Risen in Recent Months, Leading
to a Decline in Inventory – But Inventory Is Still at Double
Historical Levels – And Shadow Inventory Lurks
Annualized Rate of Existing Home Sales Months Supply
7.5 12
11
7.0
10
6.5 3.6 million units, equal to 7.8 months
9
as of the end of September 2009
6.0
8
Millions
Months
5.5 7
6
5.0
5.6 million units as of the 5
end of September 2009
4.5
4
4.0 3
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Actual inventory levels are significantly higher due to “shadow inventory.” “As of July, mortgage companies
hadn't begun the foreclosure process on 1.2 million loans that were at least 90 days past due…An
additional 1.5 million seriously delinquent loans were somewhere in the foreclosure process, though the
lender hadn't yet acquired the property…Moreover, there were 217,000 loans where the borrower hadn't
made a payment in at least a year but the lender hadn't begun the foreclosure process. In other words, 17%
of home mortgages that are at least 12 months overdue aren't in foreclosure, up from 8% a year earlier.”
Source: NATIONAL ASSOCIATION OF REALTORS® Existing Home Sales data series; estimates prepared for The
Wall Street Journal by LPS Applied Analytics, WSJ, 9/23/09 54

22. Thanks to Massive Government Stimulus (Mainly the FHA & the
$8,000 First-Time Homebuyers Tax Credit), Sales from June-
Sept. 2009 Were Higher Than 2008, But This May Not Last
Note how seasonal home sales are
Source: Mark Hanson Advisors.
55

23. Thanks to Massive Government Stimulus (Mainly the FHA & the
$8,000 First-Time Homebuyers Tax Credit), Sales from June-
Sept. 2009 Were Higher Than 2008, But This May Not Last
Note how seasonal home sales are
Organic sales are highly seasonal,
while distressed sales are have fallen
in recent months due to loan mods
Source: Mark Hanson Advisors.
56

24. Inventory is Moving at the Low End, But As the
High End Tips Over, Sales Are Falling and
Inventories Are Ballooning
Months Inventory in CA By Home Price Sudbury, MA (July data)
Months of
Price Inventory
>$250K 6
$250-500 8
$500-750 5
$750-1M 14
$1M+ 51
Another example: based on the rate of sales over the seven months ending in May
2009, there is five years of housing inventory in Greenwich, CT
Sources: JP Morgan; CA Assoc. of Realtors (left chart); National Assoc. of Realtors via Moody’s Economy.com, WSJ 6/22/09 (right chart).
57

25. Defaults Are Massively Outpacing
Liquidations, So the Inventory
Overhang Continues to Worsen
First time defaults
Liquidations
Note: This data is based on approximately 28 million loans. Total first-time defaults are running at 300,000/month.
Source: First American CoreLogic Loan-Level Servicing Data, Amherst Securities. 58

26. Defaulted Mortgages Are Taking Longer to
Liquidate, Adding to the Inventory Overhang
Source: First American CoreLogic Loan-Level Servicing Data, Amherst Securities.
59

27. Cure Rates Have Fallen Such That Once a
Homeowner Misses Two Payments, A
Foreclosure Is Almost Inevitable
Source: Loan Performance, Amherst Securities.
60

28. The Current “Housing Overhang” Is 7 Million Homes –
Which Doesn’t Include Any New Defaults, Which Are
Running at Approximately 300,000/Month!
Source: Mortgage Bankers Association, Loan Performance, Amherst Securities.
61

29. Shadow Inventory for Each of the 20 Cities
in the Case-Shiller Index
Note: Notice of Default data is incomplete or missing for many cities.
Source: www.trulia.com, Amherst Securities. 62

30. Outlook for Housing Prices

31. Home Prices Were in an Unprecedented
Freefall Until A Slight Bounce in Q209
220
S&P/Case-Shiller U.S. National Home Price Index
S&P/Case-Shiller 20-City Composite
OFHEO Purchase-Only Index
200
NAR Median Sales Price of Existing Homes
180
160
140
120
100
00
00
Q 01
Q 01
Q 02
Q 02
Q 03
Q 03
Q 04
Q 04
Q 05
Q 05
Q 06
Q 06
Q 07
Q 07
Q 08
Q 08
09
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
1
3
1
3
1
3
1
3
1
3
1
3
1
3
1
3
1
3
1
Q
Q
Q
Sources: Standard & Poor’s, OFHEO Purchase-Only Index, NATIONAL ASSOCIATION OF REALTORS® Existing Home Sales data series.
64

32. Home Prices Look Affordable Due to Price
Declines and Ultra-Low Interest Rates
800
CASE SHILLER USA (1975 = 100)
Modeled Home Prices - Interest Only
700 Modeled Home Prices - 30yr Fully Amortizing
600
500
Index Value
400
300
200
100
0
Date
S C Shill B fL b St ti ti Bl b A h tS iti
Source: Case-Shiller, Bureau of Labor Statistics, Amherst Securities.
65

33. The Housing Affordability Index Shows
Houses Are Now Affordable
26
24
Mortgage Payment on Median Priced
Home as % of Family Income
22
20
18
Before concluding that houses are cheap, however, there are three big caveats: first, low rates
are only available to those who qualify for conforming mortgages, which doesn’t help millions of
homeowners or potential homeowners who have spotty credit histories or are underwater on their
16 current mortgages. Second, with low enough interest rates, almost anything looks affordable; if
rates rise, houses won’t look so reasonably priced based on these metrics. Finally, in light of the
severe economic downturn, average income may fall for quite some time.
14
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
Source: NATIONAL ASSOCIATION OF REALTORS® Housing Affordability Index. 66

34. Home Prices Need to Fall Another 5-10%
to Reach Trend Line
300
Shiller
Lawler
275
Real Home Price Index (1890=100)
250
225
200
Housing
Bubble
175
Trend Line
150
125
100
50
54
58
62
66
70
74
78
82
86
90
94
98
02
06
09
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
Sources: Robert J. Shiller, Irrational Exuberance: Second Edition, as updated by the author; Lawler Economic & Housing Consulting, T2 estimates.
67

35. GMO’s Study of Bubbles Shows That All
of Them Eventually Return to Trend Line
34 Have Returned to Trend; the Only Exception, British Housing, Is On Its Way
12 Examples
GMO calls this “the greatest sucker’s rally in history”
S&P 500 S&P 500 Stocks Japan vs. EAFE ex-Japan S&P 500
1920-1932 1946-1984 1981-1999 1992-October 2008
2.3 2.5 3.0 2.4
Detrended Real Price
Detrended Real Price
Detrended Real Price
2.5
Relative Return
1.8 2.0 2.0
2.0
1.5
1.3 1.5 1.6
Trend Line 1.0
Trend Line 1.0
0.8 0.5 1.2
0.5 Trend Line Trend Line
0.3 0.0 0.0 0.8
20 21 22 23 24 25 26 27 28 29 30 31 46 50 54 58 62 66 70 74 78 82 81 83 85 87 89 91 93 95 97 99 92 94 96 98 00 02 04 06 08
U.S. Dollar U.K. Pound Currencies Japanese Yen Japanese Yen
1979-1992 1979-1985 1983-1990 1992-1998
2.0 1.4 1.4 1.4
Cumulative Return
Cumulative Return
Cumulative Return
Cumulative Return
1.8 1.3 1.3 1.3
1.6 1.2 1.2 1.2
1.4 1.1 1.1 1.1
1.2 1.0 1.0 1.0
1.0 0.9 0.9 0.9
0.8 0.8 0.8 0.8
79 81 83 85 87 89 91 79 80 81 82 83 84 83 84 85 86 87 88 89 90 92 93 94 95 96 97
Gold Crude Oil Commodities Nickel Cocoa
1970-1999 1962-1999 1979-1999 1970-1999
2000 250
80 600
1600 200 500
60
Real Price
Real Price
Real Price
Real Price
1200 150 400
40 300
800 100
200
400 20 50 100
0 0 0 0
70 74 78 82 86 90 94 98 62 66 70 74 78 82 86 90 94 98 79 81 83 85 87 89 91 93 95 97 70 74 78 82 86 90 94 98
Source: GMO LLC. Note: For S&P charts, trend is 2% real price appreciation per year. Source: GMO. Data through 10//10/08.
* Detrended Real Price is the price index divided by CPI+2%, since the long-term trend increase in the price of the S&P 500 has been on the order of 2% real. 68

36. The Biggest Danger is That Home Prices
Overshoot on the Downside, Which Often
Happens When Bubbles Burst
S&P 500 1927-1954
2.50
Overrun: 59%
2.25 Fair Value to Bottom: 1.5 Years
Fair Value to Fair Value: 23 Years
Detrended Real S&P 500 Stock Price Index
2.00
1.75
1.50
1.25
1.00
S&P 500 1955-1986
2.25
0.75
Overrun: 45%
0.50 2.00 Fair Value to Bottom: 7 Years
Fair Value to Fair Value: 12 Years
Detrended Real S&P 500 Stock Price Index
0.25 -59% 1.75
0.00 1.50
1927 1930 1933 1936 1939 1942 1945 1948 1951 1954
1.25
1.00
0.75
0.50
-45%
0.25
0.00
1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1976 1978 1980 1982 1984 1986
Source: GMO LLC, T2 Partners calculations.
69

37. Recent Signs of Stabilization Are Likely
the Mother of All Head Fakes
Rather than representing a true bottom, recent signs of stabilization are likely due to seven factors that
are (or are likely to be) short-term:
1. Ultra-low interest rates
2. The $8,000 tax credit for first-time homebuyers
– This expires on November 30th, but will likely be renewed and perhaps expanded
– Current cost: $1 billion/month
3. More middle- and upper-end homes are being sold (either voluntarily or via foreclosure), which has the effect of
raising the price at which the average home is sold – but more defaults of higher priced homes is very bad news
for mortgage holders
4. A decline in resets (which will ramp up again over the next few years)
5. A temporary reduction in the inventory of foreclosed homes
– There are currently big delays in foreclosures due to four reasons (in descending order of importance): A) Loan modifications via the
HAMP program; B) Political pressure on banks and servicers; C) The system is overwhelmed with the unprecedented volume of
defaulting homeowners; and D) Some banks, weakened by losses, may be motivated to drag out the process so that losses/write-
downs can be delayed, giving them more time to earn their way out of trouble.
– “For now, the delays have led to what is probably a temporary drop in the supply of bank-owned homes in California and other places
where investors and first-time home buyers have been competing for bargains. In Orange County, Calif., the number of bank-owned
homes listed for sale dropped to 322 in early September from 1,404 in November 2008, according to Altera Real Estate. But the
number of foreclosures is expected to increase in the fourth quarter as mortgage-servicing companies determine who is eligible for a
loan modification and who isn't. ‘We are going to see a spike from now to the end of the year in foreclosures as we take people out of
the running’ for a loan modification or other alternatives, says a Bank of America Corp. spokeswoman. ‘Foreclosure sales had dropped
to ‘abnormally low’ levels in response to government efforts to stem foreclosures, she adds.’ – WSJ, 9/23/09
6. The FHA is providing massive support to the housing market, in part by doing extremely risky lending
– FHA’s market share has risen from 2% in 2005 to 23% of all mortgages, in part because of lax lending standards: only 3.5% down for
people with 600 (subprime) FICO scores and 10% down for people with 500 (deep subprime) FICO scores
– Thousands of shady subprime mortgage lenders rebranded themselves and are now doing FHA-backed business. Approved FHA
lenders grew from just over 9,600 at the end of FY07 to nearly 14,000 today, according to HUD
– FHA has very poor systems and controls – there’s not even a Chief Risk Officer!
– It’s no surprise, therefore, that defaults are skyrocketing – 17.9% of all FHA-guaranteed loans are now in some stage of delinquency
– HUD's audit for FY08 (which ended 9/30/08) showed that the FHA capital ratio declined dramatically from 6.4% to 3.0%, but projected
that it would remain above its statutory minimum of 2% going forward – this is highly unlikely
– FHA will likely need additional funding from Congress in the near future – one analyst estimated $54 billion – and a condition of this
might be a requirement of tighter lending standards, in which case it’s highly unlikely that any other lender would step in to fill the gap;
it’s possible, however, that Congress might decide to continue the subsidy to help stabilize the housing market
7. Home sales and prices are seasonally strong in April-July due to tax refunds and the spring selling season
70

38. The Average Loan Size of Defaulted Loans is Rising
Rapidly, Reflecting the Spread of Defaults Away From
Smaller Subprime Loans Toward Alt-A and Prime Loans
This Has the Effect of Raising the Average Home Price Reported By Many Data Providers
Note: Data is only for loans that were securitized.
Source: LoanPerformance, Amherst Securities. 71

39. Another Wave of Resetting Loans Is On the Horizon
The Last Wave Was Driven By Subprime Loans;
This Time, It Will be Option ARMs
Option ARM Alt A Prime Subprime
20
We are
Total Loan Balance ($Bil)
here
15
10
5
0
Source: Loan Performance, Amherst Securities.
72

40. Banks Are Selling Their REO, But
Foreclosures Have Plunged By More Than
Half, Ballooning the Inventory Pipeline
25%
Monthly Roll Rates
Non-Performing to Foreclosure
20%
REO to Liquidation
Monthly Roll Rates (%)
15%
10%
5%
Foreclosure to REO Inventory Pipeline
0% 1,400,000
1,200,000
90 Days & Foreclosure
1,000,000
Non Performing to Foreclosure Foreclosure to REO REO to Liquidation
800,000
600,000
400,000
REO
200,000
0
REO 90 Days PLUS Foreclosure
Source: Loan Performance, Amherst Securities.
73

41. One Third of All New Single Family Home
Sales Are Financed With FHA or VA Loans
Number of FHA Loans Insured
FHA/VA Share of New SF Home Sales
40%
35%
30%
25%
20%
15%
10%
5%
0%
19 1
19 1
19 1
19 1
19 1
19 1
19 1
19 1
19 1
19 1
19 1
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 1
1
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
19
Source: HUD/FHA, through August 31, 2009, NY Times, 10/8/09; Commerce Department through Q3 09.
74

42. FHA’s Loan Book Is a Rapidly Growing Disaster
17.9% of Loans Are in Some Stage of Default;
For 2007 Loans, It’s 32.4%
Source: HUD/FHA, through August 31, 2009, NY Times, 10/8/09.
75

43. Existing Home Sales Are Highly Seasonal
Source: National Association of Realtors.
76

44. Existing Home Sales Are Highly Seasonal
HPA Seasonality Coefficient -- Deviation From Mean
Source: National Association of Realtors.
77

45. M
ar
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
M -05
ay
August…
-0
Ju 5
l
Se -05
p
N - 05
ov
-
Source: S&P Case-Shiller 20-city index.
J a 05
n
M - 06
ar
M -06
ay
-0
Ju 6
l
Se -06
p
N - 06
ov
-
J a 06
n
M - 07
ar
M -07
ay
-0
Ju 7
l
Se -07
p
N - 07
ov
-
J a 07
Home Prices Bounced From April-
n-
M 08
ar
M -08
ay
-0
Ju 8
l
Se -08
p
N - 08
ov
Sequential Home Prices March 2005-August 2009
-
J a 08
n
M - 09
ar
August 2009: +1.2%
M -09
ay
-0
Ju 9
l-0
9
78