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					              SUBPRIME MORTGAGE AND RELATED LITIGATION

                     AND ENFORCEMENT ACTIVITY




                              October 2, 2008

                              Ann M. Kappler
                                 Partner
                               WilmerHale

                         1875 Pennsylvania Avenue, NW
                             Washington, DC 20006
                                 (202) 663-6227
                          ann.kappler@wilmerhale.com




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I.       Overview1
      Civil litigation continues to increase.

      Through the 18 months ended June 30, 2008, federal filings of subprime
       mortgage and related cases total 607.

      California and New York are most popular venues (45% of 2008 filings).
       Borrower class actions concentrate in California; securities cases and
       commercial contract disputes concentrate in New York.
      Most recent cases (Q2) dominated by securities claims, including relating to
       auction rate securities (41%).

      Subprime crisis is overall driver of all securities class action litigation.

      Only 20% of cases filed in 2007 have received a ruling on a motion to
       dismiss; such motions filed in only 42% of the cases as of June 30, 2008.

      For the 197 class actions filed in 2007, only six cases have been class
       certified.
      For every case disposed of, three new ones are filed.

      Statistics do not include cases filed in state court and abroad (e.g., UK).
      Numerous participants in subprime lending and related secondary markets
       are, or likely will be, commencing litigation, including:
         -- Borrowers
         -- Community/advocacy groups
         -- Federal regulators
         -- Investors who purchased loans or related securities (e.g., RMBS, MBS,
             CDOs)
         -- Contract counterparties
         -- Pension and investment funds
         -- Warehouse lenders
         -- Mortgage originators
1
          Statistics from Jeff Nielsen, Subprime Mortgage and Related Litigation; Second Quarter 2008 Update:
Setting the Bar, Navigant Consulting, September 2008.


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         -- Shareholders
       Defendants in these actions include:

         -- Mortgage lenders/originators/brokers

         -- Real estate brokers and agents
         -- Appraisers
         -- Mortgage servicers
         -- Securitizers/sellers/underwriters
         -- Securitization trustees
         -- Asset managers/investment advisors/investment funds
         -- Trust fund/pension plan fiduciaries
         -- Ratings agencies
         -- Directors and officers
         -- Companies holding subprime related assets
         -- Bond and mortgage insurers
         -- Law firms
         -- Auditors, accountants, and accounting advisors

II.      Litigation Against Subprime Lenders/Originators/Servicers
       Borrower class actions
         -- Claims focused on products and disclosures at origination: allege unfair
            and deceptive trade practices, inadequate disclosures, improper fees and
            charges

         -- Claims alleging discrimination, disparate treatment, and impact: focus
            on exercise of pricing discretion

              - some cases brought by community groups (NAACP; NCRC)

         -- State and federal theories (UDAP, breach, RESPA, TILA, FHA, ECOA):
            can result in damages and (sometimes) rescission.
         -- Lawsuits focused on subprime origination process trailing off

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         -- Growing focus
              - as underwriting tightens: disclosure, breach, discrimination claims

              - improper termination of home equity lines of credit (HELOCs)

              - servicing, including in borrower bankruptcy context

     Lawsuits by States
         -- Mass. v. Fremont: alleges certain 2/28 and 3/27 ARM loans were
            “presumptively unfair”

         -- Mass. v. H&R Block: alleges UDAP violations and unlawful targeting of
            minority borrowers for high cost loans
         -- Multiple suits against Countrywide: alleging UDAP violations and
            discrimination
     Lawsuits by Municipalities

         -- Alleging public nuisance against originators, servicers, and secondary
            market purchasers (Cleveland, Buffalo)

         -- Alleging discrimination (Baltimore)

     Lawsuits against secondary market participants based on aiding and abetting
     Actions Initiated by Federal Regulators

         -- OTS cease and desist agreement with AIG subsidiary regarding subprime
            originations
         -- September 10, 2008, Bear Stearns and its mortgage servicing subsidiary,
            EMC Mortgage, agreed to pay $28 million to settle FTC allegations
            regarding misrepresentations, unauthorized fees, unlawful or abusive
            collection practices

III.     Commercial Disputes with Subprime Lenders/Originators
     Early actions focused on warehouse lenders and loan purchasers seeking
      recovery against originators, including seeking repurchase of defaulted loans


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      Growing number of suits by and against private mortgage and financial
       guaranty insurers disputing coverage obligations

      Emergence of lawsuits by purchasers of allegedly defective loans to recover
       under sellers’ E&O insurance policies

IV.      Bankruptcy and Failed Bank Related Litigation
      Significant litigation in connection with bankruptcy filings of monoline
       subprime mortgage brokers/lenders

      Roughly one month after OTS seized IndyMac Bank, in July 2008, its
       holding company IndyMac Bancorp filed for Chapter 7 bankruptcy

      September 15, 2008: Lehman Brothers Holdings Inc. files for Chapter 11
       bankruptcy; subsequently sells broker-dealer and asset management
       affiliates

         -- Example of fall-out litigation: Ameriprise Financial sued Reserve
            Management Co. (manager of money market funds) alleging tipping of
            select institutional investors about exposure to Lehman securities

      Washington Mutual: A day after JPMorgan Chase bought Washington
       Mutual Bank, Washington Mutual, Inc., former holding company of what
       had been the nation’s largest S&L, and WMI Investment Corp. filed for
       voluntary Chapter 11 bankruptcy
      Thirteen financial institutions have failed; when FDIC takes over as
       conservator or receiver, litigation usually results



V.       Shareholder Lawsuits
      Securities fraud class actions brought by shareholders of publicly traded
       companies (Section 10(b)5 of 1934 Act)
         -- Pace of filings has increased, especially with plaintiffs’ firms recently
            receiving huge Enron fee payouts




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         -- Almost any company with 20% or more stock drop recently is being
            sued; amended complaints in existing class actions to extent class period
            to cover recent events

         -- Against subprime mortgage lenders/originators alleging failure to fairly
            present subprime exposure in public disclosures: focus on quality of
            loans and/or negative performance trends

         -- Against holders of RMBS/CDOs alleging failure to disclose nature of
            holdings, risks and negative trends; securities valuation issues

         -- Against mortgage and securities insurers alleging failures to disclose
            exposure to subprime market

     ERISA/401(k) class actions filed against many of the same companies by
      employees who invested in company-sponsored pension or 401(k) funds
      holding company stock
     Shareholder derivative lawsuits alleging directors breached fiduciary duties
      by over-exposing the company to subprime mortgage and excessive credit
      risk
     Shareholder merger litigation challenging hasty mergers of companies trying
      to stave off bankruptcy as a result of the credit crisis

VI.      Lawsuits Against Issuers/Securitizers/Underwriters
     Brought by purchasers of RMBS/CDOs
     Securities class actions against underwriters/issuers of RMBS and CDOs
      alleging fraudulent statements in registration statements (strict liability
      provisions of Section 11 of Securities Act of 1933)

     Often add state law allegations of breach of fiduciary duty because of failure
      to do proper due diligence, breach of contract, fraud, conspiracy
     Often triggered by ratings agency downgrades of securities

     Sometimes underwriters added as parties to securities class action against
      company; other times targeted directly, particularly if company is insolvent
      or subject to government protection


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     Recent lawsuits extend beyond RMBS/CDOs issuances, e.g., against
      underwriters of Fannie Mae debt offerings prior to conservatorship

     Defendants often seen as “deep pockets” by plaintiffs

     Consider potential targets relating to bank failures and companies
      funded/aided by government

VII. Lawsuits Against Fund Managers (hedge funds, pension funds, REITs,
     mutual funds) and Investment Advisors
     Lawsuits attack investment decisions and/or disclosure of asset quality,
      diversification, valuation, risk monitoring, and hedging of loan performance
      by managers of funds who purchased subprime-based RMBS and/or CDOs

     Allegations include fraud, breach of contract, breach of fiduciary duty;
      violations of § 11 and § 12(a)(2) of 1933 Act

     ERISA fiduciary lawsuits against pension fund managers/investment
      advisors alleging misrepresentation of investment strategies; failure to
      disclose; failure to abide by agreed-upon investment objectives

VIII. Lawsuits Between and Among CDO Investors
     CDO investors suing trustees regarding payment priority among tranches of
      investors
     Credit insurers have been involved, claiming an interest

     Valuation disputes
     Trustees have brought interpleader actions to seek court resolution of
      subordination and seniority claims

     Government-driven blanket loan modifications to forestall foreclosures may
      prompt more disputes if tranches have different interests in outcome.

IX.      Lawsuits against Ratings Agencies (Moody’s, S&P, Fitch)
     Allege inflated ratings on RMBS and CDOs and refusal to downgrade even
      as downturn caused delinquencies constitute false and misleading statements

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         -- Forward looking statements/First Amendment defenses
      Shareholder class actions alleging misrepresentation in public statements
       and application of lax ratings criteria to obtain lucrative fee revenue

X.      Regulatory and Enforcement Activity
      SEC has formed the “Subprime Task Force” that includes all divisions of the
       SEC, to focus on investigations into possible misconduct in the subprime
       industry

              -- Enforcement Division has said it has roughly four dozen active
                 investigations

              -- Focus on valuation and related public disclosures

              -- Other issues focusing on: categorization of assets as held for sale
                 versus held for investment; adequacy of marketing disclosures; risk
                 disclosures; role of ratings agencies; insider trading
              -- Two recent cases: June 19 charges against Ralph Cioffi and Matthew
                 Tannin, former Bear Stearns portfolio managers, regarding collapsed
                 hedge funds; September 3 charges against Joseph Tzolov and Eric
                 Butler, former Credit Suisse registered representatives, for concealing
                 unauthorized purchases of ARS collateralized by subprime mortgages
                 and CDOs
      State securities regulators focusing enforcement activity on industry
       (sometimes together with SEC), e.g., auction-rate securities actions

      FTC focusing on unfair and deceptive practices in mortgage servicing and
       foreclosure relief programs

      All bank regulators (state and federal) have stepped up oversight,
       examinations, and reviews
      DOJ has become active in the investigation of potential criminal aspects

         -- DOJ investigations accompanying SEC investigations

         -- FBI states it is currently investigating 26 companies, including AIG,
            Lehman, Fannie Mae, and Freddie Mac

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         -- FBI has 1400 mortgage fraud investigations under way (brokers,
            appraisers, buyers, lenders, foreclosure relief scams)

     DOJ and HUD fair lending inquiries have increased, largely based on
      lender-reported HMDA data

     State Attorneys General have had a subprime mortgage task force in place
      for some time

         -- Actively pursuing investigations into possible violations of state law,
            issuing subpoenas to a wide variety of market participants

         -- Mortgage origination, appraisal, broker fraud

         -- Mortgage servicing practices

         -- Securities-related practices (e.g., auction-rate securities, credit default
            swaps, short-selling, ratings agencies)

     Foreign regulator action as well

XI.      What’s Ahead? Predictions include:
     Increased government scrutiny and enforcement

         -- State and federal (SEC, FTC, HUD, DOJ, federal banking regulators,
            state securities and banking regulators, State AGs)

         -- Increased focus on servicing and loan modification
         -- Securities and valuation issues, disclosures
     Increased Congressional activity: hearings and legislation

     Possible new state/municipal litigation especially if foreclosures continue
      apace or rise

     Borrower lawsuits

         -- May trail off, but pay-option ARMs are nearing reset points and may
            trigger another wave
         -- May refocus on servicing and loan modification

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         -- Tightened credit standards may result in lawsuits alleging discrimination
            and other claims

         -- New Fed HOEPA rule (effective October 1, 2009) predicted to bring new
            wave of litigation

     More bank failures and ensuing litigation: as of June 30, 2008, FDIC had
      117 institutions on its “problem list”

         -- FDIC is reportedly hiring lawyers in anticipation of litigation
     Increased claims against companies’ E&O and D&O policies

     More commercial bankruptcy filings (including beyond financial sector)
      with ensuing litigation

     More CDO-related litigation (unexpected and large potential losses, priority
      of payments, liquidation issues, collateral calls, valuation disputes)

     Increased litigation against securitizers and asset managers, especially if
      illiquity remains, values fall, valuation models are challenged
     Shareholder securities suits (extended timeframes, additional companies)

     Spread to other asset-backed securities?
     Credit default swap related litigation?

     Lawsuits against lawyers and accountants?
     Federal Emergency Relief Bill will likely spawn new set of litigation issues




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