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					CAHEC Partners Conference




            1
    Topics

•     Sub-prime correction – what happened?
•     Housing & mortgage trends
•     Local markets




                            2
Sub-Prime Market Considerations




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What happened?
A credit event (the performance of 2006 vintage sub-prime)
has sparked:
  – a flight-to-quality rally in rates
  – the failure of over 30 sub-prime lenders
  – an enormous increase in risk premiums investors
    charge
  – a spike in option prices, and a broader liquidity crisis
To understand the implications, you need to understand
who the investors are, why they buy mortgage securities,
and what they are watching for:
             “their next signal” = the economy

                              4
MBS investors – who are they now?
•   Outstanding MBS increased 60% since 2001refi boom
•   GSEs’ share has fallen from 31% to 21%
•   Biggest growth in foreign investors (banks, central banks)




                                      5
Today’s investors – why do they buy?
Fundamentals:
•  Investing to improve interest spreads/margins/$,
   actual loan credit performance is also key
•  How bad is the current situation?
   –   2006 vintage sub-prime loans are going delinquent at startling
       rates
   –   If current delinquency rates continue, the 2006 vintage could
       peak at over 45%
   –   Some will see opportunity, but many will be forced to stay
       sidelined




                                 6
Mortgage delinquencies
Fundamentals (cont’d):




                         7
Housing starts & foreclosures
•   Housing starts & home sales back to “normal” levels, commercial
    development has taken-up the employment slack (so far)
•   However, inventories have a way to go…and foreclosure sales
    could make that situation worse…




                                 8
 Trends in credit markets
How we got to the current situation…
• Actual loan performance combined with headlines and bankruptcies has
  created a significant liquidity problem for sub-prime




                                      9
Weathering the storm – where are we going?
Unique aspects of this cycle:
Positives
•    Strong domestic and global economy
•       Relatively low rates
•       Globally, enormous funds to be invested (including hedge funds)
•       Stronger GSEs provide support to the market
Negatives
•   Participants have never seen a period with such a combination of:
    –      Home price appreciation growth and
    –      Loose lending (investors have lost confidence in rating agencies)
•       First-time home buyer has been the growth engine in ’06, has
        been heavily sub-prime, and liquidity for that market is vanishing
•       Between 6% and 12% of loans done in ’06 will have a tough time
        finding financing today if forced to do so (due to ARM resets, etc.)

                                         10
Weathering the storm – where are we going?
Where we go from here depends on:
1)       Collateral type (prime vs. sub-prime)
2)       Strength of the “feedback loop” between housing and the broader
         economy
     –      Pent-up demand for assets, prime non-agency bonds should start to
            trade much better – when??
     –      With tightening of guidelines, Alt-A should start trading better, but is
            more exposed to the economy than prime “A”
     –      Sub-prime is much more at risk as it’s future depends more on the
            broader economy (especially employment)
     –      Many loans that once went sub-prime/Alt-A were actually DU eligible
            (est. 30%)
     –      Investors must decide…how hard will the impact of housing on the
            economy be?


                                            11
Housing & Mortgage Industry Trends




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Housing and the economy
•    Tighter guidelines – especially in sub-prime and Alt-A
•    Govi’s – state & federal programs become more attractive to both
     first-time home buyers and investors
•    “You can’t take 10% out of mortgage originations without some
     impact” (Alan Greenspan)

So what’s the punch line?
•   Consumer behavior (lack of savings & documentation) will change
    over time to meet tighter investor standards
•    Investors likely to return as guidelines improve (can’t stay in cash
     forever)
•    Sub-prime economics will take the longest to recover
•    High quality Alt-A MBS execution should start to recover in Q3/Q4
•    Prime MBS will continue to do fine


                                    13
Outlook on 2007 Mortgage Market
• Housing Market Correction Continues
  – Home sales down
  – Large inventories pressuring home prices

• Mortgage Origs ~ $2.6 trillion
  – Purchase $ volume down slightly; still a top 5 purchase year
  – Refi share declines to 48% (cash-outs; ARM resets);

• Regulatory Measures
  – Non-traditional mortgage guidelines
  – Suitability standards


• Current News
  – Sub-prime … recovery programs
  – Secondary markets … GSE’s recovering


                                    14
Industry trends – 2000 thru ’05 Actual, Forecasted ’06 thru ’09




                                15
Consumer behavior
• 36% of purchases are first-time home buyers
• 75% of first-time home buyers put 10% or less down
• 45% of first-time home buyers put no money down
• 78% of purchases were existing homes
• 84% of first-time home buyers used realtors
• Average distance from residence to home purchased ~ 13
  miles

      How does this apply in local markets?

                             16
Local Markets




                17
Raleigh Market




                 18
    Raleigh, NC MSA

     Production                                                 All Conventional Mortgage Loans

                                                   #                        %       $(000)         %



     Total Originations                         40,173                             6,941,658


     White                                      28,858                     71.8%   4,986,832      71.8%




     African American                            3,922                     9.8%     542,146       7.8%


     Hispanic                                    1,023                     2.5%     140,178       2.0%



     Asian                                       1,608                     4.0%     296,984       4.3%




       Source: 2004 HMDA Data



Source: U.S. Census Bureau, 2004 American Community Survey, *2000 Census


                                                                    19
 Raleigh, NC MSA
                                Households Owners vs.       Opportunity      Household      Income vs. Price   Opportunity
Demographics                            Renters



                                Owners        Renters         % Rent        Median Income     Median Home      % At or Above
                                                                                                 Price         Area Median
                                                                                                                  Income


Total Population                 80,212       59,032           42%             $47,878          $166,428           50%


White                            57,586       29,651           34%             $56,546          $166,428           58%


Af rican American                18,706       19,983           52%             $31,281          $166,428           30%


Hispanic                         1,238         5,140           81%            $33,411*          $166,428          33%*


Asian                            1,875         2,364           56%            $51,985*          $166,428          56%*




 Source: U.S. Census Bureau, 2004 American Community Survey, *2000 Census




                                                               20
Raleigh, NC MSA

Economic Indicators                    2004     2005     2006     2007     2008     2009      2010
Population (000)                       914.7    934.2    954.8    972.5    990.6    1,012.1   1,035.0


Singe Family Permits                   12,083   14,748   13,963   12,291   11,777   11,686    11,793


Unemployment Rate                       4.4      4.2      3.8      3.9      3.8       3.7       3.6


Existing Home Price ($Ths)             169.9    183.7    205.7    216.6    226.7    236.6     246.9


Mortgage Originations ($MM)            8,342    8,102    8,585    8,205    8,131    8,486     8,917




Source: Moody’s Economy.com May 2006




                                                  21
Richmond Market




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 Richmond, VA MSA
Production                        All Conventional Mortgage Loans

                           #               %          $(000)         %



Total Originations       51,374                      7,922,634


White                    32,973           64.2%      5,248,382      66.2%


African American         8,533            16.6%      1,027,273      13.0%


Hispanic                  928             1.8%        131,077       1.7%



Asian                    1,229            2.4%        224,108       2.8%




Source: 2004 HMDA Data




                                     23
 Richmond, VA MSA
                            Households Owners vs.           Opportunity     Household   Income vs. Price   Opportunity
Demographics                        Renters


                             Owners          Renters           % Rent         Median     Median Home       % At or Above
                                                                              Income        Price          Area Median
                                                                                                              Income


Total Population             278,535         118,018            30%           $52,468      $156,716            50%

White                        206,461          57,535            22%           $60,816      $156,716            60%

Af rican American             61,932          52,104            46%           $36,670      $156,716            34%

Hispanic                      4,056           5,308             57%           $42,537      $156,716            36%

Asian                         6,174           4,794             44%           $41,761      $156,716            48%


 Source: U.S. Census Bureau, 2004 American Community Survey, *2000 Census




                                                               24
Richmond, VA MSA

 Economic Indicators                   2004      2005      2006      2007      2008      2009      2010
 Population (000)                      1,154.3   1,166.6   1,178.7   1,190.0   1,200.0   1,209.8   1,219.3


 Singe Family Permits                  7,924     9,452     8,494     7,014     6,142     5,805     5,750


 Unemployment Rate                       3.9       3.7       3.5      3.6       3.6       3.4       3.4


 Existing Home Price ($Ths)            169.8     201.9     229.7     239.1     241.0     241.2     242.6


 Mortgage Originations ($MM)           9,329     9,678     9,753     8,819     7,940     7,872     7,928




Source: Moody’s Economy.com May 2006




                                                     25
Charleston Market




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 Charleston, SC MSA
Production                        All Conventional Mortgage Loans

                           #               %          $(000)         %



Total Originations       26,519                      4,944,764


White                    19,713           74.3%      3,848,847      77.8%


African American         2,684            10.1%       295,506       6.0%


Hispanic                  392             1.5%        61,605        1.2%


Asian                     310             1.2%        53,952        1.1%




Source: 2004 HMDA Data




                                     27
Charleston, SC MSA
                                       Households Owners vs.         Opportunity   Household           Income vs.   Opportunity
Demographics                                  Renters                                          Price

                                       Owners         Renters          % Rent       Median       Median Home        % At or Above
                                                                                    Income          Price           Area Median
                                                                                                                       Income

Total Population                      152,279          71,849           32%        $45,128             $144,202         50%


White                                 110,477          45,132           29%        $53,919             $144,202         57%


Af rican American                      38,234          24,534           39%        $26,919             $144,202         31%


Hispanic                                2,071          3,407            62%        $35,480*            $144,202        36%*


Asian                                  1,348*          1,080*           44%        $41,753*            $144,202        44%*



Source: U.S. Census Bureau, 2004 American Community Survey, *2000 Census




                                                                28
Charleston, SC MSA
Economic Indicators                     2004    2005    2006    2007    2008    2009    2010
Population (000)                        583.5   594.9   602.2   612.9   617.6   623.5   630.9


Singe Family Permits                    7,371   8,084   6,573   4,805   4,018   3,963   3,989


Unemployment Rate                        5.3     5.3     5.2     5.4     5.4     5.1     5.0


Mortgage Originations ($MM)             5,890   5,924   5,527   5,086   4,711   4,737   4,844


Existing Home Price ($Ths)              183.4   195.9   212.9   217.8   218.8   220.5   223.8



 Source: Moody’s Economy.com May 2006




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