UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Exact name of registrant as specified in its charter)

Michigan		38-3150651
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)
5151 Corporate Drive, Troy, Michigan		48098-2639
(Address of principal executive offices)		(Zip code)

(248) 312-2000

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.

Yes þ     No o.

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ.

     As of November 6, 2008, 83,626,726 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.

 

 

FORWARD—LOOKING STATEMENTS

     This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Flagstar Bancorp, Inc. (“Flagstar” or the “Company”) and these statements are subject to risk and uncertainty. Forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, include those using words or phrases such as “believes,” “assumes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions.

     There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under the heading “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and Part II, Item 1A of this Quarterly Report on Form 10-Q, including: (1) general business, economic and political conditions may significantly affect our earnings; (2) if we cannot effectively manage the impact of the volatility of interest rates, our earnings could be adversely affected; (3) the value of our mortgage servicing rights could decline with reduction in interest rates; (4) gains on mortgage servicing rights may be difficult to realize due to disruption in the capital markets; (5) we use estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; (6) current and further deterioration in the housing and commercial real estate markets may lead to increased loss severities and further worsening of delinquencies and non-performing assets in our loan portfolios. Consequently, our allowance for loan losses may not be adequate to cover actual losses, and we may be required to materially increase our reserves; (7) our secondary market reserve for losses could be insufficient; (8) our home lending profitability could be significantly reduced if we are not able to resell mortgages; (9) our commercial real estate and commercial business loan portfolios carry heightened credit risk; (10) we have substantial risks in connection with securitizations and loan sales; (11) our ability to borrow funds, maintain or increase deposits or raise capital could be limited, which could adversely affect our liquidity and earnings; (12) we may be required to raise capital at terms that are materially adverse to our stockholders; (13) our holding company is dependent on the Bank for funding of obligations and dividends; (14) we may not be able to replace key members of senior management or attract and retain qualified relationship managers in the future; (15) the network and computer systems on which we depend could fail or experience a security breach; (16) our business is highly regulated; (17) our business has volatile earnings because it operates based on a multi-year cycle; (18) our loans are geographically concentrated in only a few states; (19) a larger percentage or our loans are collateralized by real estate, and an adverse change in the real estate market may result in losses and adversely affect our portfolio; (20) a significant part of our business strategy involves adding new branch locations, and our failure to grow may adversely affect our business, prospects, and results of operations and financial condition; (21) we are subject to heightened regulatory scrutiny with respect to bank secrecy and anti-money laundering statutes and regulations; (22) certain hedging strategies that we use to manage our investment in mortgage servicing rights may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rate; and (23) we depend on our institutional counterparties to provide services that are critical to our business. If one or more of our institutional counterparties defaults on its obligations to us or becomes insolvent, it could materially adversely affect our earnings, liquidity, capital position and financial condition.

     The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

FLAGSTAR BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2008
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION			4
Item 1. Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures about Market Risk			45
Item 4. Controls and Procedures			45
PART II — OTHER INFORMATION			46
Item 1. Legal Proceedings			46
Item 1A. Risk Factors			46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 3. Defaults upon Senior Securities			47
Item 4. Submission of Matters to a Vote of Security Holders			47
Item 5. Other Information			47
Item 6. Exhibits			48
SIGNATURES			49
EX-11
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

The unaudited condensed consolidated financial statements of the Company are as follows:

Consolidated Statements of Financial Condition — September 30, 2008 (unaudited) and December 31, 2007.

Unaudited Consolidated Statements of Operations — For the three and nine months ended September 30, 2008 and 2007.

Consolidated Statements of Stockholders’ Equity and Comprehensive Loss — For the nine months ended

September 30, 2008 (unaudited) and for the year ended December 31, 2007.

Unaudited Consolidated Statements of Cash Flows — For the nine months ended September 30, 2008 and 2007.

Unaudited Notes to Consolidated Financial Statements.

Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(In thousands, except for share data)

		At September 30,				At December 31,
		2008				2007
		(Unaudited)
Assets
Cash and cash items		$	155,889			$	129,992
Interest-bearing deposits			192,046				210,177
Cash and cash equivalents			347,935				340,169
Securities classified as trading			23,074				13,703
Securities classified as available for sale			1,041,446				1,308,608
Mortgage-backed securities held to maturity (fair value $1.3 billion at December 31, 2007)			—				1,255,431
Other investments			31,826				26,813
Loans available for sale			1,961,352				3,511,310
Loans held for investment			9,134,884				8,134,397
Less: allowance for loan losses			(224,000	)			(104,000	)
Loans held for investment, net			8,910,884				8,030,397
Total interest-earning assets			12,160,628				14,356,439
Accrued interest receivable			53,308				57,888
Repossessed assets, net			119,205				95,074
Federal Home Loan Bank stock			373,443				348,944
Premises and equipment, net			246,340				237,652
Mortgage servicing rights at fair value			722,159				—
Mortgage servicing rights, net			9,992				413,986
Other assets			318,405				151,120
Total assets		$	14,159,369			$	15,791,095
Liabilities and Stockholders’ Equity
Liabilities
Deposits		$	7,420,804			$	8,236,744
Federal Home Loan Bank advances			5,438,000				6,301,000
Security repurchase agreements			108,000				108,000
Long term debt			248,660				248,685
Total interest-bearing liabilities			13,215,464				14,894,429
Accrued interest payable			27,237				47,070
Secondary market reserve			28,600				27,600
Other liabilities			211,597				129,018
Total liabilities			13,482,898				15,098,117
Commitments and Contingencies
Stockholders’ Equity
Preferred stock $0.01 par value, 25,000,000 shares authorized; no shares outstanding			—				—
Common stock $0.01 par value, 150,000,000 shares authorized; 83,626,726 and 63,656,979 shares issued, and 83,626,726 and 60,270,624 shares outstanding at September 30, 2008 and December 31, 2007, respectively			836				637
Additional paid in capital			118,664				64,350
Accumulated other comprehensive loss			(95,668	)			(11,495	)
Retained earnings			652,639				681,165
Treasury stock, at cost, no shares at September 30, 2008, and 3,386,355 shares at December 31, 2007			—				(41,679	)
Total stockholders’ equity			676,471				692,978
Total liabilities and stockholders’ equity		$	14,159,369			$	15,791,095

The accompanying notes are an integral part of these consolidated financial statements.

Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
						(Unaudited)
Interest Income
Loans		$	172,163			$	201,464			$	526,039			$	578,673
Mortgage-backed securities held to maturity			—				15,485				15,576				43,869
Securities available for sale			14,563				15,212				51,325				42,334
Interest-bearing deposits			1,416				3,647				5,561				9,823
Other			395				1,343				1,453				5,486
Total interest income			188,537				237,151				599,954				680,185
Interest Expense
Deposits			60,940				91,117				215,807				262,181
FHLB advances			62,348				70,534				190,168				203,268
Federal reserve borrowings			419				—				484				—
Security repurchase agreements			1,179				17,982				5,541				48,416
Other			3,810				3,582				11,916				10,495
Total interest expense			128,696				183,215				423,916				524,360
Net interest income			59,841				53,936				176,038				155,825
Provision for loan losses			89,612				30,195				167,708				49,941
Net interest income (loss) after provision for loan losses			(29,771	)			23,741				8,330				105,884
Non-Interest Income
Loan fees and charges			777				(218	)			2,278				1,257
Deposit fees and charges			7,183				5,808				20,029				16,496
Loan administration			25,655				4,333				45,980				10,097
Net gain (loss) on loan sales			22,152				(17,457	)			129,403				35,841
Net gain on sales of mortgage servicing rights			896				456				348				6,181
Net gain (loss) on sales of securities available for sale			149				(2,944	)			5,019				(2,215	)
(Loss) gain on trading securities			(12,899	)			1,914				(26,485	)			1,914
Other fees and charges			9,475				9,376				29,768				29,039
Total non-interest income			53,388				1,268				206,340				98,610
Non-Interest Expense
Compensation and benefits			51,461				40,037				157,538				118,680
Occupancy and equipment			19,462				17,599				59,721				51,380
Asset resolution			18,019				1,952				29,799				6,912
General and administrative			30,222				13,672				55,010				39,920
Total non-interest expense			119,164				73,260				302,068				216,892
Loss before federal income taxes			(95,547	)			(48,251	)			(87,398	)			(12,398	)
Benefit for federal income taxes			(33,456	)			(16,196	)			(30,454	)			(3,233	)
Net Loss		$	(62,091	)		$	(32,055	)		$	(56,944	)		$	(9,165	)
Loss per share
Basic		$	(0.79	)		$	(0.53	)		$	(0.83	)		$	(0.15	)
Diluted		$	(0.79	)		$	(0.53	)		$	(0.83	)		$	(0.15	)

The accompanying notes are an integral part of these consolidated financial statements.

Flagstar Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss
(In thousands, except per share data)

														Accumulated
										Additional				Other												Total
		Preferred				Common				Paid in				Comprehensive				Retained				Treasury				Stockholders’
		Stock				Stock				Capital				Income (Loss)				Earnings				Stock				Equity
Balance at January 1, 2007		$	—			$	636			$	63,223			$	5,182			$	743,193			$	—			$	812,234
Net loss			—				—				—				—				(39,225	)			—				(39,225	)
Reclassification of gain on swap extinguishment			—				—				—				(101	)			—				—				(101	)
Change in net unrealized loss on swaps used in cash flow hedges			—				—				—				(3,957	)			—				—				(3,957	)
Change in net unrealized loss on securities available for sale			—				—				—				(12,619	)			—				—				(12,619	)
Total comprehensive loss			—				—				—				—				—				—				(55,902	)
Adjustment to initially apply FIN 48			—				—				—				—				(1,428	)			—				(1,428	)
Stock options exercised			—				1				69				—				—				—				70
Stock-based compensation			—				—				1,083				—				—				—				1,083
Tax effect from stock-based compensation			—				—				(25	)			—				—				—				(25	)
Purchase of treasury stock			—				—				—				—				—				(41,705	)			(41,705	)
Issuance of treasury stock			—				—				—				—				—				26				26
Dividends paid ($0.35 per share)			—				—				—				—				(21,375	)			—				(21,375	)
Balance at December 31, 2007			—				637				64,350				(11,495	)			681,165				(41,679	)			692,978
(Unaudited)
Net loss			—				—				—				—				(56,944	)			—				(56,944	)
Reclassification of gain on dedesignation of swaps used in cash flow hedges			—				—				—				(236	)			—				—				(236	)
Change in net unrealized loss on securities available for sale			—				—				—				(83,937	)			—				—				(83,937	)
Total comprehensive loss			—				—				—				—				—				—				(141,117	)
Cumulative effect adjustment due to change of accounting for residential mortgage servicing rights			—				—				—				—				28,418				—				28,418
Issuance of preferred stock			1				—				45,796				—				—				—				45,797
Issuance of common stock			—				199				54,162				—				—				—				54,361
Issuance of treasury stock			—				—				—				—				—				41,092				41,092
Conversion of preferred stock			(1	)			—				(45,796	)			—				—				—				(45,797	)
Restricted stock issued			—				—				(587	)			—				—				587				—
Stock options exercised			—				—				77				—				—				—				77
Stock-based compensation			—				—				867				—				—				—				867
Tax effect from stock-based compensation			—				—				(205	)			—				—				—				(205	)
Balance at September 30, 2008		$	—			$	836			$	118,664			$	(95,668	)		$	652,639			$	—			$	676,471

The accompanying notes are an integral part of these consolidated financial statements.

Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows
(In thousands)

		For the Nine Months Ended September 30,
		2008				2007
		(Unaudited)
Operating Activities
Net loss		$	(56,944	)		$	(9,165	)
Adjustments to net loss to net cash used in operating activities
Provision for loan losses			167,708				49,941
Depreciation			17,015				19,024
Amortization of MSRs			1,949				52,668
Decrease in valuation allowance in mortgage servicing rights			(82	)			(358	)
Loss on fair value of residential mortgage servicing rights, net of hedging gains (losses)			58,839				—
Stock-based compensation expense			867				1,119
Loss on interest rate swaps			149				—
Net gain on the sale of assets			(429	)			(3,041	)
Net gain on loan sales			(129,403	)			(35,841	)
Net gain on sales of mortgage servicing rights			(348	)			(6,181	)
Net (gain) loss on securities classified as available for sale			(5,019	)			2,215
Unrealized (gain) loss on trading securities			26,485				(1,914	)
Proceeds from sales and securitization of loans available for sale			18,745,006				16,031,878
Origination and repurchase of mortgage loans available for sale, net of principal repayments			(21,068,787	)			(19,018,391	)
Decrease (increase) in accrued interest receivable			4,580				(11,062	)
(Increase) decrease in other assets			(88,256	)			387
Decrease in accrued interest payable			(19,833	)			(119	)
Net tax effect of stock grants issued			205				25
Decrease in federal income taxes payable			(98,996	)			(21,229	)
Decrease in payable for securities purchased			—				(249,694	)
Increase in other liabilities			47,591				8,318
Net cash used in operating activities			(2,397,703	)			(3,191,420	)
Investing Activities
Net change in other investments			(5,013	)			(745	)
Repayment of mortgage-backed securities held to maturity			90,846				249,475
Proceeds from sale of investment securities available for sale			913,798				254,937
Repayment (purchase) of investment securities available for sale			138,988				(132,755	)
Proceeds from sales of portfolio loans			1,312,084				693,283
Origination of portfolio loans, net of principal repayments			1,474,806				708,063
Purchase of Federal Home Loan Bank stock			(24,499	)			(53,524	)
Investment in unconsolidated subsidiary			—				1,238
Proceeds from the disposition of repossessed assets			78,447				70,318
Acquisitions of premises and equipment, net of proceeds			(24,240	)			(25,891	)
Proceeds from the sale of mortgage servicing rights			—				33,915
Net cash provided by investing activities			3,955,217				1,798,314
Financing Activities
Net (decrease) increase in deposit accounts			(815,940	)			862,068
Net decrease in security repurchase agreements			—				(522,138	)
Net (decrease) increase in Federal Home Loan Bank advances			(863,000	)			985,000
Payment on other long term debt			(25	)			—
Issuance of junior subordinated debt			—				40,000
Net receipt of payments of loans serviced for others			21,005				17,069
Net receipt of escrow payments			12,885				19,931
Proceeds from the exercise of stock options			77				(241	)
Net tax effect of stock grants issued			(205	)			(25	)
Issuance of preferred stock			45,797				—
Issuance of common stock			8,566				—
Issuance of treasury stock			41,092				26

		For the Nine Months Ended September 30,
		2008				2007
		(Unaudited)
Dividends paid to stockholders			—				(18,361	)
Purchase of treasury stock			—				(41,705	)
Net cash (used in) provided by financing activities			(1,549,748	)			1,341,599
Net increase (decrease) in cash and cash equivalents			7,766				(51,507	)
Beginning cash and cash equivalents			340,169				277,236
Ending cash and cash equivalents		$	347,935			$	225,729
Supplemental disclosure of cash flow information:
Loans held for investment transferred to repossessed assets		$	149,855			$	88,576
Total interest payments made on deposits and other borrowings		$	443,748			$	524,479
Federal income taxes paid		$	5,808			$	—
Reclassification of mortgage loans originated for portfolio to mortgage loans available for sale		$	280,635			$	693,283
Reclassification of mortgage loans originated available for sale then transferred to portfolio loans		$	1,583,069			$	210,639
Mortgage servicing rights resulting from sale or securitization of loans		$	292,004			$	247,570
Reclassification of mortgage backed securities held to maturity to securities available for sale		$	1,163,681			$	—
Retention of residual interests in securitization transactions		$	—			$	20,487
Recharacterization of mortgage loans available for sale to mortgage-backed securities available for sale		$	—			$	406,094
Recharacterization of loans held for investment to mortgage-backed securities held to maturity		$	—			$	345,794
Conversion of mandatory convertible non-cumulative perpetual preferred stock		$	45,797			$	—

The accompanying notes are an integral part of these consolidated financial statements.

Flagstar Bancorp, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

Note 1. Nature of Business

     Flagstar Bancorp, Inc. (“Flagstar” or the “Company”), is the holding company for Flagstar Bank, FSB (the “Bank”), a federally chartered stock savings bank founded in 1987. With $14.2 billion in assets at September 30, 2008, Flagstar is the largest financial institution headquartered in Michigan.

     The Company’s principal business is obtaining funds in the form of deposits and wholesale borrowings and investing those funds in single-family mortgages and other types of loans. Its primary lending activity is the acquisition or origination of single-family mortgage loans. The Company also originates consumer loans, commercial real estate loans, and non-real estate commercial loans and it services a significant volume of residential mortgage loans for others, although the Company has recently suspended originating substantially all loans other than those that are eligible for sale through Fannie Mae or Freddie Mac or insured through the Federal Housing Administration (“FHA”).

     The Company sells or securitizes most of the mortgage loans that it originates and generally retains the right to service the mortgage loans that it sells. These mortgage servicing rights (“MSRs”) have occasionally been sold by the Company in transactions separate from the sale of the underlying mortgages. The Company may also retain a portion of its loan production on its consolidated statement of financial condition as loans held for investment in order to enhance the Company’s leverage ability and receive the interest spread between earning assets and paying liabilities over the longer term.

     The Bank is a member of the Federal Home Loan Bank of Indianapolis (“FHLB”) and is subject to regulation, examination and supervision by the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s deposits are insured by the FDIC up to applicable limits.

Note 2. Basis of Presentation

     The accompanying unaudited consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated. In accordance with current accounting principles, the Company’s trust subsidiaries are not consolidated. In addition, certain prior period amounts have been reclassified to conform to the current period presentation.

     The unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. The accompanying interim consolidated financial statements are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three and nine month periods ended September 30, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, you should refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The Form 10-K can be found on the Company’s Investor Relations web page, at www.flagstar.com, and on the website of the SEC, at www.sec.gov.

Note 3. Recent Accounting Developments

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 157, “Fair Value Measurements.” SFAS 157 defines the term “fair value,” establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. SFAS 157 clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. SFAS 157 emphasizes that fair value is a market-based measurement and not an entity-specific measurement. It also establishes a hierarchy used in such measurement and expands the required disclosures of assets and liabilities measured at fair value. The Company adopted SFAS 157 as of January 1, 2008. See Note 4, “Fair Value Accounting” for further information.

     In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The decision to elect the fair value option may be applied instrument by instrument, is irrevocable and must be applied to the entire instrument and not to specified risks, specific cash flows or

portions of that instrument. An entity is restricted in choosing the dates to elect the fair value option for an eligible item. The Company adopted SFAS 159 effective January 1, 2008. See Note 4, “Fair Value Accounting” for further information.

     In November 2007, the FASB issued SFAS 160, “Non-controlling Interest in Consolidated Financial Statements — an amendment to ARB No. 51.” SFAS 160 changes the way consolidated net earnings are presented. The new standard requires consolidated net earnings to be reported at amounts attributable to both the parent and the non-controlling interest on the face of the consolidated statement of operations. The adoption of this statement will result in more transparent reporting of the net earnings attributable to non-controlling interests. The statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary which does not result in deconsolidation. The statement also requires that a parent recognize a gain or loss in net earnings when a subsidiary is deconsolidated. The adoption of SFAS 160 is effective for the Company on January 1, 2009. Management does not expect that the adoption of this statement will have a material impact on the Company’s consolidated financial condition, results of operation or liquidity.

     In November 2007, the SEC issued Staff Accounting Bulletin 109 (“SAB 109”) regarding the written loan commitments that are accounted for at fair value through earnings under U.S. GAAP. SAB 109 supersedes SAB 105 and expresses the current view of the SEC staff that, consistent with the guidance in SFAS 156, “Accounting for Servicing of Financial Assets” and SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” the expected net future cash flows related to the associated servicing of the loans should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The adoption of SAB 109 was effective on a prospective basis for the Company’s derivative loan commitments issued or modified on or after January 1, 2008. The effect of this change resulted in an increase in the Company’s gain on loan sales by approximately $6.7 million during the three month period ended September 30, 2008.

     In December 2007, the SEC issued Staff Accounting Bulletin 110 (“SAB 110”). SAB 110 expresses the views of the SEC regarding the use of a “simplified” method in developing an estimate of the expected term of “plain vanilla” share options as discussed in SAB 107 and issued under SFAS 123 (revised 2004), “Share-Based Payment.” The SEC indicated in SAB 107 that it would accept a company’s decision to use the simplified method, regardless of whether the company had sufficient information to make more refined estimates of expected term. Under SAB 107, the SEC had believed detailed information about employee exercise behavior would be readily available and therefore would not expect companies to use the simplified method for share option grants after December 31, 2007. SAB 110 states that the SEC will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. The Company does not utilize the simplified method, and therefore management does not expect that this pronouncement will have an impact on the Company’s consolidated financial condition, results of operation or liquidity.

     In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133.” SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves on the transparency of financial reporting. In adopting SFAS 161, entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial positions, financial performance and cash flows. Because this pronouncement affects only disclosures, this pronouncement will not have an impact on the Company’s consolidated financial condition, results of operation or liquidity. The adoption of SFAS 161 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. The Company does not expect to elect early adoption of SFAS 161.

     In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of non-governmental entities that are presented in conformity with U.S. GAAP (the GAAP hierarchy). The adoption of SFAS 162 will be effective 60 days following SEC approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Management does not expect that the adoption of this statement will have a material impact of this Company’s consolidated financial condition, results of operation or liquidity.

     In May 2008, the FASB issued SFAS 163, “Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60.” SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. The statement also clarifies how SFAS 60 applies to financial guarantee insurance contracts by insurance enterprises. The statement also requires expanded disclosures about financial guarantee insurance contracts. The adoption of SFAS 163 will be effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods of those years, except for some disclosures about the risk-management activities. Management does not expect that this statement will have an impact on the Company’s consolidated financial condition, results of operation or liquidity.

Note 4. Fair Value Accounting

     On January 1, 2008, the Company adopted SFAS 157, “Fair Value Measurements” and SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 was issued to establish a uniform definition of fair value. The definition of fair value under SFAS 157 is market-based as opposed to company-specific and includes the following:

	•		Defines fair value as the price that would be received to sell an asset or paid to transfer a liability, in either case through an orderly transaction between market participants at a measurement date, and establishes a framework for measuring fair value;
	•		Establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date;
	•		Nullifies the guidance in EITF 02-3, which required the deferral of profit at inception of a transaction involving a derivative financial instrument in the absence of observable data supporting the valuation technique;
	•		Eliminates large position discounts for financial instruments quoted in active markets and requires consideration of the company’s creditworthiness when valuing liabilities; and
	•		Expands disclosures about instruments that are measured at fair value.

     SFAS 159 provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized Company commitments and written loan commitments not previously recorded at fair value. In accordance with the provisions of SFAS 159, the Company, as of January 1, 2008, elected the fair value option for certain non-investment grade residual securities from private-label securitizations. The Company elected fair value on these residual securities and reclassified these investments as securities — trading to provide consistency in the accounting for the Company’s residual interests. The Company had recognized a permanent impairment on these residual securities as of December 31, 2007, thereby reducing the carrying value to fair value at that time. Thus, the fair value election had no impact on opening retained earnings. The decrease in fair value for the three and nine months ended September 30, 2008 was $10.7 million and $23.9 million, respectively, before taxes, which is included within the total loss on trading securities reported in the Company’s consolidated statement of operations.

     Effective January 1, 2008, the Company elected the fair value measurement method for residential mortgage servicing rights (“MSRs”) under SFAS 156 “Accounting for Servicing of Financial Assets an amendment of FASB 140.” Upon election, the carrying value of the residential MSRs was increased to fair value by recognizing a cumulative effect adjustment to retained earnings of $43.7 million before tax, or $28.4 million after tax. Management elected the fair value measurement method of accounting for residential MSRs to be consistent with the fair value accounting method required for its risk management strategy to hedge the fair value of these assets. Changes in the fair value of residential MSRs, as well as changes in fair value of the related derivative instruments, are recognized each period within loan administration income (loss) on the consolidated statement of operations.

Determination of Fair Value

     The following is a description of the Company’s valuation methodologies for assets measured at fair value which have been applied to all assets carried at fair value, whether as a result of the adoption of SFAS 159, SFAS 156 or previously carried at fair value.

     The Company has an established process for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon internally developed models that use primarily market-based or independently-sourced market parameters, including interest rate yield curves and option volatilities. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, creditworthiness, liquidity and unobservable parameters that are applied consistently over time. Any changes to the valuation methodology are reviewed by management to determine appropriateness of the changes. As markets develop and the pricing for certain products becomes more transparent, the Company expects to continue to refine its valuation methodologies.

     The methods described above may produce a fair value estimate that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in different estimates of fair values of the same financial instruments at the reporting date.

Valuation Hierarchy

     SFAS 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy favors the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows.

	•		Level 1 — Fair value is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets in which the Company can participate.
	•		Level 2 — Fair value is based upon quoted prices for similar (i.e., not identical) assets and liabilities in active markets, and other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
	•		Level 3 — Fair value is based upon financial models using primarily unobservable inputs.

     A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

     The following is a description of the valuation methodologies used by the Company for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

     Assets

     Securities classified as trading. These securities are non-investment grade residual securities that arose from private-label securitizations of the Company in 2005, 2006 and 2007. These non-investment grade residual securities do not trade in an active, open market with readily observable prices and are therefore classified within the Level 3 valuation hierarchy. Accordingly, the fair value of residual securities is determined by discounting estimated net future cash flows using expected prepayment rates and discount rates that approximate current market rates. Estimated net future cash flows include assumptions related to expected credit losses on these securities. The Company maintains a model that evaluates the default rate and severity of loss on the residual securities’ collateral, considering such factors as loss experience, delinquencies, loan-to-value ratios, borrower credit scores and property type.

     Securities classified as available for sale. Where quoted prices for securities are available in an active market, those securities are classified within Level 1 of the valuation hierarchy. If such quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of securities with similar characteristics, which would generally be classified within Level 2 of the valuation hierarchy, include certain AAA rated U.S. government sponsored agency securities. Due to illiquidity in the markets, the Company determined the fair value of certain non-agency securities using internal valuation models and therefore classified them within the Level 3 valuation hierarchy as these models utilize significant inputs which are unobservable.

     Other Investments. Other investments are primarily comprised of various mutual fund holdings. These mutual funds trade in an active market and quoted prices are available. Other investments are classified within Level 1 of the valuation hierarchy.

     Loans held for investment. The Company does not record these loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, “Accounting by Creditors for Impairment of a Loan,” (SFAS 114). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2008, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as a nonrecurring Level 2 valuation.

     Repossessed assets. Loans on which the underlying collateral has been repossessed are adjusted to fair value upon transfer to repossessed assets. Subsequently, repossessed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the repossessed asset as a nonrecurring Level 2 valuation.

     Mortgage Servicing Rights. The Company has obligations to service residential first mortgage loans and consumer loans (i.e. home equity lines of credit (“HELOCs”) and second mortgage loans obtained through private-label securitization

transactions). Effective January 1, 2008, the Company elected the fair value measurement method for residential MSRs under SFAS 156. Upon this election, residential MSRs began to be accounted for at fair value on a recurring basis. Consumer servicing assets are carried at amortized cost and are periodically evaluated for impairment.

     Residential Mortgage Servicing Rights. The current market for residential mortgage servicing rights is not sufficiently liquid to provide participants with quoted market prices. Therefore, the Company uses an option-adjusted spread valuation approach to determine the fair value of residential MSRs. This approach consists of projecting servicing cash flows under multiple interest rate scenarios and discounting these cash flows using risk-adjusted discount rates. The key assumptions used in the valuation of residential MSRs include mortgage prepayment speeds and discount rates. Management periodically obtains third-party valuations of the residential MSR portfolio to assess the reasonableness of the fair value calculated by its internal valuation model. Due to the nature of the valuation inputs, residential MSRs are classified within Level 3 of the valuation hierarchy. See Note 9, “Mortgage Servicing Rights” for the key assumptions used in the residential MSR valuation process.

     Consumer Servicing Assets. Consumer servicing assets are subject to periodic impairment testing. A valuation model, which utilizes a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management, is used in the completion of impairment testing. If the valuation model reflects a value less than the carrying value, consumer servicing assets are adjusted to fair value through a valuation allowance as determined by the model. As such, the Company classifies consumer servicing assets subject to nonrecurring fair value adjustments as Level 3 valuations.

     Derivative Financial Instruments. Certain classes of derivative contracts are listed on an exchange and are actively traded, and are therefore classified within Level 1 of the valuation hierarchy. These include U.S. Treasury futures, U.S. Treasury options and interest rate swaps. The Company’s forward loan commitments may be valued based on quoted prices for similar assets in an active market with inputs that are observable and are classified within Level 2 of the valuation hierarchy. Rate lock commitments are valued using internal models with significant unobservable market parameters and therefore are classified within Level 3 of the valuation hierarchy.

     Assets measured at fair value on a recurring basis

     The following table presents the financial instruments carried at fair value as of September 30, 2008, by caption on the Consolidated Statement of Financial Condition and by SFAS 157 valuation hierarchy (as described above) (dollars in thousands):

														Total carrying
														value in the
														Consolidated
														Statement of
														Financial
		Level 1				Level 2				Level 3				Condition
Securities classified as trading:
Residual interests		$	—			$	—			$	23,074			$	23,074
Securities classified as available for sale			—				407,758				633,688				1,041,446
Residential mortgage servicing rights			—				—				722,159				722,159
Other investments			31,826				—				—				31,826
Derivative financial instruments			—				—				—				—
Rate lock commitments			—				—				10,216				10,216
Forward agency and loan sales			—				21,180				—				21,180
Treasury futures			(19,802	)			—				—				(19,802	)
Treasury options			(24,316	)			—				—				(24,316	)
Interest rate swaps			(149	)			—				—				(149	)
Total assets at fair value		$	(12,441	)		$	428,938			$	1,389,137			$	1,805,634

     Changes in Level 3 fair value measurements

     A determination to classify a financial instrument within Level 3 of the valuation hierarchy is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources); accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are included within the valuation methodology. Also, the Company manages the risk associated with the observable components of certain Level 3 financial instruments using securities and derivative positions that are classified within Level 1 or Level 2 of the valuation hierarchy; these Level 1 and Level 2 risk

management instruments are not included below, and therefore the gains and losses in the tables do not reflect the effect of the Company’s risk management activities related to such Level 3 instruments.

Fair value measurements using significant unobservable inputs

     The table below includes a rollforward of the Consolidated Statement of Financial Condition amounts for the nine months ended September 30, 2008 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy (in thousands).

																						Changes in
																						unrealized
																						gains and
																						(losses) related
										Purchases,												to financial
										issuances												instruments
		Fair value,				Total realized/				and				Transfers in				Fair value,				held at
Nine months ended		January 1,				unrealized				settlements,				and/or out				September				September 30,
September 30, 2008		2008				gains/(losses)				net				of Level 3				30, 2008				2008(c)
Securities classified as trading:
Residual interests(a)		$	13,703			$	(22,716	)		$	—			$	32,087			$	23,074			$	—
Securities classified as available for sale(b) (c) (e)			33,333				(127,986	)			(59,571	)			787,912				633,688				(127,986	)
Residential mortgage servicing rights (d)			445,962				(15,691	)			291,888				—				722,159				—
Derivative financial
Instruments:
Rate lock commitments			26,129				—				(15,913	)			—				10,216				—
Totals		$	519,127			$	(166,393	)		$	216,404			$	819,999			$	1,389,137			$	(127,986	)

     The Company also has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market and had a fair value below cost at the end of the period as summarized below (in thousands).

Assets Measured at Fair Value on a Nonrecurring Basis

		Balance at
		September 30, 2008				Level 1				Level 2				Level 3
Loans held for investment		$	257,995			$	—			$	257,995			$	—
Repossessed assets			119,205				—				119,205				—
Consumer servicing assets			9,992				—				—				9,992
Totals		$	387,192			$	—			$	377,200			$	9,992

Note 5. Investment Securities

     As of September 30, 2008 and December 31, 2007, investment securities were comprised of the following (in thousands):

		September 30,				December 31,
		2008				2007
Securities — trading		$	23,074			$	13,703
Securities — available for sale
Non-agencies		$	633,688			$	821,245
U.S. government sponsored agencies			407,758				454,030
Non-investment grade residual			—				33,333
Total securities — available for sale		$	1,041,446			$	1,308,608
Mortgage-backed securities — held to maturity
AAA-rated U.S. government sponsored agencies		$	—			$	1,255,431
Other investments
Mutual funds		$	31,826			$	26,107
U.S. Treasury bonds			—				706
Total other investments		$	31,826			$	26,813

     As of January 1, 2008, non-investment grade residuals amounting to $33.3 million that were classified as available for sale securities were reclassified to trading securities in accordance with SFAS 159. No gain or loss was recorded upon reclassification. See Note 4, “ Fair Value Accounting” for further information. At September 30, 2008, the Company had $23.1 million in securities classified as trading. These securities are non-investment grade residual securities from private-label securitizations. The securities are recorded at fair value with any unrealized gains and losses reported in the consolidated statement of operations. During the quarter ended September 30, 2008, the Company recognized losses related to these trading securities of $12.9 million as a result of the decrease in the fair value of the securities. During the nine month period ending September 30, 2008, the Company recognized losses related to these trading securities of $26.5 million as a result of the decrease in the fair value of the securities. The decline in the fair value of these residual securities was principally due to the increase in the actual and expected losses in the second mortgages and home equity lines of credit that underlie these assets. Additionally, during the third quarter of 2008, the values of certain of these assets were affected by the tightening of the spread between the three month LIBOR rate and the prime rate. The Company had gains on trading securities amounting to $1.9 million during the quarter and nine month period ended September 30, 2007.

     At September 30, 2008, the Company had $1.0 billion in securities classified as available for sale which were comprised of U.S. government sponsored agency securities and non-agency securities. Securities available for sale are carried at fair value, with unrealized gains and losses reported as a component of other comprehensive loss to the extent they are temporary in nature. If losses are, at any time, deemed to have arisen from “other-than-temporary impairments” (“OTTI”), then they are reported as an expense for that period.

     At September 30, 2008 and December 31, 2007, $895.7 million and $570.0 million of the securities classified as available for sale, respectively, were pledged as collateral for security repurchase agreements or FHLB borrowings. Contractual maturities of the securities generally range from 2020 to 2038.

     As of March 31, 2008, the Company reclassified $1.2 billion of mortgage-backed securities, which were comprised of AAA-rated U.S. government sponsored agency securities, from held-to-maturity to available-for sale. Upon reclassification, the Company recorded a decrease in the carrying value of such securities of $8.5 million with a corresponding increase to other comprehensive loss. The reclassification was required because the Company’s management indicated it no longer had the intent to hold such securities to maturity because of its sale subsequent to March 31, 2008 of a significant portion of these securities. During the quarter ended September 30, 2008, the Company sold $13.8 million of these securities resulting in a gain of $0.1 million. For the nine months ended September 30, 2008, the Company sold $908.8 million of these securities for a gain of $5.0 million.

     The Company has other investments because of interim investment strategies in trust subsidiaries, collateral requirements required in swap and deposit transactions, and Community Reinvestment Act investment requirements.

     The following table summarizes the amortized cost and estimated fair value of agency and non-agency mortgage-backed securities classified as available for sale (in thousands):

		September 30,				December 31,
		2008				2007
Amortized cost		$	1,188,627			$	1,326,656
Gross unrealized holding gains			933				4,647
Gross unrealized holding losses			(148,114	)			(22,695	)
Estimated fair value		$	1,041,446			$	1,308,608

     The unrealized losses on securities available for sale include $141.9 million on investments in non-agency collateralized mortgage obligations (“CMOs”) at September 30, 2008. These CMOs consist of interests in investment vehicles backed by mortgage loans. In all of the CMOs, the Company’s investment is senior to a subordinated tranche(s) which have first loss exposure. At September 30, 2008, $336.1 million of non-agency available for sale securities with unrealized losses of $61.7 million had been in a continuous unrealized loss position for greater than twelve months. Management concluded that these unrealized losses are temporary in nature since they are not related to the underlying credit quality of the issuers and the Company has the intent and ability to hold these investments for a time necessary to recover its cost or will ultimately recover its cost at maturity (i.e., these investments have contractual maturities that, absent credit default, should allow the Company to recover its cost). The Company believes that these losses are primarily related to market conditions rather than underlying credit issues associated with the issuers of the obligations.

     As of September 30, 2008, the aggregate amount of available for sale securities from each of the following non-agency issuers were greater than 10% of the Company’s stockholders’ equity.

		Amortized				Fair
Name of Issuer		Cost				Value
		(in thousands)
Countrywide Alternative Loan Trust		$	119,869			$	62,931
Countrywide Home Loans			250,773				213,267
Flagstar Home Equity Loan Trust 2006-1			236,500				207,880
Goldman Sachs Mortgage Company			87,030				77,192
JP Morgan Mortgage Trust			81,464				72,418
		$	775,636			$	633,688

     The following table summarizes the amortized cost and estimated fair value of agency mortgage-backed securities classified as held to maturity (dollars in thousands):

		September 30,				December 31,
		2008				2007
Amortized cost		$	—			$	1,255,431
Gross unrealized holding gains			—				33,956
Gross unrealized holding losses			—				(304	)
Estimated fair value		$	—			$	1,289,083

Note 6. Loans Available for Sale

     The following table summarizes loans available for sale (dollars in thousands):

		September 30,				December 31,
		2008				2007
Mortgage loans		$	1,961,341			$	3,083,779
Consumer loans			—				170,891
Second mortgage loans			11				256,640
Total		$	1,961,352			$	3,511,310

     During the nine months ended September 30, 2008, management reclassified approximately $1.6 billion of mortgage loans, consumer loans and second mortgage loans from loans available for sale to loans held for investment. Such loans were

reclassified at fair value and resulted in losses on loan sales of $34.7 million. The loans were reclassified because management no longer has the intent to sell such loans. The change in management’s intent was caused by the continued disruption of the secondary market.

     Loans available for sale are carried at the lower of aggregate cost or estimated fair value. These loans had an aggregate fair value that exceeded their recorded amount for each period presented. The Company generally estimates the fair value of mortgage loans based on quoted market prices for securities backed by similar types of loans. Given the lack of liquidity in the secondary mortgage market at September 30, 2008 and December 31, 2007, significant management judgment was necessary to estimate the fair value of loans available for sale. Where quoted market prices were available, such market prices were utilized as estimates for fair values. Otherwise, the fair values of loans were estimated by discounting estimated cash flows using management’s best estimate of market interest rates, prepayment speeds and loss assumptions for similar collateral.

Note 7. Loans Held for Investment

     Loans held for investment are summarized as follows (dollars in thousands):

		September 30,				December 31,
		2008				2007
Mortgage loans		$	6,134,305			$	5,823,952
Second mortgage loans			291,523				56,516
Commercial real estate loans			1,737,152				1,542,104
Construction loans			65,814				90,401
Warehouse lending			344,731				316,719
Consumer loans			536,759				281,746
Commercial loans			24,600				22,959
Total			9,134,884				8,134,397
Less allowance for loan losses			(224,000	)			(104,000	)
Total		$	8,910,884			$	8,030,397

     Activity in the allowance for loan losses is summarized as follows (dollars in thousands):

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Balance, beginning of period		$	154,000			$	53,400			$	104,000			$	45,779
Provision charged to operations			89,612				30,196				167,708				49,941
Charge-offs			(20,066	)			(6,895	)			(49,246	)			(20,746	)
Recoveries			454				1,099				1,538				2,826
Balance, end of period		$	224,000			$	77,800			$	224,000			$	77,800

     Loans on which interest accruals have been discontinued totaled approximately $485.8 million and $166.1 million at September 30, 2008 and 2007, respectively. Interest on these loans is recognized as income when collected. Interest that would have been accrued on such loans totaled approximately $10.8 million and $2.3 million during the nine months ended September 30, 2008 and 2007, respectively.

     A loan is impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impaired loans were as follows (dollars in thousands):

		September 30,				December 31,
		2008				2007
Impaired loans with no allowance for loan losses allocated		$	51,140			$	22,307
Impaired loans with allowance for loan losses allocated			266,536				112,044
Total impaired loans		$	317,676			$	134,351
Amount of the allowance allocated to impaired loans		$	77,233			$	34,937
Average investment in impaired loans		$	186,269			$	70,582
Cash-basis interest income recognized during impairment		$	7,248			$	2,324

     Those impaired loans with no allowance for loan losses allocated represent loans for which the fair value of the related collateral less estimated selling costs exceeded the recorded investments in such loans. At September 30, 2008, approximately 97.3% of the total impaired loans were evaluated based on the fair value of related collateral.

Note 8. Private-label Securitization Activity

     At September 30, 2008, key assumptions used in determining the value of residual interests resulting from the Company’s private-label securitizations were as follows:

										Annual				Weighted
		Prepayment				Projected				Discount				Average Life
		Speed				Credit Losses				Rate				(in years)
2005 HELOC Securitization			16	%			4.10	%			20	%			3.2
2006 HELOC Securitization			11	%			12.22	%			20	%			5.7
2006 Second Mortgage Securitization			9	%			3.53	%			20	%			6.2
2007 Second Mortgage Securitization			11	%			5.52	%			20	%			6.4

     Effective as of the beginning of the second quarter of 2008 and in accordance with the terms of the 2005 HELOC securitization, credit losses in the securitization exceeded losses as originally modeled. As such, the monoline insurer that protects the bondholders determined that the status of the securitization should be changed to “rapid amortization.” During the rapid amortization period, the Company will no longer be reimbursed for draws on the home equity lines of credit until after the bondholders are paid off. Therefore, this status has the effect of extending the time period for which the Company’s advances are outstanding and may result in the Company not receiving reimbursement for all of the funds advanced. The 2006 HELOC securitization became subject to rapid amortization during the fourth quarter of 2007. Therefore, both of the Company’s HELOC securitizations are in rapid amortization.

     Certain cash flows received from securitization trusts outstanding were as follows (in thousands):

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Proceeds from new securitizations		$	—			$	—			$	—			$	719,097
Proceeds from collections reinvested in securitizations			—				93,869				6,960				184,817
Servicing fees received			1,604				1,928				5,037				5,050
Loan repurchases for representations and warranties			—				—				(1,501	)			(642	)

Credit Risk on Securitization

     With respect to the issuance of private-label securitizations, the Company retains certain limited credit exposure in that it retains non-investment grade residual securities in addition to customary representations and warranties. The Company does not have credit exposure associated with non-performing loans in securitizations beyond its residual interests and the amount of draws on HELOCs that it funds and which are not reimbursed by the respective trust. The value of the Company’s residual interests includes the Company’s credit loss assumptions as to the underlying collateral pool. To the extent that actual credit losses exceed these assumptions, the value of the Company’s residual interests will be diminished.

     The following table summarizes the loan balance associated with the Company’s servicing portfolio and the balance of related retained assets with credit exposure, which includes residual interests that are included as trading securities and unreimbursed HELOC draws that are included in loans held for investment at September 30, 2008 (in thousands):

						Balance of Retained
		Total Loans				Assets with Credit
		Serviced				Exposure
Private-label securitizations		$	1,242,740			$	63,245
Government sponsored agencies			50,587,417				—
Other investors			550				—
Total		$	51,830,707			$	63,245

     Mortgage loans that have been securitized in private-label securitizations at September 30, 2008 and 2007 that are sixty days or more past due and the credit losses incurred in the securitization trusts are presented below (in thousands):

																		Credit Losses
		Total Principal								Principal Amount								(Net of Recoveries)
		Amount of Loans								Of Loans 60 Days								For the Nine
		Outstanding								Or More Past Due								Months Ended
		September 30,								September 30,								September 30,
		2008				2007				2008				2007				2008				2007
Securitized mortgages		$	1,242,740			$	1,467,933			$	42,050			$	12,869			$	42,966			$	14,781

Note 9. Mortgage Servicing Rights

     The Company has obligations to service residential first mortgage loans and consumer loans (HELOC and second mortgage loans resulting from private-label securitization transactions). A description of these classes of servicing assets follows.

     Residential Mortgage Servicing Rights. Servicing of residential first mortgage loans is a significant business activity of the Company. The Company recognizes MSR assets on residential first mortgage loans when it retains the obligation to service these loans upon sale and the servicing fee is more than adequate compensation. MSRs are subject to changes in value from, among other things, changes in interest rates, prepayments of the underlying loans and changes in credit quality of the underlying portfolio. Historically, the Company has treated this risk as a counterbalance to the increased production and gain on loan sale margins that tend to occur in an environment with increased prepayments. In the quarter ended March 31, 2008, the Company began to specifically hedge the risk by hedging the fair value of MSRs with derivative instruments that are intended to change in value inversely to part or all of the changes in the value of MSRs.

     Changes in the carrying value of residential MSRs, accounted for at fair value, for the nine month period ended September 30, 2008 were as follows:

		For the Nine Month
		Period Ended
		September 30, 2008
		(In Thousands)
Balance at beginning of period		$	402,243
Cumulative effect of change in accounting			43,719
Additions from loans sold with servicing retained			291,888
Changes in fair value due to:
Payoffs(a)			(42,765	)
All other changes in valuation inputs or assumptions (b)			27,074
Fair value of MSRs at end of period		$	$722,159
Unpaid principal balance of residential mortgage loans serviced for others		$	50,587,967

     Prior to January 1, 2008, all residential MSRs were accounted for at the lower of their initial carrying value, net of accumulated amortization, or fair value. Residential MSRs were periodically evaluated for impairment and a valuation allowance established through a charge to operations when the carrying value exceeded the fair value and was believed to be temporary. Other-than-temporary impairments were recognized if the recoverability of the carrying value was determined to be remote. There were no other-than-temporary impairments recognized during 2007. Changes in the carrying value of the residential MSRs, accounted for using the amortization method, and the associated valuation allowance for the nine month period ended September 30, 2007 follow:

		For the Nine Month
		Period Ended
		September 30, 2007
		(In Thousands)
Balance at beginning of period		$	166,705
Additions from loans sold with servicing retained			239,482
Amortization			(50,361	)
Sales			(27,733	)
Carrying value before valuation allowance at end of period			328,093
Valuation allowance
Balance at beginning of period			(358	)
Impairment recoveries			358
Balance at end of period			—
Net carrying value of amortization method MSRs at end of period		$	328,093
Unpaid principal balance of residential mortgage loans serviced for others		$	25,197,119
Fair value of residential MSRs:
Beginning of period		$	190,875
End of period		$	373,309

     The fair value of residential MSRs is estimated using a valuation model that calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions. The Company periodically obtains third-party valuations of its residential MSRs to assess the reasonableness of the fair value calculated by the valuation model.

     The key economic assumptions used in determining the fair value of MSRs capitalized during the nine month periods ended September 30, 2008 and 2007 periods were as follows:

		2008				2007
Weighted-average life (in years)			6.6				6.2
Weighted-average constant prepayment rate (CPR)			12.9	%			17.7	%
Weighted-average discount rate			9.3	%			9.8	%

     The key economic assumptions used in determining the fair value of MSRs at period end were as follows:

		September 30,
		2008				2007
Weighted-average life (in years)			6.7				5.6
Weighted-average CPR			13.2	%			16.5	%
Weighted-average discount rate			10.7	%			9.8	%

     Consumer Servicing Assets. Consumer servicing assets represent servicing rights related to HELOC and second mortgage loans that were created in the Company’s private-label securitizations. These servicing assets are initially measured at fair value and subsequently accounted for using the amortization method. Under this method, the assets are amortized in proportion to and over the period of estimated servicing income and are evaluated for impairment on a periodic basis. When the carrying value exceeds the fair value and is believed to be temporary, a valuation allowance is established by a charge to loan administration income in the consolidated statement of operations. Other-than-temporary impairment is recognized when the recoverability of the carrying value is determined to be remote. When this situation occurs, the unrecoverable portion of the valuation allowance is applied as a direct write-down to the carrying value of the consumer servicing asset. Unlike a

valuation allowance, a direct write-down permanently reduces the carrying value of the consumer servicing asset and the valuation allowance, precluding recognition of subsequent recoveries. There were no other-than-temporary impairments on consumer servicing assets recognized during the three or nine month periods ended September 30, 2008 and 2007.

     The fair value of consumer servicing assets is estimated by using an internal valuation model. This method is based on calculating the present value of estimated future net servicing cash flows, taking into consideration discount rates, actual and expected loan prepayment rates, servicing costs and other economic factors. The internal valuation model is validated periodically through a third-party valuation.

     Changes in the carrying value of the consumer servicing assets and the associated valuation allowance follow:

		For the Nine Month Period Ended
		September 30,
		2008				2007
		(In Thousands)
Consumer servicing assets
Balance at beginning of period		$	11,914			$	6,846
Additions:
From loans securitized with servicing retained			116				8,078
Subtractions:
Amortization			(1,949	)			(2,462	)
Carrying value before valuation allowance at end of period			10,081				12,462
Valuation allowance
Balance at beginning of period			(144	)			(150	)
Impairment recoveries (charges)			55				(37	)
Balance at end of period			(89	)			(187	)
Net carrying value of servicing assets at end of period		$	9,992			$	12,275
Unpaid principal balance of consumer loans serviced for others		$	1,242,740			$	1,467,933
Fair value of servicing assets:
Beginning of period		$	11,861			$	6,757
End of period		$	10,167			$	12,291

     The key economic assumptions used to estimate the fair value of these servicing assets at September 30, 2008 and 2007 were as follows:

		September 30
		2008				2007
Weighted-average life (in years)			3.9				2.7
Weighted-average discount rate			13.7	%			12.7	%

     Contractual Servicing Fees. Contractual servicing fees, including late fees and ancillary income, for each type of loan serviced are presented below. Contractual servicing fees are included within loan administration income on the consolidated statements of operations (in thousands).

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Residential real estate		$	39,423			$	20,642			$	101,691			$	54,499
Consumer			2,299				2,676				4,963				5,256
Total		$	41,722			$	23,318			$	106,654			$	59,755

Note 10. Accumulated Other Comprehensive Loss

     The following table sets forth the ending balance in accumulated other comprehensive loss for each component (in thousands):

		September 30,				December 31,
		2008				2007
Net unrealized gain on derivatives used in cash flow hedges		$	—			$	236
Net unrealized loss on securities available for sale			(95,668	)			(11,731	)
Ending balance		$	(95,668	)		$	(11,495	)