2. Planning for Success in THIS Market Mission Impossible? Presented by Michele Perrin, Washington Mutual Bank Western Secondary Conference July, 2006

3. Mission Impossible?

4. Your Assignment: Manage Your Mortgage Company Through Changing Markets: Reduce Costs Reduce Costs Maintain Adequate Liquidity Maintain Adequate Liquidity Avoid Repurchase Requests Avoid Repurchase Requests Keep your Warehouse Lender Happy Keep your Warehouse Lender Happy Goal: Survive with Your Net Worth and your Warehouse Line Intact! Goal: Survive with Your Net Worth and your Warehouse Line Intact!

5. Biggest Risk Faced in this Market: Lack of liquidity caused by: –Losses –Unsaleable loans –Repurchase requests

6. What is Liquidity? Liquidity is your cash and assets easily converted to cash Liquidity is your cash and assets easily converted to cash Allows the company to make haircuts and margin calls required by lenders Allows the company to make haircuts and margin calls required by lenders The resource used to negotiate on repurchase requests The resource used to negotiate on repurchase requests The life-blood of your business The life-blood of your business Can be added through equity, lines of credit or subordinated debt Can be added through equity, lines of credit or subordinated debt

7. RESULT OF LACK OF LIQUIDITY:

8. RESULTS of Lack of Liquidity: Loss of Warehouse lines Loss of Warehouse lines Inability to fund Inability to fund No source of income No source of income Inability to meet obligations Inability to meet obligations Shutdown of business Shutdown of business Bankruptcy Bankruptcy Potential loss of personal assets due to personal guaranties Potential loss of personal assets due to personal guaranties

9. The Survival Solution: PLANNING “Success is not an accident—it is always accompanied by a plan.” --(Dave Hershman in Mortgage Daily, 5/25/04)

10. How to Protect Your Liquidity: I. Plan Your Way to Profitability a.Project Your Operating Results and Staffing Needs b.Find Profitable Products to originate c.Project cash flows on a daily/weekly basis II. Sell Loans PRIOR to Funding III. Defend Against Repurchase Requests IV. Get Additional Liquidity if Needed

11. Project Operating Results Use a model to project income and expenses and predict your cash needs Use a model to project income and expenses and predict your cash needs Use realistic production and margins Use realistic production and margins Use projections to determine timing and extent of expense cuts Use projections to determine timing and extent of expense cuts Preserve capital by reducing staff early Preserve capital by reducing staff early Don’t wait until you see losses to cut staff Don’t wait until you see losses to cut staff

12. Using Projections: Calculate number of loans each type of employee can handle in a month Calculate number of loans each type of employee can handle in a month Create spreadsheet with various monthly volumes as the column heading and each type of employee as a row heading Create spreadsheet with various monthly volumes as the column heading and each type of employee as a row heading Plot out the number of each type of staff needed for each level of volume considered likely Plot out the number of each type of staff needed for each level of volume considered likely

13. Sell Loans PRIOR to Funding Unsaleable loans due to Changing Guidelines are the Number One drain on liquidity Unsaleable loans due to Changing Guidelines are the Number One drain on liquidity Forward Commitments do not typically guard against guideline changes Forward Commitments do not typically guard against guideline changes Bulk selling presents an unacceptable risk at this time for even largest sellers Bulk selling presents an unacceptable risk at this time for even largest sellers Flow selling to trusted investors on a prior- approved basis is least risky Flow selling to trusted investors on a prior- approved basis is least risky

14. Find Profitable Products to Originate Hard Money Loans (find financing first) Hard Money Loans (find financing first) Agency & HUD loans Agency & HUD loans Low Cost to originate Low Cost to originate Low risk of repurchase (Agency, Option ARMs) Low risk of repurchase (Agency, Option ARMs) Manage Commission Costs Manage Commission Costs

15. Project Cash Flows Helps to anticipate cash needs Helps to anticipate cash needs Plot out timing of sales and expected net proceeds Plot out timing of sales and expected net proceeds Drop in all expenses Drop in all expenses Other cash outlays Other cash outlays Determine expected total cash at each end of day Determine expected total cash at each end of day

16. Defend Against Repurchase Requests:

17. Defend Against Repurchase Requests Get servicing records from investor Get servicing records from investor Contact borrower to determine whether payments were made Contact borrower to determine whether payments were made Bring borrower current through direct contact or through broker intervention Bring borrower current through direct contact or through broker intervention Go after brokers & borrowers for fraud Go after brokers & borrowers for fraud Hire a good advisor and/or attorney Hire a good advisor and/or attorney Re-negotiate Sale Contracts to reduce repurchase risk: EPD periods and Reps & warrants Re-negotiate Sale Contracts to reduce repurchase risk: EPD periods and Reps & warrants

18. Need Additional Liquidity? Bring in Additional Capital from Current Owners or New Investors Bring in Additional Capital from Current Owners or New Investors –Subordinated Debt –Preferred Stock –Common Stock Borrow Short-Term Money Borrow Short-Term Money Sell Illiquid Assets-Real Estate, Investments, Repurchased Loans, Stale Loans Sell Illiquid Assets-Real Estate, Investments, Repurchased Loans, Stale Loans

19. Summary This is a cyclical business-plan early and often! This is a cyclical business-plan early and often! Plan to Preserve Liquidity Plan to Preserve Liquidity Pre-sell all loans prior to funding to avoid guideline shifts Pre-sell all loans prior to funding to avoid guideline shifts Vigorously defend against existing and future repurchase requests Vigorously defend against existing and future repurchase requests Don’t wait to cut costs-when you see losses on your financial statements, it’s too late! Don’t wait to cut costs-when you see losses on your financial statements, it’s too late! Beg, borrow or sell first born to get additional liquidity Beg, borrow or sell first born to get additional liquidity Keep your warehouse line and your business intact and get to.…… Keep your warehouse line and your business intact and get to.……

20. Mission accomplished!