August 7, 2007 Joshua Rosner 646/652-6207 jrosner@graham-fisher.com

Please refer to important disclosures at the end of this report.

COMMENTS ON RECENT MARKET SPECULATION REGARDING THE GSEs The lack of understanding and mass delusion about the ability of the GSEs to "save us" may be best summed up in the comment from a portfolio manager that was included in one of Monday’s news stories; "Maybe the government regulators will allow them to grow their portfolio now in a way they couldn't before, across the board, for jumbo, subprime and conventional loans". The GSEs cannot possibly, nor do I expect they would want to, be held responsible to purchase the majority of unsalvageable problem loans that others originated. Recent statements, including those by Richard Syron (see, as example http://money.cnn.com/2007/08/04/news/companies/freddiemac.reut/?postversion=2007080415) suggest that although the GSEs are interested in assisting many distressed borrowers, the reality persists that there are a limited number of seriously distressed borrowers who they would be able to assist. I view Mr. Syron’s perspective on this issue as prudent and responsible. In fact, current regulatory guidance would likely prevent them from helping all but those conforming limit borrowers who, given time or a basic change in mortgage terms, could become current on their mortgages. I expect that to be the minority of impaired subprime borrowers and not all of the impaired Alt-A borrowers. A few points: 1) It would take an act of Congress to allow the GSEs to get into the Jumbo market. As for a significant increase in their subprime exposures, the GSEs have historically avoided outsized credit risk as a percentage of their businesses. Given ongoing internal control issues, I would not expect them to aggressively take on such risks now; 2) The GSEs could step in, in a limited way, and securitize assets, they don’t need larger portfolios to do so; 3) The GSEs are bound by the non-traditional mortgage guidance so there is only so much they could re-underwrite even if they wanted to “save everyone”. They themselves are being required to adjust their automated underwriting systems to meet the requirements of this guidance; 5) I suspect they may use their portfolios to hold modified assets they could have to buy out of RMBS pools as a result of their guarantees; 6) I do not believe that OFHEO provided the information to the WSJ. It seems possible that someone affiliated with FNM may have leaked the story to the WSJ, perhaps in an effort pressure the regulator. Several large lenders/banks would also probably like to be able to rely on the GSEs to purchase large volumes of originations. They too would have an interest in leaking this or pressuring the regulator as well;

Weekly Spew July 2007

- 2 -

7) Fannie's consent agreement with the regulator ( See: http://www.ofheo.gov/media/pdf/attachsettlement.pdf p.9 Article 3 Sec. 4 ) suggests that, barring specific internal events at FNM, it would require a significant liquidity problem in the market for the regulator to have reason to lift the limits. Current conditions do not seem to necessitate such an action. There is liquidity in the system for decent credits albeit at higher rates. OFHEO, like the other regulators will likely continue to monitor the situation for a further deterioration but I do not believe there is reason at this point for them to view the market as illiquid; 8) The GSEs were among the early pioneers of low documentation loans, Automated Underwriting, moves to lower allowable FICO scores. As early as 2004, 16% OF FNM’S portfolio had FICO scores below 660 (S&P 12/06). Similarly, even before the recent speculative frenzy by buyers, FNMs 2004 exposures to second homes and vacation properties was about 8% (S&P 12/06); 9) There is very little known about their loss mitigation practices and whether these practices are effectively keeping borrowers in their homes or if they are merely pushing losses off into the future. The increasing application of loss mitigation during the past several years has almost certainly distorted the historic comparability of delinquency, default and foreclosure statistics. As loans are mitigated the GSEs may be more likely to hold those in portfolio thus creating further risks in a period of rising stress; 10) While the GSEs have been active in the refinancing market it is unclear how many of those refinancing are from either subprime or FHA products where the borrower was able to use home price appreciation in support of refinancing into a conforming product. 11) It appears, prior to the recent requirement that they conform to the Joint Guidance on non-traditional mortgages, one or both GSE were offering negative-amortization products that seem not to have begun to fully amortize until after the reset period. (“Higher-risk products such as interest-only, sub-prime, Alt-A and negative amortization loans are growing, but are currently about 20 percent of the book of business” http://www.ofheo.gov/media/pdf/OFHEOReporttoCongress07.pdf) As a result the GSEs could use loss mitigation to assist borrowers but that might to come at some cost; 12) The GSE Risk Based Capital Rules require them to increase their haircuts against counterparties as those counterparties ratings are downgraded. Currently 7 private mortgage insurers insure about 17% of the GSE’s book (roughly $400BB) and it is unclear how the PMI industry’s capital base (roughly $40BB) would have the ability to absorb the possible (not necessarily likely) sizeable impact to their first loss exposures to the GSE’s book. These figures do not include other exposures of the PMI companies ( as example: non-traditional mortgage insurance for second and high loan-to-value mortgages). If the market continues to deteriorate there may also be risks to the abilities of other counterparties to continue to act as economic counterparties; 13) We are in a period of increasing stress in the mortgage markets and will likely continue to see rising mortgage industry levels of Alt-A and subprime REO. Regardless of the direct impact to the GSEs book of business this would conceivably reduce the recoveries on the GSE’s REO portfolios;

Weekly Spew July 2007

- 3 -

14) While investor expectations that the guarantee fees the agencies charge may rise seem supportable, servicing expenses of the GSEs would also appear likely to rise; 15) While it is unclear if OFHEO will move forward on their plans or if any proposed rules would be approved, “OFHEO plans additional future rulemakings to address substantial topics such as making adjustments to the loss severity equations used to calculate Enterprise risk-based capital and the appropriateness of incorporating mark-to-market accounting into the Risk-Based Capital Regulation. OFHEO also plans to update the Minimum Capital Regulation to address fair value accounting and other issues”; and 16) While the current shape of the Yield curve, the shift toward 30-year fixed product and the anticipated resolution to their delinquent financial filings should help the GSEs, the increased risk to credit quality, risk to counterparties, falling home prices, rising single family inventories, rising REOs, increased servicing costs and potential increases in required capital may cause unconsidered risks to the conforming conventional market and the GSEs in turn.

1- This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Graham Fisher or its subsidiaries or affiliated to any registration or licensing requirement within such jurisdiction. All material presented within this report, unless specifically indicated otherwise, is under copyright to Graham Fisher & Co. (GF&Co). None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, or distributed to any other party, without the prior express written permission of Graham Fisher & Co. (GF&Co).

2- The information, tools and material presented in this report are provided to you for information purposes only and are not

to be used or considered as an offer or the solicitation of an offer to sell or buy or subscribe for securities or financial instruments. GF&Co. has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. The contents of this report are not intended to be used as investment advice.

Weekly Spew July 2007

- 4 -

3- Information and opinions presented in this report have been obtained or derived from sources believed by GF&Co to be reliable, but GF&Co makes no representation as to their accuracy or completeness and GF&Co accepts no liability for loss arising from the use of the material presented in this report where permitted by law and/or regulation. This report is not to be relied upon in substitution for the exercise of independent judgment. GF&Co may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect different assumptions, views and analytical methods of the analysts who prepared them.

4- Past performance should not be taken as an indication or guarantee of future performance, and no representation or

warranty, express or implied is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by GF&Co and are subject to change. The value and income of any of the securities or financial instruments mentioned in this report can fall as well as rise, and is subject to exchange rate fluctuations that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADRs, the values of which are influenced by currency fluctuation, effectively assume this risk.