• Management’s Discussion and Analysis
• Reports of Management and Independent Auditors
• Financial Statements
• Notes to Consolidated Financial Statements

Management’s Discussion and Analysis

ResCap

Results of Operations

The following table summarizes the operating results for ResCap for the periods indicated. The amounts presented are before the elimination of balances and transactions with our other operating segments.

2006 Compared to 2005

ResCap operations’ net income for 2006 declined 31% when compared to 2005. The 2006 operating results were adversely affected by domestic economic conditions especially during the fourth quarter. These developments were offset by the conversion to an LLC for income tax purposes, which resulted in the elimination of a $523 million net deferred tax liability. Excluding the LLC benefit, our net income was $182 million. The adverse conditions affecting the business included the following:

• Interest rates have steadily increased since the middle of 2005. Rising rates have the impact of decreasing mortgage affordability. In addition, long-term rates have remained low relative to short-term rates (i.e., a flattening of the yield curve) and, in some instances, have been lower than short-term rates (i.e., an inverted yield curve). This results in a reduction in net interest margin and generally has a negative effect on our hedging result.
• The rising interest rate environment has contributed to lower home sales and an increased inventory of unsold homes. Accordingly, the level of home price appreciation declined to a five-year low in the fourth quarter of 2006 and in a number of areas in the country has resulted in a decline in the appreciation of home prices and, in some areas, a decline in home values, which has increased the severity of our loan losses.
• The nonprime securitization market significantly deteriorated during the fourth quarter of 2006. Nonprime loan prices declined significantly due to the changing market conditions and our ability to securitize delinquent subprime loans was severely restricted. This had a significant negative impact on nonprime sales margins and impacted the fair value of our delinquent loans in our mortgage loans held for sale portfolio.
• In the fourth quarter of 2006, nonprime delinquencies rose significantly. The combination of lower home prices and sales and loan defaults has put significant pressure on a number of nonprime lenders, including our nonprime warehouse lending customers. This resulted in a significant provision for loan losses due to the decline in value of the collateral for our loans.
• The economic conditions resulted in lower net interest margins, higher provisions for loan losses, lower gains on sale margins and loan production, real estate investment impairments, and reduced gains on dispositions of real estate acquired through foreclosure. As these domestic market conditions persist, these unfavorable impacts on our results of operations may continue.

The mortgage loan production in 2006 was $189.4 billion, an increase of 8% from $175.6 billion in 2005. Domestic mortgage loan production increased 2% and international loan production increased 68% in 2006 compared to 2005. Domestic loan production increased due to increases in production of prime second-lien and prime non-conforming products. U.K. operations provided the majority of the international increase.

ResCap net financing revenue was ($376) million in 2006 compared to $726 million in 2005, a decrease of 152%. Total financing revenue increased 42% compared to the prior year, primarily as a result of the increase in our average interest-earning assets, including mortgage loans held for sale, mortgage loans held for investment and lending receivables. Interest expense increased 66% during the 2006 year due to increases in the average amount of interest-bearing liabilities outstanding to fund asset growth as well as increases in funding costs primarily due to the increase in market interest rates.

The provision for credit losses was approximately $1.3 billion in 2006 compared to $626 million in 2005, representing an increase of approximately 113%. The majority of this increase occurred in the fourth quarter as the decline in the domestic housing market accelerated and the market for nonprime loans significantly deteriorated. These market conditions resulted in our increasing loss estimates for the number and estimated charge-offs, an increase in nonprime delinquencies and significant stress on warehouse lending customers. The increase in the provision for loan losses was driven by an increase in delinquent loans. These developments resulted in higher loss severity assumptions for new loan production, as compared to the prior year period, when the market observed home price appreciation. If home prices continue to weaken, it may have a continued negative effect on the provision for credit losses.

Net loan servicing income decreased 32% compared to 2005 due to negative servicing asset valuations, which were partially offset by an increase in the size of the mortgage servicing rights portfolio. The negative servicing asset valuation was primarily due to derivative hedging results, which were negatively impacted by lower market volatility and the inverted yield curve. The domestic servicing portfolio was approximately $412.4 billion as of December 31, 2006, an increase of approximately $57.5 billion or 16% from $354.9 billion as of December 31, 2005. Gains on sales of loans decreased 14% due to our inability in the fourth quarter of 2006 to include nonprime delinquent loans in our nonprime securitizations.

Other income increased 13% during the 2006 year due to a gain on the sale of an interest in a regional home builder in the second quarter of 2006 resulting in a gain of $415 million ($259 million after-tax). This was partially offset by lower income from sales of real estate owned and lower valuations of real estate owned due to lower home prices as well as lower management fee income due to the elimination of an off-balance sheet warehouse lending facility during the fourth quarter of 2005.

Noninterest expense decreased in 2006 by 2% compared to 2005. This decrease was primarily attributable to a $42.6 million gain from the curtailment of a pension plan as well as lower real estate commissions due to the softening of the real estate market. These reductions were partially offset by higher professional fees that were incurred in conjunction with the integration of GMAC Residential and Residential Capital Group into the U.S. Residential Finance Group.

Income tax benefit was $289 million, which included a conversion benefit of $523 million related to ResCap’s election to be treated as an LLC for federal income tax purposes. The benefit was the result of the elimination of net deferred tax liabilities. Almost all significant domestic legal entities of ResCap have been converted to LLC’s with the exception of GMAC Bank. Effective December 2006, federal income tax expense is no longer incurred for the entities that made the election.

2005 Compared to 2004

Net financing revenue was $726 million in 2005 compared to approximately $1.5 billion in 2004, a decrease of $725 million or 50%. Our total financing revenue increased $392 million in 2005 compared to the prior year, primarily as a result of an increase in interest earning assets including mortgage loans held for sale, mortgage loans held for investment, lending receivables and other interest-earning assets. Interest expense increased approximately $1.5 billion in 2005 compared to the prior year due to both an increase in the volume of interest-bearing liabilities and an increase in the cost of those funds. Funding costs increased in 2005 primarily due to the increase in short-term market interest rates. Additionally, the cost of funds has increased as lower cost affiliate borrowings were replaced with unsecured debt.

The provision for credit losses was $626 million in 2005 compared to $978 million in 2004, representing a decrease of $352 million or 36%. The provision for credit losses was lower in 2005 compared to the prior year primarily due to favorable severity assumptions resulting from home price appreciation along with a slower rate of increase in delinquencies, including nonaccrual loans, during 2005 compared to 2004 as the rate of seasoning of the portfolio slowed. These positive effects were partially offset by provisions for Hurricane Katrina.

Net loan servicing income increased from $525 million during 2004 to $716 million during 2005, representing an increase of $191 million or 36%. Net loan servicing income increased as a result of increased mortgage servicing fees due to growth in the residential servicing portfolio in 2005 as compared to 2004. In addition, net servicing income benefited from a reduction in amortization and impairment due to the favorable impact of slower than expected prepayments consistent with observed trends in the portfolio and rising interest rates.

Gains on sale of loans increased $347 million or 50%, compared to 2004 due to higher overall loan production and the increased volume of off-balance sheet securitizations versus on-balance sheet secured financings. Other income increased 45% or $543 million in 2005 primarily related to favorable net impact on the valuation of retained interests from updating estimates of future credit losses resulting from favorable credit loss experience and favorable changes in market rates, offset by the reduction in valuation of residual assets affected by Hurricane Katrina. In addition, other income includes an increase in other investment income related to certain equity investments as well as interest earned on investments in U.S. Treasury securities. Noninterest expense increased $236 million or 10% compared to 2004, primarily due to salary and commission increases in loan production, number of employees and new location occupancy costs.

Industry and Competition

The U.S. residential mortgage market had been a growth market for the last several decades. This growth had been driven by a variety of factors, including low interest rates, increasing rates of homeownership, greater access to mortgage financing, the development of an efficient secondary market, home price appreciation and the tax advantage of mortgage debt compared to other forms of consumer debt. Origination of residential mortgage loans has increased during the 2006 year; however, the pace of growth has declined given the softening real estate market, rising interest rates and various concerns about the U.S. economy. The domestic mortgage origination market was estimated to be approximately $2.5 trillion in 2006 and $3.0 trillion in 2005.

Prime credit quality mortgage loans are the largest component of the residential mortgage market in the U.S. with loans conforming to the underwriting standards of Fannie Mae and Freddie Mac, Veterans’ Administration-guaranteed loans and loans insured by the Federal Housing Administration representing a significant portion of all U.S. residential mortgage production. Prime credit quality loans that do not conform to the underwriting standards of the government-sponsored enterprises, because their original principal amounts exceed Fannie Mae or Freddie Mac limits or because they do not otherwise meet the relevant documentation or property requirements, represent a growing portion of the residential mortgage market. Home equity mortgage loans, which are typically mortgage loans secured by a second (or more junior) lien on the underlying property, continue to grow in significance within the U.S. residential real estate finance industry.

The development of an efficient secondary market for residential mortgage loans, including the securitization market, has played an important role in the growth of the residential real estate finance industry. Mortgage-backed and mortgage-related asset-backed securities are issued by private sector issuers as well as by government-sponsored enterprises, primarily Fannie Mae and Freddie Mac.

An important source of capital for the residential real estate finance industry is warehouse lending. These facilities provide funding to mortgage loan originators until the loans are sold to investors in the secondary mortgage loan market.

The global mortgage markets, particularly in Europe, are less mature than the U.S. mortgage market. The historic lack of available sources of liquidity make these markets a potential opportunity for growth. As a result, many of our competitors have entered the global mortgage markets.

Our mortgage business operates in a highly competitive environment and faces significant competition from commercial banks, savings institutions, mortgage companies and other financial institutions. In addition, ResCap earnings are subject to volatility due to seasonality inherent in the mortgage banking industry and volatility in interest rate markets.

U.S. Residential Real Estate Finance

Through our activities at ResCap, we are one of the largest residential mortgage producers and servicers in the U.S., producing approximately $162 billion in residential mortgage loans in 2006 and servicing approximately $412 billion in residential mortgage loans as of December 31, 2006. We are also one of the largest non-agency issuers of mortgage-backed and mortgage-related asset-backed securities in the United States. The principal activities of our U.S. residential real estate finance business include originating, purchasing, selling and securitizing residential mortgage loans; servicing residential mortgage loans for ourselves and others; providing warehouse financing to residential mortgage loan originators and correspondent lenders to originate residential mortgage loans; creating a portfolio of mortgage loans and retained interests from our securitization activities; conducting limited banking activities through GMAC Bank; and providing real estate closing services.

Sources of Loan Production

We have three primary sources for our residential mortgage loan production: the origination of loans through our direct lending network, the origination of loans through our mortgage brokerage network and the purchase of loans in the secondary market (primarily from correspondent lenders).

• Direct Lending Network – Our direct lending network consists of retail branches, internet and telephone-based operations. Our retail network targets customers desiring face-to-face service. Typical referral sources are realtors, homebuilders, credit unions, small banks and affinity groups. We originate residential mortgage loans through our direct lending network under two brands: GMAC Mortgage and ditech.com.
• Mortgage Brokerage Network – We also originate residential mortgage loans through mortgage brokers. Loans sourced by mortgage brokers are funded by us and generally closed in our name. When originating loans through mortgage brokers, the mortgage broker’s role is to identify the applicant, assist in completing the loan application, gather necessary information and documents and serve as our liaison with the borrower through the lending process. We review and underwrite the application submitted by the mortgage broker, approve or deny the application, set the interest rate and other terms of the loan and, upon acceptance by the borrower and satisfaction of all conditions required by us, fund the loan. We qualify and approve all mortgage brokers who generate mortgage loans for us, and we continually monitor their performance.
• Correspondent Lender and other Secondary Market Purchases – Loans purchased from correspondent lenders are originated or purchased by the correspondent lenders and subsequently sold to us. As with our mortgage brokerage network, we approve any correspondent lenders who participate in our loan purchase programs.

We also purchase pools of residential mortgage loans from entities other than correspondent lenders, which we refer to as bulk purchases. These purchases are generally made from large financial institutions. In connection with these purchases, we typically conduct due diligence on all or a sampling of the mortgage pool and use our underwriting technology to determine if the loans meet the underwriting requirements of our loan programs. Some of the residential mortgage loans we obtain in bulk purchases are “seasoned” or “distressed”. Seasoned mortgage loans are loans that generally have been funded for more than 12 months, while distressed mortgage loans are loans that are currently in default or otherwise nonperforming.

The following summarizes our domestic mortgage loan production by channel:

Types of Mortgage Loans

We originate and acquire mortgage loans that generally fall into one of the following five categories:

• Prime Conforming Mortgage Loans – These are prime credit quality first-lien mortgage loans secured by single-family residences that meet or conform to the underwriting standards established by Fannie Mae or Freddie Mac for inclusion in their guaranteed mortgage securities programs.
• Prime Non-Conforming Mortgage Loans – These are prime credit quality first-lien mortgage loans secured by single-family residences that either (1) do not conform to the underwriting standards established by Fannie Mae or Freddie Mac, because they have original principal amounts exceeding Fannie Mae and Freddie Mac limits ($417,000 in 2006 and 2007 and $359,650 in 2005), which are commonly referred to as jumbo mortgage loans or (2) have alternative documentation requirements and property or credit-related features (e.g., higher loan-to-value or debt-to-income ratios) but are otherwise considered prime credit quality due to other compensating factors.
• Government Mortgage Loans – These are first-lien mortgage loans secured by single-family residences that are insured by the Federal Housing Administration or guaranteed by the Veterans Administration.
• Nonprime Mortgage Loans – These are first-lien and certain junior lien mortgage loans secured by single-family residences made to individuals with credit profiles that do not qualify for a prime loan, have credit-related features that fall outside the parameters of traditional prime mortgage products or have performance characteristics that otherwise expose us to comparatively higher risk of loss.
• Prime Second-Lien Mortgage Loans – These are open- and closed-end mortgage loans secured by a second or more junior lien on single-family residences, which include home equity mortgage loans.

The following table summarizes our domestic mortgage loan production by type:

Underwriting Standards

All the mortgage loans we originate and most of the mortgage loans purchased are subject to our underwriting guidelines and loan origination standards. When originating mortgage loans directly through our retail branches, or by internet or telephone, or indirectly through mortgage brokers, we follow established lending policies and procedures that require consideration of a variety of factors, including:

• the borrower’s capacity to repay the loan;
• the borrower’s credit history;
• the relative size and characteristics of the proposed loan; and
• the amount of equity in the borrower’s property (as measured by the borrower’s loan-to-value ratio).

Our underwriting standards have been designed to produce loans that meet the credit needs and profiles of our borrowers, thereby creating more consistent performance characteristics for investors in our loans. When purchasing mortgage loans from correspondent lenders, we either re-underwrite the loan prior to purchase or delegate underwriting responsibility to the correspondent lender originating the mortgage loan.

To further ensure consistency and efficiency, much of our underwriting analysis is conducted through the use of automated underwriting technology. We also conduct a variety of quality control procedures and periodic audits to ensure compliance with our origination standards, including our responsible lending standards and legal requirements. Although many of these procedures involve manual reviews of loans, we seek to leverage our technology in further developing our quality control procedures. For example, we have programmed many of our compliance standards into our loan origination systems and continue to use and develop automated compliance technology to mitigate regulatory risk.

Sale and Securitization of Assets

We sell most of the mortgage loans we originate or purchase. In 2006 we sold $152.7 billion in mortgage loans. We typically sell our Prime Conforming Mortgage Loans in sales that take the form of securitizations guaranteed by Fannie Mae or Freddie Mac, and we typically sell our Government Mortgage Loans in securitizations guaranteed by the Government National Mortgage Association or Ginnie Mae. In 2006 we sold $45.9 billion of mortgage loans to government-sponsored enterprises, or 30% of the total loans we sold, and $106.8 billion to other investors through whole loan sales and securitizations, including both on-balance sheet and off-balance sheet securitizations.

Our sale and securitization activities include developing asset sale or retention strategies, conducting pricing and hedging activities and coordinating the execution of whole loan sales and securitizations.

In addition to cash we receive in exchange for the mortgage loans we sell to the securitization trust, we often retain interests in the securitization trust as partial payment for the loans and generally hold these retained interests in our investment portfolio. These retained interests may take the form of mortgage-backed or mortgage-related asset-backed securities (including senior and subordinated interests), interest-only, principal-only, investment grade, non-investment grade or unrated securities.

Servicing Activities

Although we sell most of the residential mortgage loans that we produce, we generally retain the rights to service these loans. The mortgage servicing rights we retain consist of primary and master servicing rights. Primary servicing rights represent our right to service certain mortgage loans originated or purchased and later sold on a servicing-retained basis through our securitization activities and whole loan sales, as well as primary servicing rights we purchase from other mortgage industry participants. When we act as primary servicer, we collect and remit mortgage loan payments, respond to borrower inquiries, account for principal and interest, hold custodial and escrow funds for payment of property taxes and insurance premiums, counsel or otherwise work with delinquent borrowers, supervise foreclosures and property dispositions and generally administer the loans. Master servicing rights represent our right to service mortgage-backed and mortgage-related asset-backed securities and whole loan packages sold to investors. When we act as master servicer, we collect mortgage loan payments from primary servicers and distribute those funds to investors in mortgage-backed and mortgage-related asset-backed securities and whole loan packages. Key services in this regard include loan accounting, claims administration, oversight of primary servicers, loss mitigation, bond administration, cash flow waterfall calculations, investor reporting and tax reporting compliance. In return for performing primary and master servicing functions, we receive servicing fees equal to a specified percentage of the outstanding principal balance of the loans being serviced and may also be entitled to other forms of servicing compensation, such as late payment fees or prepayment penalties. Our servicing compensation also includes interest income or the float earned on collections that are deposited in various custodial accounts between their receipt and our distribution of the funds to investors.

The value of our mortgage servicing rights is sensitive to changes in interest rates and other factors (see further discussion in the Critical Accounting Estimates section of this MD&A). We have developed and implemented an economic hedge program to, among other things, mitigate the overall risk of impairment loss due to a change in the fair value of our mortgage servicing rights. In accordance with this economic hedge program, we designate hedged risk as the change in the total fair value of our capitalized mortgage servicing rights. The success or failure of this economic hedging program may have a material effect on our results of operations.

The following table summarizes the primary domestic mortgage loan servicing portfolio for which we hold the corresponding mortgage servicing rights:

Warehouse Lending

We are one of the largest providers of warehouse lending facilities to correspondent lenders and other mortgage originators in the United States. These facilities enable those lenders and originators to finance residential mortgage loans until they are sold in the secondary mortgage loan market. We provide warehouse lending facilities for a full complement of residential mortgage loans, including mortgage loans we acquire through our correspondent lenders. Advances under our warehouse lending facilities are generally fully collateralized by the underlying mortgage loans and bear interest at variable rates. As of December 31, 2006, we had total warehouse line of credit commitments of approximately $13.2 billion, against which we had advances outstanding of approximately $8.8 billion. We purchased approximately 23% of the mortgage loans financed by our warehouse lending facilities in 2006.

Other Real Estate Finance and Related Activities

We provide bundled real estate services to consumers, including real estate brokerage services, full service relocation services, mortgage closing services and settlement services. Through GMAC Bank, which commenced operations in North America in August 2001, ResCap offers a variety of personal investment products to its customers, including consumer deposits, consumer loans and other investment services. GMAC Bank also provides collateral pool certification and collateral document custodial services to third-party customers. We provide real estate brokerage and full-service relocation to consumers as well as real estate closing services, such as obtaining flood and tax certifications, appraisals, credit reports and title insurance.

Business Capital

Business Capital conducts the following business activities: residential construction finance, residential equity, model home finance, resort finance and health capital. The residential construction finance, residential equity and model home finance businesses all provide capital to residential land developers and homebuilders to finance residential real estate projects for sale, using a variety of capital structures. The resort finance business provides debt capital to resort and timeshare developers and the health capital business provides debt capital to health care providers, primarily in the health care services sector. We have historically retained and serviced most of the loans and investments that we originate in the Business Capital Group.

In almost all cases, we source our transactions either through our loan officers or referrals. Our residential construction finance, residential equity and model home finance businesses have relationships with many large homebuilders and residential land developers across the United States. Our resort finance business has relationships primarily with large private timeshare developers and our health capital business has relationships with physician groups and other healthcare service providers. We believe that we have been able to provide creative capital solutions tailored to our customers’ individual needs, resulting in strong relationships with our customers. Because of these relationships, we have been able to conduct multiple and varied transactions with these customers to expand our business.

International Business

Outside the United States, our International operations are primarily located in the United Kingdom, The Netherlands, and Germany.

The following table summarized our international mortgage loan production:

The following table sets forth our international servicing portfolio for which we hold the corresponding mortgage servicing rights:

Credit Risk Management

As previously discussed, we often sell mortgage loans to third parties in the secondary market subsequent to origination or purchase. While loans are held in mortgage inventory prior to sale in the secondary market, we are exposed to credit losses on the loans. In addition, we bear credit risk through investments in subordinate loan participations or other subordinated interests related to certain consumer and commercial mortgage loans sold to third parties through securitizations. Management estimates credit losses for mortgage loans held for sale and subordinate loan participations and records a valuation allowance when losses are considered probable and estimable. The valuation allowance is included as a component of the fair value and carrying amount of mortgage loans held for sale. As previously discussed, certain loans that are sold in the secondary market are subject to recourse in the event of borrower default. Management closely monitors historical experience, borrower payment activity, current economic trends and other risk factors, and establishes an allowance for foreclosure losses that, we believe, is sufficient to cover incurred foreclosure losses in the portfolio.

We periodically acquire or originate certain finance receivables and loans held for investment purposes. Additionally, certain loans held as collateral for securitization transactions (treated as financings) are also classified as mortgage loans held for investment. We have the intent and ability to hold these finance receivables and loans for the foreseeable future. Credit risk on finance receivables and mortgage loans held for investment is managed and guided by policies and procedures that are designed to ensure that risks are accurately assessed, properly approved and continuously monitored. In particular, we use risk-based loan pricing and appropriate underwriting policies and loan-collection methods to manage credit risk. Management closely monitors historical experience, borrower payment activity, current economic trends and other risk factors and establishes an allowance for credit losses, which we consider sufficient to cover incurred credit losses in the portfolio of loans held for investment.

In addition to credit exposure on the mortgage loans held for sale and held for investment portfolios, we also bear credit risk related to investments in certain asset- and mortgage-backed securities, which are carried at estimated fair value (or at amortized cost for those classified as held to maturity) in our Consolidated Balance Sheet. Typically, our non-investment grade and unrated asset- and mortgage-backed securities provide credit support and are subordinate to the higher-rated senior certificates in a securitization transaction.

We are also exposed to risk of default by banks and financial institutions that are counterparties to derivative financial instruments. These counterparties are typically rated single A or above. This credit risk is managed by limiting the maximum exposure to any individual counterparty and, in some instances, holding collateral, such as cash deposited by the counterparty.

Allowance for Credit Losses

Our allowance for credit losses is intended to cover management’s estimate of incurred losses in the portfolio. Refer to the Critical Accounting Estimates section of this MD&A and Note 1 to our Consolidated Financial Statements for further discussion.

The following table summarizes the activity related to the allowance for credit losses.

Nonperforming Assets

The following table summarizes the nonperforming assets in our on-balance sheet held for sale and held for investment residential mortgage loan portfolios for each of the periods presented. Nonperforming assets are nonaccrual loans, foreclosed assets and restructured loans. Mortgage loans are generally placed on nonaccrual status when they are 60 days or more past due or when the timely collection of the principal of the loan, in whole or in part, is doubtful. Management’s classification of a loan as nonaccrual does not necessarily indicate that the principal of the loan is uncollectible in whole or in part. In certain cases, borrowers make payments to bring their loans contractually current; in all cases, our mortgage loans are collateralized by residential real estate. As a result, our experience has been that any amount of ultimate loss is substantially less than the unpaid balance of a nonperforming loan.

The following table summarizes the delinquency information for our mortgage loans held for investment portfolio:

In the fourth quarter of 2006, we experienced a significant increase in nonprime delinquencies. Loans 60 days or more delinquent, which are all nonaccrual loans, increased from 10.6% of the mortgage loans held for investment portfolio as of September 30, 2006, to 12.5% as of December 31, 2006. In addition, the level of home price appreciation declined to a five-year low, which negatively impacted the severity we experienced upon the disposal of real estate acquired through foreclosure.

We originate and purchase mortgage loans that have contractual features that may increase our exposure to credit risk and thereby result in a concentration of credit risk. These mortgage loans include loans that may subject borrowers to significant future payment increases, create the potential for negative amortization of the principal balance or result in high loan-to-value ratios. These loan products include interest only mortgages, option adjustable rate mortgages, high loan-to-value mortgage loans and teaser rate mortgages. Total loan production and combined exposure related to these products recorded in finance receivables and loans and loans held for sale for the years ended and as of December 31, 2006 and 2005 is summarized as follows:

The underwriting guidelines for these products takes into consideration the borrower’s capacity to repay the loan and credit history. We believe our underwriting procedures adequately consider the unique risks which may come from these products. We conduct a variety of quality control procedures and periodic audits to ensure compliance with our underwriting standards.

• Interest-only mortgages – Allow interest-only payments for a fixed period of time. At the end of the interest-only period, the loan payment includes principal payments and increases significantly. The borrower’s new payment, once the loan becomes amortizing (i.e., includes principal payments), will be greater than if the borrower had been making principal payments since the origination of the loan.
• Payment option adjustable rate mortgages – Permit a variety of repayment options. The repayment options include minimum, interest-only, fully amortizing 30-year and fully amortizing 15-year payments. The minimum payment option sets the monthly payment at the initial interest rate for the first year of the loan. The interest rate resets after the first year, but the borrower can continue to make the minimum payment. The interest-only option sets the monthly payment at the amount of interest due on the loan. If the interest-only option payment would be less than the minimum payment, the interest-only option is not available to the borrower. Under the fully amortizing 30-year and 15-year payment options, the borrower’s monthly payment is set based on the interest rate, loan balance and remaining loan term.
• High loan-to-value mortgages – Defined as first-lien loans with loan-to-value ratios in excess of 100% or second-lien loans that when combined with the underlying first-lien mortgage loan result in a loan-to-value ratio in excess of 100%.
• Below market rate (teaser) mortgages – Contain contractual features that limit the initial interest rate to a below market interest rate for a specified time period with an increase to a market interest rate in a future period. The increase to the market interest rate could result in a significant increase in the borrower’s monthly payment amount.