Looking for Opportunities Among the Subprime Carnage
• Looking for Opportunities. While the problems with the subprime mortgage sector are serious, we
believe the breadth of the stock market decline in some cases has been overdone. Accordingly, we
believe there are several opportunities for investors. While the subprime problems stem from the
mortgage market in the US, there are some European-based companies that have exposure, thus,
we have viewed this from a global perspective.
• Upgrading IndyMac and Fannie Mae. We are raising the rating on both these stocks to
Outperform from In Line. We are raising NDE to Outperform based on valuation (trades at 1.1x book
vs. historical ratios of 1.7x), its prime credit profile (significantly lower NCOs, rep and warranty
reserves), and its better access to liquidity (FHLB borrowings, deposits). We are upgrading FNM to
Outperform ahead of the company completing its timely financial reports, as the attainment of this
target should result in the lifting of the excess capital requirement (leading to buybacks, dividends)
and the retained portfolio growth cap (primary earnings engine). With this outlook, we believe FNM’s
valuation 1.6x book is an attractive entry point, as the future prospects look good for the company.
• Lowering Ratings on Two Subprime Mortgage REITs. At the present time, we find conditions to
be too uncertain to maintain positive ratings on the Mortgage REITs that specialize in the subprime
sector. Consequently, we are lowering our ratings on New Century and Accredited Home Lenders
to In Line from Outperform. But we’re not concerned about Mortgage REITs with limited subprime
exposure. Therefore, we are not changing our Outperform ratings on Redwood Trust and Impac.
• We Recently Upgraded the Major Investment Banks. The shares of the major investment banks
have declined, in part because of concerns about their exposure to the subprime mortgage market and
partly because of the overall weakness in the equity markets. As a consequence, we recently upgraded
the industry to Overweight from Marketweight and we raised the ratings on MS, MER and BSC to
Outperform (joining LEH). See our March 7th report “Upgrading Group Weighting to Overweight.”
• HSBC Looks Attractive. Concerns about the US mortgage business have dominated trading in
HSBC recently. We have stress tested the company’s provision assumptions using aggressive
delinquency and loss assumptions, and believe that management is being prudent. Importantly, our
analysis suggests that the HSBC Finance model is far from broken, as the branch based fixed real
estate secured loans performed well and the unsecured book seasoned in line with expectations. The
shares are rated Outperform. See our separate March 6th Report “HSBC Holdings: Emerging Value.”
• Countrywide Also Looks Attractive. On the originator side, we believe CFC stock has overreacted.
We have stress tested the earnings and book values for potentially deteriorating conditions and find the
current valuation to be compelling, albeit not without risk. The stock is rated Outperform.
• We remain Lukewarm on the Mortgage Insurance Sector. Given the large disruption in the
subprime mortgage market, rising severities, weaker home prices and the poor underwriting that
infected 2006 MBS pools, we would remain on the sidelines. While NIW, IIF and expenses all look
excellent, our view is that credit will erase all of these positive trends.
• Banks have little subprime exposure. While the commercial banks as a group have some real
estate and mortgage exposure, very little of this is in the subprime sector. Any concerns we have
with the banks are related to the problems that might emerge in the US economy as a consequence
of the subprime problems. See our separate report March 9th, “Sub-prime Exposure Minimal – Risk
Remains Tied to US Economy.”
• No issues with the other sectors. While some other sectors (notably the Life Insurers and Asset
Managers) have underperformed the market, of late, we attribute this to the market itself, not to any
specific subprime concerns.

TABLE OF CONTENTS
Report Overview......................................................................................................................................4
Tracking The Subprime Meltdown .........................................................................................................5
Company and Sector Discussions.........................................................................................................8
IndyMac Bancorp: Credit Is An Issue, Subprime Is Not – Valuation Is Compelling ................................................ 8
Fannie Mae: In The Subprime Maelstrom Fannie Mae Is The Place To Hide – Upgrading To Outperform.......... 12
Mortgage REITs: Troubled Times......................................................................................................................... 15
Accredited Home Lenders: Downgrading to In Line.......................................................................................... 16
New Century Financial: Downgrading to In Line ............................................................................................... 17
Impac Holdings: Maintain Outperform............................................................................................................... 18
Redwood Trust: Maintaining Outperform .......................................................................................................... 20
Investment Banks: We Believe the Impact of Sub-Prime Exposure Will Be Manageable..................................... 21
HSBC Holdings: We Think Investors Are Reading The Stock Wrong................................................................... 23
Countrywide Financial: The Biggest and the Best, but Not Risk Free .................................................................. 26
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