Equity Research Regulatory Alert Washington Research November 13, 2007 Brian Gardner 212-887-7735 bgardner@kbw.com Conference Call on Cuomo Investigation of Mortgage Appraisals Summary-- On Friday, KBW hosted a conference call with Washington consultant Howard Glaser regarding New York Attorney General Andrew Cuomo's investigation of mortgage appraisals. Mr. Glaser, a former senior adviser to Mr. Cuomo when Mr. Cuomo was Secretary of HUD, indicated that Mr. Cuomo is most interested in creating changes in the appraisal process. He did not believe that the NYAG is looking to pursue lawsuit against players in the mortgage industry for the sake of seeking monetary damages. Key Points-■ On Friday, we hosted a conference call with Howard Glaser, a former senior advisor to Andrew Cuomo, the New York Attorney General who has recently launched an investigation of inflated mortgage appraisals. ■ Recently, Mr. Cuomo filed a lawsuit against First American alleging that they had bowed to pressure from Washington Mutual to inflate mortgage appraisals. Last week, he subpoenaed Fannie Mae and Freddie Mac for documents related to appraisals. ■ Mr. Glaser commented that he believes that the Attorney General is interested in reforming the mortgage appraisal process and is not necessarily interested in pursuing legal action against parts of the mortgage industry to punish past behavior. ■ Mr. Glaser indicated that Mr. Cuomo has been interested in the mortgage appraisal process since he was Secretary of HUD during the Clinton Administration and talked about it during his 2006 campaign for Attorney General. ■ During his recent press conferences, Mr. Cuomo has repeatedly mentioned that he is following the mortgage trail. He started with a lawsuit against First American for its dealings with Washington Mutual (the primary market) and he then subpoenaed the GSEs (the conforming loan secondary market). It appears that the next part of the investigation will look at the nonconforming loan secondary market (investment banks). Please refer to important disclosures and analyst certification information on pages 4 - 6. November 13, 2007 Washington Research , Conference Call on Cuomo Investigation of Mortgage Appraisals Howard Glaser, a mortgage industry consultant and former senior adviser to New York Attorney General Andrew Cuomo, joined us last week for a conference call during which Mr. Glaser discussed the nature of Mr. Cuomo's recent investigation of inflated mortgage appraisals. Mr. Glaser made several interesting points during the call. He believes that the New York AG is not a new convert to investigating mortgage appraisals. He indicated that appraisals were a topic of interest to Mr. Cuomo when he was Secretary of Housing and Urban Affairs (HUD) during the Clinton Administration. Mr. Glaser also indicated that the current investigation is similar to the Attorney General's recent investigation of the student loan industry. In that investigation, Mr. Cuomo was able to use public pressure to force industry participants to agree to changes in the way they conduct business. They agreed to codes of conduct and best practices but Mr. Cuomo did not sue entities in order to collect damages. Despite the lawsuit against First American, Mr. Glaser believes that the current investigation will proceed in a way similar to the student loan investigation and that Mr. Cuomo is seeking prospective public policy changes. However, since the mortgage industry is more fragmented than the student loan industry, it may be difficult to implement and enforce changes in business practices. The first stage of the investigation, the lawsuit against First American for its dealings with Washington Mutual, focused on the primary market. The next phase of the investigation focused on the secondary market and the GSEs. Mr. Glaser thinks the Cuomo investigation will continue to look at the secondary market and will now look at the nonconforming market and investment banks. Mr. Glaser reiterated his view that Mr. Cuomo is following the loans and is not explicitly targeting Wall Street firms. Mr. Glaser also indicated that he does not believe that the Attorney General is trying to force securitized loans that were subject to inflated appraisals be put back to the lenders although he did acknowledge that could well be a by-product of Mr. Cuomo's investigation. After listening to Mr. Glaser's presentation, we think investors should expect the Cuomo investigation of mortgage appraisals to proceed to a new stage. We think that stage should be similar to the action taken last week against the GSEs. In the end, we think investors should expect that Mr. Cuomo will try and reach agreements with the mortgage industry to change the mortgage appraisal process and will not necessarily be interested in punishing firms for past actions. It is still too early in the investigation to know what changes will occur in the mortgage appraisal industry but it will probably include codes of conduct that mitigate conflicts of interest and bring more transparency and independence to the appraisal process. Below are the details for the replay of KBW's conference call regarding New York Attorney General Cuomo's investigation of inflated mortgage appraisals: Replay Conf Call Details: Please refer to important disclosures and analyst certification information on pages 4 - 6. Page 2 November 13, 2007 Washington Research , Conference Call on Cuomo Investigation of Mortgage Appraisals Replay will be available until 11/16/07 Domestic Replay Dial-In: 800-642-1687 International Replay Dial-In: 706-645-9291 Conference ID# 24147281 Companies mentioned in this note: First American Corp. (FAF-$32.03, Outperform) Washington Mutual (WM-$20.77, Market Perform) Fannie Mae (FNM-$47.06, Market Perform) Freddie Mac (FRE-$40.00, Market Perform) Please refer to important disclosures and analyst certification information on pages 4 - 6. Page 3 November 13, 2007 Washington Research , Conference Call on Cuomo Investigation of Mortgage Appraisals Rating and Price Target History for: First American Corp. (FAF) as of 11-09-2007 01/12/05 OP:$38 02/03/05 MP:$38 02/17/05 MP:$40 07/12/05 MP:$43 07/28/05 MP:$47 10/31/05 MP:$51 01/11/06 MP:$54 02/17/06 MP:$52 05/24/06 OP:$52 07/07/06 OP:$51 08/04/06 OP:$52 56 48 40 32 Q1 Q2 Q3 2005 11/06/06 OP:$49 Q1 Q2 Q3 2006 01/03/07 OP:$51 03/02/07 OP:$55 03/16/07 OP:$61 Q1 Q2 Q3 24 2007 05/04/07 OP:$56 06/11/07 OP:$60 06/25/07 OP:$58 08/03/07 OP:$57 09/06/07 OP:$51 Created by BlueMatrix Rating and Price Target History for: Washington Mutual Inc. (WM) as of 11-06-2007 04/21/05 MP:$41 06/13/05 MP:$43 07/15/05 OP:$47.5 01/04/06 OP:$50 12/22/06 MP:$48 01/18/07 MP:$47 03/07/07 MP:$44 04/18/07 MP:$42 08/23/07 MP:$36 10/18/07 MP:$29 48 40 32 24 Q1 Q2 Q3 2005 Q1 Q2 Q3 2006 Q1 Q2 Q3 16 2007 Created by BlueMatrix Rating and Price Target History for: Fannie Mae (FNM) as of 11-09-2007 01/13/05 I:UN:$65 01/24/05 MP:$67 01/12/07 I:MP:$62 72 64 56 48 40 Q1 2005 Q2 Q3 Q1 2006 Q2 Q3 Q1 Q2 Q3 32 2007 Created by BlueMatrix Please refer to important disclosures and analyst certification information on pages 4 - 6. Page 4 November 13, 2007 Washington Research , Conference Call on Cuomo Investigation of Mortgage Appraisals Rating and Price Target History for: Freddie Mac (FRE) as of 11-09-2007 01/13/05 I:MP:$81 01/24/05 OP:$81 09/02/05 OP:$74 01/12/07 D:NR:NA 02/21/07 MP:$66 72 64 56 48 40 Q1 Q2 2005 Q3 Q1 Q2 Q3 2006 Q1 Q2 Q3 32 2007 Created by BlueMatrix Distribution of Ratings/IB Services KBW IB Serv./Past 12 Mos. Rating Outperform [BUY] Market Perform [HOLD] Underperform [SELL] Restricted [RES] Suspended [SP] Count Percent Count Percent 139 240 22 0 8 33.99 58.68 5.38 0.00 1.96 32 13 0 0 2 23.02 5.42 0.00 0.00 25.00 I, Brian Gardner, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company and its securities. I also certify that I have not been, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation in this report. This communication is not an offer to sell or a solicitation to buy the securities mentioned. The information relating to any company herein is derived from publicly available sources and Keefe, Bruyette & Woods, Inc. makes no representation as to the accuracy or completeness of such information. Disclosures Keefe, Bruyette & Woods (KBW) Research Department provides three core ratings: Outperform, Market Perform and Underperform, and two ancillary ratings: Suspended and Restricted. For purposes of New York Stock Exchange Rule 472 and NASD Rule 2711, Outperform is classified as a Buy, Market Perform is classified as a Hold, and Underperform is classified as a Sell. Suspended and Restricted ratings are classified as described below. Stocks are rated based on an absolute rate of return (percentage price change plus dividend yield).Outperform represents a total rate of return of 15% or greater.Market Perform represents a total rate of return in a range between -5% and +15%.Underperform represents a total rate of return at or below -5%.Suspended indicates that KBW's investment rating and target price have been temporarily suspended due to a lack of publicly available information and/or to comply with applicable regulations and/or KBW policies.Restricted indicates that KBW is precluded from providing an investment rating or price target due to the firm's role in connection with a merger or other strategic financial transaction.Companies placed on the KBW Best Ideas Outperform List are expected to generate a total rate of return (percentage price change plus dividend yield) of 20% or more over the following 12 months.Companies placed on the KBW Best Ideas Underperform List are expected to generate a total rate of return (percentage price change plus dividend yield) at or below -20% over the following 12 months.Research analysts employ widely used multiple valuation methodologies including, but not limited to, absolute, relative and Please refer to important disclosures and analyst certification information on pages 4 - 6. Page 5 November 13, 2007 Washington Research , Conference Call on Cuomo Investigation of Mortgage Appraisals historical Price/Earnings (P/E) and Price/Cash Flow multiples, absolute, relative and historical Price/Book Value multiples and Discounted Cash Flow Analysis.All KBW research analysts are compensated based on a number of factors, including overall profitability of the company, which is based in part on KBW's overall investment banking revenues. KBW either expects to receive or intends to seek compensation for investment banking services from First American Corp. during the next three months. KBW currently makes a market in this security FAF. KBW either expects to receive or intends to seek compensation for investment banking services from Washington Mutual Inc. during the next three months. During the past 12 months, KBW received compensation for investment banking services from Washington Mutual Inc. 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