Confidential

ITeS Vertical

NOTE ON SUBPRIME LENDING

ITeS Vertical ITeS Vertical –– Notes September 08Notes September 08

�� A type of loan that is offered at a rate above prime to individuA type of loan that is offered at a rate above prime to individuals not qualifying for als not qualifying for normal loannormal loan

�� Subprime borrowers are often turned away from traditional lenderSubprime borrowers are often turned away from traditional lenderss because because ofof theirtheir low credit ratings low credit ratings

�� Subprime loans tend to have a higher interest rate than prime raSubprime loans tend to have a higher interest rate than prime rate offeredte offered on on traditional loanstraditional loans

�� Different lenders charge different rates in subprime loanDifferent lenders charge different rates in subprime loan

SUB PRIME LOANSUB PRIME LOAN

Hybrid MortgagesHybrid Mortgages

Types of Types of Subprime Subprime MortgagesMortgages

Pay Option L

oans

Pay Option L

oansIn

tere

st O

nly

Loa

ns

Inte

rest

Onl

y L

oans

BASIC TYPES OF SUB PRIME LOANS

BASIC TYPES OF SUBPRIME LOANSBASIC TYPES OF SUBPRIME LOANS

�� IInterestnterest--ononly payments, borrowers pay only interest for a period of 5ly payments, borrowers pay only interest for a period of 5--10 years 10 years

�� "pay option" loans, are adjustable rates, borrowers choose their"pay option" loans, are adjustable rates, borrowers choose their monthly payment monthly payment

(full payment, interest only, or a minimum payment )(full payment, interest only, or a minimum payment )

�� and soand so--called "hybrid" mortgages with initial fixed rates that sooner/ called "hybrid" mortgages with initial fixed rates that sooner/ later convert later convert

to adjustable rates; includes the "2to adjustable rates; includes the "2--28 loan", which offers a low initial interest rate 28 loan", which offers a low initial interest rate

fixed for two years fixed for two years

PARTICIPANTS & BENEFITS PARTICIPANTS & BENEFITS

LENDER/

CONDUIT

SERVICER

MORTGAGE BROKER

HOME OWNER

TRUST/ TRUSTEE UNDERWRITER

INDIVIDUALS, PENSION FUNDS,

INSURANCE COMPANIES

Participants in the Subprime LoanParticipants in the Subprime Loan

LENDERS PROFILE IN SUBPRIME LOANLENDERS PROFILE IN SUBPRIME LOAN

�� Lenders take risks associated with lending to people with allegeLenders take risks associated with lending to people with allegedly poor credit dly poor credit

ratings ratings

�� Subprime loans carry a far greater risk for the lender due to thSubprime loans carry a far greater risk for the lender due to the credit risk e credit risk

characteristics of typical subprime borrower characteristics of typical subprime borrower

�� Lenders offset the risk with a higher interest rate Lenders offset the risk with a higher interest rate

�� Subprime customer may be charged higher late fees, higher over lSubprime customer may be charged higher late fees, higher over limit fees, yearly imit fees, yearly

fees, or up front fees for the cardfees, or up front fees for the card

Non Bankruptcy in the last 7 years

A credit score of not less than 620

Not more than 2 or more loan payments in the last 30 days

Accurate credit lined data by the underwriter

BORROWERS BORROWERS PROFILEPROFILE

CRITERIA BASED CRITERIA BASED –– BORROWER PROFILEBORROWER PROFILE

PARTICIPANTS PARTICIPANTS

& &

BENEFITSBENEFITS

Borrowers- Access to credit despite poor

credit history

Securities Dealer- Makes money by selling the

securities and charging commission on the

underwriting

Mortgage Originator-Makes money by the

difference between the interest of the market

and the premium charged to the borrower

Investors-Opportunity to

diversify Portfolio

Greater integration for financial and capital

markets

Source of funds for banks and other

institutions

BENEFITS TO THE PARTICIPANTS IN SUBPRIME MARKETBENEFITS TO THE PARTICIPANTS IN SUBPRIME MARKET

EFFECTS OF SUBPRIME LOANSEFFECTS OF SUBPRIME LOANS

Repercussions

Late Possession, Charge offs

and Bankruptcy

High Rate

Preclusion from Obtaining any Type

of Conventional Loan

Subprime LoanSubprime Loan

Subprime Loan

Effects of Subprime LoanEffects of Subprime Loan

IN THE CONTEXT OF U.S. SUBPRIME MARKET SCENARIOIN THE CONTEXT OF U.S. SUBPRIME MARKET SCENARIO

1.1. In late 2006, the U.S. subprime mortgage industry saw a shift thIn late 2006, the U.S. subprime mortgage industry saw a shift that was referred as a at was referred as a meltdownmeltdown

2.2. Steep rise in the rate of subprime mortgage defaults has caused Steep rise in the rate of subprime mortgage defaults has caused more than 100 more than 100 subprime mortgage lenders to fail or file for bankruptcysubprime mortgage lenders to fail or file for bankruptcy

3.3. The failure of companies has caused prices in the $6.5 trillion The failure of companies has caused prices in the $6.5 trillion mortgage backed mortgage backed securities market to collapse, threatening broader impacts on thsecurities market to collapse, threatening broader impacts on the U.S. housing e U.S. housing market and economy as a whole market and economy as a whole

4.4. The crisis is ongoing and has received considerable attention frThe crisis is ongoing and has received considerable attention from the U.S. media om the U.S. media and from lawmakers during the first half of 2007and from lawmakers during the first half of 2007

EFFECTS OF SUMPRIME CHALLENGESEFFECTS OF SUMPRIME CHALLENGES

�� Effect on Home Owners Effect on Home Owners -- As home prices have declined caused by speculation reAs home prices have declined caused by speculation re--financing standards have tightenedfinancing standards have tightened

�� Effect on Jobs of the Financial SectorEffect on Jobs of the Financial Sector

�� According to According to BloombergBloomberg, from July 2007 to March 2008 , from July 2007 to March 2008 financial institutionsfinancial institutions laid off laid off more than 34,000 employees. In April, more than 34,000 employees. In April, CitigroupCitigroup announced an extra 9,000 layoffs for announced an extra 9,000 layoffs for the remainder of 2008 the remainder of 2008

�� In April, In April, Merrill LynchMerrill Lynch planned to terminate 2,900 jobs by year end. At planned to terminate 2,900 jobs by year end. At Bear StearnsBear Stearnsfear is that half of the 14,000 jobs could be eliminated once fear is that half of the 14,000 jobs could be eliminated once JP MorganJP Morgan completes completes acquisitionacquisition

Effect on MinoritiesEffect on Minorities-- About 46% of Hispanics and 55% of About 46% of Hispanics and 55% of African AmericansAfrican Americans who who obtained mortgages in 2005 got higherobtained mortgages in 2005 got higher--cost loans compared with about 17% of whites cost loans compared with about 17% of whites and Asiansand Asians

�� Effect on Tenants Effect on Tenants -- Many renters have been forced from their homes by foreclosures Many renters have been forced from their homes by foreclosures due to their landlords defaulting on loans due to their landlords defaulting on loans

�� Effect on Stock MarketsEffect on Stock Markets

Investors have taken their money out of risky mortgage bonInvestors have taken their money out of risky mortgage bonds/ shaky equities and put it ds/ shaky equities and put it into into commoditiescommodities as "stores of value"as "stores of value"

�� Effect on FEffect on Financial Institutionsinancial Institutions

ICICIICICI, India's second largest bank, has reported loss of $263 million, India's second largest bank, has reported loss of $263 million in loans/ investment in loans/ investment exposuresexposures

�� Effect on Insurance CompaniesEffect on Insurance Companies

There is concern that some homeowners are turning to arsonThere is concern that some homeowners are turning to arson as a way to escape from as a way to escape from mortgages they can't or refuse to paymortgages they can't or refuse to pay

�� Effect on Municipal Bond Effect on Municipal Bond ““Monoline" InsurersMonoline" Insurers

A secondary cause and effect of the crisis relates to the A secondary cause and effect of the crisis relates to the role of role of "monoline" insurance"monoline" insurancecorporations; corporations; AmbacAmbac and and MBIAMBIA. By . By insuringinsuring municipal bond issues, those bonds achieve municipal bond issues, those bonds achieve higher debt ratings higher debt ratings

EFFECTS OF SUBPRIME MARKETEFFECTS OF SUBPRIME MARKET

US SUBPRIME CRISIS US SUBPRIME CRISIS –– INDIA IN CONTEXTINDIA IN CONTEXT

MACRO INDICATORSMACRO INDICATORS

Loan Write Offs

Buyer Behavior

Increased Interest Rates

Cyclical nature of the real estate market

Stagnation of the Housing prices

Share Prices dipped considerably

Decision Making Process

Purchase Occasion

Functional Needs

Systems Economics

Investment BankInvestment BankPlans on HoldPlans on Hold

Beginning of the Beginning of the Subprime MessSubprime Mess

Rectification at Rectification at the base levelthe base level

FEEL FACTOR OF SUBPRIME CRISIS ON INDIAN ECONOMYFEEL FACTOR OF SUBPRIME CRISIS ON INDIAN ECONOMY

�� India should escape major fallout from the US sub prime credit tIndia should escape major fallout from the US sub prime credit turmoil urmoil

�� It remains far less exposed to global financial upheaval than maIt remains far less exposed to global financial upheaval than many countriesny countries

�� India appears to be in a strong position to withstand aftershockIndia appears to be in a strong position to withstand aftershock as the country has as the country has

largely a domestically driven economy with limited trade dependelargely a domestically driven economy with limited trade dependencence

�� India's banking sector is not directly exposed to sub prime woesIndia's banking sector is not directly exposed to sub prime woes unlike some banks in unlike some banks in

Britain, Germany and elsewhereBritain, Germany and elsewhere

ContinuedContinued ……

�� A possible US economic slowdown could hit budgets of costA possible US economic slowdown could hit budgets of cost--conscious firms, but this conscious firms, but this accounts for only 5.4 percent of India's GDP.accounts for only 5.4 percent of India's GDP.

�� Some insist that subprime upheaval could cause a "significant" sSome insist that subprime upheaval could cause a "significant" slowdown, as "Global lowdown, as "Global risk" has been at the heart of India's current growth acceleratirisk" has been at the heart of India's current growth acceleration cycleon cycle

�� However, if the current global risk aversion trend continues forHowever, if the current global risk aversion trend continues for more than three more than three months, India could face a significant deceleration in growthmonths, India could face a significant deceleration in growth

�� It all boils down to international integration our growth story It all boils down to international integration our growth story is still one mainly of is still one mainly of domestic demand. domestic demand.

MAJOR COMPANIES THAT HAVE MORTGAGE PROCESSESMAJOR COMPANIES THAT HAVE MORTGAGE PROCESSES

Various Positions in Mortgage ProcessingVarious Positions in Mortgage Processing

EXECUTIVE/ORIGINATIONEXECUTIVE/ORIGINATION

�� >> Executive ManagementExecutive Management

�� >> Origination ChannelsOrigination Channels

�� >> RetailRetail

�� >> TelemarketingTelemarketing

�� >> WholesaleWholesale

SECONDARY/CAPITAL MARKETSSECONDARY/CAPITAL MARKETS

�� >> Loan Portfolio ManagementLoan Portfolio Management

�� >> Loan Securitization/Loan PoolingLoan Securitization/Loan Pooling

�� >> PricingPricing

�� >> Quantitative AnalysisQuantitative Analysis

�� >> Sales/Investor RelationsSales/Investor Relations

�� >> Secondary/Capital MarketsSecondary/Capital Markets

ContinuedContinued……

ManagementManagement

�� >> Secondary/Capital Markets SupportSecondary/Capital Markets Support

�� >> TradingTrading

�� OPERATIONS/SERVICING ANDOPERATIONS/SERVICING AND

INFRASTRUCTUREINFRASTRUCTURE

�� >> Customer ServiceCustomer Service

�� >> FinanceFinance

�� >> Loan OperationsLoan Operations

�� >> Loan WorkoutLoan Workout

�� >> Marketing & CommunicationsMarketing & Communications

�� >> Quality Control/ComplianceQuality Control/Compliance

�� >> Risk ManagementRisk Management

�� >> TechnologyTechnology

�� >> UnderwritingUnderwriting

Company- Mortgage Processing

�� AEGIS MORTGAGE CORPORATIONAEGIS MORTGAGE CORPORATION

�� >> AEGON USA REALTY ADVISORS, INC.AEGON USA REALTY ADVISORS, INC.

�� >> AMERICAN GENERAL FINANCEAMERICAN GENERAL FINANCE

�� >> AMERICAN HOME MORTGAGEAMERICAN HOME MORTGAGE

�� >> AMTRUST BANKAMTRUST BANK

�� >> ARVEST BANK OPERATIONSARVEST BANK OPERATIONS

�� >> ASSURITY FINANCIAL SERVICES LLCASSURITY FINANCIAL SERVICES LLC

�� >> ASTORIA FEDERAL SAVINGSASTORIA FEDERAL SAVINGS

�� >> AURORA LOAN SERVICESAURORA LOAN SERVICES

�� >> AVELO MORTGAGE, LLCAVELO MORTGAGE, LLC

�� >> BANK OF AMERICABANK OF AMERICA

�� >> BANK OF MONTREALBANK OF MONTREAL

�� >> BANK UNITEDBANK UNITED

�� >> BARCLAYS CAPITAL GROUPBARCLAYS CAPITAL GROUP

�� >> BMO FINANCIAL GROUPBMO FINANCIAL GROUP

�� >> BNC MORTGAGE, INC.BNC MORTGAGE, INC.

�� >> BRANCH BANKING & TRUST CO.BRANCH BANKING & TRUST CO.

�� >> CENLARCENLAR

�� >> CHEVY CHASE BANKCHEVY CHASE BANK

�� >> CITI CONSUMER LENDING GROUPCITI CONSUMER LENDING GROUP

� > D.B. HOME LOANSD.B. HOME LOANS�� >> DOWNEY SAVINGS & LOANDOWNEY SAVINGS & LOAN�� >> EMC MORTGAGEEMC MORTGAGE�� >> EQUIFIRSTEQUIFIRST�� >> EVERBANKEVERBANK�� >> FANNIE MAEFANNIE MAE�� >> FIFTH THIRD BANKFIFTH THIRD BANK�� >> FIRST FRANKLIN (MERRILL LYNCH)FIRST FRANKLIN (MERRILL LYNCH)�� >> FIRST TENNESSEE BANK/ FIRST HORIZON HOME LOANSFIRST TENNESSEE BANK/ FIRST HORIZON HOME LOANS�� >> FIELDSTONE MORTGAGE COMPANYFIELDSTONE MORTGAGE COMPANY�� >> FREDDIE MACFREDDIE MAC�� >> GMACGMAC�� >> HOMESTREET BANKHOMESTREET BANK�� >> HOMEQ SERVICINGHOMEQ SERVICING�� >> HSBC BANK USAHSBC BANK USA�� >> HUNTINGTON BANCSHARES INCORPORATEDHUNTINGTON BANCSHARES INCORPORATED�� >> INDYMAC BANKINDYMAC BANK�� >> ING MORTGAGEING MORTGAGE�� >> JOHNSON FINANCIAL GROUP, INC.JOHNSON FINANCIAL GROUP, INC.�� >> JP MORGAN CHASEJP MORGAN CHASE�� >> HOVNANIAN ENTERPRISES, LLCHOVNANIAN ENTERPRISES, LLC�� >> KEYCORPKEYCORP�� >> KH FINANCIAL, L.P.KH FINANCIAL, L.P.

� � DIVISIONDIVISION�� >> LENDINGTREE, INC.LENDINGTREE, INC.�� >> LINCOLN MORTGAGE COMPANYLINCOLN MORTGAGE COMPANY�� >> LITTON LOAN SERVICING LPLITTON LOAN SERVICING LP�� >> M & T BANKM & T BANK�� >> MARKET STREET MORTGAGE CORPORATIONMARKET STREET MORTGAGE CORPORATION�� >> MARRIOTT VACATION CLUB INTERNATIONALMARRIOTT VACATION CLUB INTERNATIONAL�� >> MDC HOLDINGS, INC.MDC HOLDINGS, INC.�� >> MIDFIRST BANKMIDFIRST BANK�� >> MORGAN STANLEY HOME LOANSMORGAN STANLEY HOME LOANS�� >> MORTGAGE GUARANTY INSURANCE CORP.MORTGAGE GUARANTY INSURANCE CORP.�� >> NATIONAL COOPERATIVE BANKNATIONAL COOPERATIVE BANK�� >> NATIONAL CITY CORPORATIONNATIONAL CITY CORPORATION�� >> NATIONWIDE INSURANCENATIONWIDE INSURANCE�� >> ONE WASHINGTON FINANCIAL, LLCONE WASHINGTON FINANCIAL, LLC�� >> OPTEUM FINANCIAL SERVICES, LLCOPTEUM FINANCIAL SERVICES, LLC�� >> OPTION ONE MORTGAGEOPTION ONE MORTGAGE�� >> PHH MORTGAGEPHH MORTGAGE�� >> PLAZA HOME MORTGAGE, INC.PLAZA HOME MORTGAGE, INC.�� >> RBC FINANCIAL GROUPRBC FINANCIAL GROUP�� >> REGIONS FINANCIAL CORPORATIONREGIONS FINANCIAL CORPORATION�� >> RESMAE MORTGAGE CORPRESMAE MORTGAGE CORP�� >> SAXON MORTGAGE (MORGAN STANLEY)SAXON MORTGAGE (MORGAN STANLEY)�� >> SCME MORTGAGE BANKERS INC.SCME MORTGAGE BANKERS INC.�� >> SHEA FINANCIAL SERVICESSHEA FINANCIAL SERVICES

�� >> CITIMORTGAGECITIMORTGAGE�� >> CITIZENS BANKCITIZENS BANK�� >> COLORADO HOUSING FINANCE AUTHORITYCOLORADO HOUSING FINANCE AUTHORITY�� >> COMPASS BANKCOMPASS BANK�� >> SN SERVICING CORPORATIONSN SERVICING CORPORATION�� >> SOVEREIGN BANKSOVEREIGN BANK�� >> STERLING SAVINGS BANKSTERLING SAVINGS BANK�� >> SUNTRUST BANK, INC.SUNTRUST BANK, INC.�� >> SYNOVUS FINANCIAL CORPORATIONSYNOVUS FINANCIAL CORPORATION�� >> TECHNOLOGY CREDIT UNIONTECHNOLOGY CREDIT UNION�� >> TITLE RESOURCE GROUPTITLE RESOURCE GROUP�� >> THORNBURG COMPANIESTHORNBURG COMPANIES�� >> UNION BANK OF CALIFORNIAUNION BANK OF CALIFORNIA�� >> UNIVERSAL AMERICAN MORTGAGE CO., LLCUNIVERSAL AMERICAN MORTGAGE CO., LLC�� >> USAAUSAA�� >> WACHOVIA CORPORATIONWACHOVIA CORPORATION�� >> WASHINGTON MUTUALWASHINGTON MUTUAL�� >> WEBSTER BANKWEBSTER BANK�� >> WELLS FARGO HOME MORTGAGEWELLS FARGO HOME MORTGAGE�� >> WILSHIRE CREDIT CORPORATION (MERRILWILSHIRE CREDIT CORPORATION (MERRIL

Companies in IndiaCompanies in India

1.1. AccentureAccenture

2.2. ACSACS

3.3. Adventity Adventity

4.4. Aegis Aegis

5.5. Capgemini Capgemini

6.6. Cognizant Cognizant

7.7. e4e e4e

8.8. Group,Equinox Group,Equinox

9.9. iflex iflex

10.10. EXL Service EXL Service

11.11. Fidelity National Information Fidelity National Information Services,Services,

12.12. First Source First Source

13.13. FiservFiserv

14.14. Genpact Genpact

15.15. HCL BPO HCL BPO

16.16. Hexaware Hexaware

17.17. IBM Daksh IBM Daksh

18.18. iGATEiGATE

19.19. Indecomm Indecomm

1.1. InfosysInfosys

2.2. iSevaiSeva

3.3. Karvy Karvy

4.4. Motif Motif

5.5. Nipuna BPO Nipuna BPO

6.6. OcwenOcwen

7.7. Office Tiger (RRD), Office Tiger (RRD),

8.8. Quattro BPO Quattro BPO

9.9. SutherlandSutherland

10.10. TCSTCS

11.11. Trans works Trans works

12.12. Aditya Birla Aditya Birla

13.13. US Technology Global US Technology Global

14.14. WiproWipro

15.15. WNS Global WNS Global

16.16. Xansa Xansa

17.17. ZentaZenta

MORTAGE PROCESS IN INDIAN BPO COMPANIESMORTAGE PROCESS IN INDIAN BPO COMPANIES

1.1. Loan Processing &UnderwritingLoan Processing &Underwriting

2.2. Document ProcurementDocument Procurement

3.3. Rate Lock ManagementRate Lock Management

4.4. Employment VerificationEmployment Verification

5.5. Automated UnderwritingAutomated Underwriting

6.6. Document PreparationDocument Preparation

7.7. Credit ReviewCredit Review

8.8. Good Faith EstimateGood Faith Estimate

9.9. Loan Process IndexingLoan Process Indexing

10.10. Rate QuotesRate Quotes

11.11. 1003/1008 Input, 1003/1008 Input,

12.12. Phone Based QualificationsPhone Based Qualifications

13.13. Order AppraisalOrder Appraisal

14.14. Title Hazard & Flood, Closing & FundingTitle Hazard & Flood, Closing & Funding

15.15. Trust/Deed Agreement ReviewTrust/Deed Agreement Review

16.16. Cross SellingCross Selling

17.17. Lead GenerationLead Generation

18.18. Review of Compliance & HOI DocumentsReview of Compliance & HOI Documents

CONTINUEDCONTINUED....

MORTGAGE BANKING BPO: servicing managementMORTGAGE BANKING BPO: servicing management includes outsourced tasks of :includes outsourced tasks of :

1.1. Loan BoardingLoan Boarding

2.2. Escrow Analysis Escrow Analysis

3.3. TaxesTaxes

4.4. InsuranceInsurance

5.5. Lien ReleaseLien Release

6.6. Loss Mitigation Loss Mitigation

7.7. PayoffPayoff

8.8. Commercial MortgagesCommercial Mortgages

9.9. Early Collections Early Collections

10.10. New Loan AuditNew Loan Audit

11.11. Skip TracingSkip Tracing

12.12. Welcome CallsWelcome Calls

13.13. ARM AuditsARM Audits

14.14. Default Loan Setup Default Loan Setup

MEASURES TAKEN TO MANAGE THE CRISISMEASURES TAKEN TO MANAGE THE CRISIS

�� The Federal ReserveThe Federal Reserve

�� In August 2007, Federal Open Market Committee announced that intIn August 2007, Federal Open Market Committee announced that interest rate cuts erest rate cuts might be forthcomingmight be forthcoming

�� The Fed is utilizing the The Fed is utilizing the Term auction facilityTerm auction facility (TAF) to provide short(TAF) to provide short--term loans term loans (liquidity) to banks(liquidity) to banks

�� In March 2008, the Fed also provided funds and guarantees to enaIn March 2008, the Fed also provided funds and guarantees to enable bank ble bank J.P. J.P. Morgan ChaseMorgan Chase to purchase to purchase Bear StearnsBear Stearns

Loan modificationLoan modification

Lenders /homeowners both benefit from avoiding costly and Lenders /homeowners both benefit from avoiding costly and lengthy foreclosure . lengthy foreclosure .

�� LitigationLitigation

Litigation related to the subprime crisis is underway. A sLitigation related to the subprime crisis is underway. A study in February 2008 tudy in February 2008 indicated that 278 civil lawsuits were filed in federal courts dindicated that 278 civil lawsuits were filed in federal courts during 2007 related to uring 2007 related to the subprime crisis. the subprime crisis.

MEASURESMEASURES

�� MediaMedia

Media can help educate the public and parties involved by Media can help educate the public and parties involved by ensuring the top subject ensuring the top subject material experts engagedmaterial experts engaged

�� Bank Financial HealthBank Financial Health

Certain major banks have reduced their Certain major banks have reduced their dividenddividend payouts to increase liquiditypayouts to increase liquidity

�� Credit Rating AgenciesCredit Rating Agencies

They are taking action to address perceived or actual confThey are taking action to address perceived or actual conflicts of interest, including licts of interest, including additional internal monitoring programs, third party reviews of additional internal monitoring programs, third party reviews of rating processes, and rating processes, and board updatesboard updates

�� RegulationRegulation

Regulators are considering action regarding lending practicRegulators are considering action regarding lending practices, bankruptcy protection, es, bankruptcy protection, tax policies, affordable housing, credit counseling, education atax policies, affordable housing, credit counseling, education and the nd the licensing/qualifications of lenderslicensing/qualifications of lenders

MEASURES

Thank You !Thank You !