LBHI FCIC 0001272 FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
Executive Summary I • Subprime mortgage business has been attractive market for Lehman Brothers - 30% plus industry growth with attractive margins 2001-06 - Vertically integrated business model enables us to achieve high level of cross-cycle profitability - Significant part of a broader-based mortgage business • Over past year, difficult markets have led to declini'ng profitability among all industry participants - Overcapacity has led to reduced pricing and increased risk taking, lowering overall profitability - Virtually all independent subprime originators cutting back operations or going out of business .. Firm has taken aggressive steps to enhance performance during downcycle and position for long term - Reduced headcount and significantly enhanced operating model - Modified product offering to reduce risk Aggressively pursued best-in-class operators from other firms to strengthen our franchise • Expect to be fundamentallY' better positioned for profitable growth when industry cycle turns· . LEHMAN BROTHERS 1
~ ~ ~ ~ ~ ~ ~ ttl h:j to< 0 H t"I ):I Types of Residential Mortgages tzJ n I h:j H ttl t:I tzJ Z 0 8 8 ::c H Credit score (FICO) avg. + 720 + 705 + 625 tzJ ~ + 6.13% (30 yrFixed) + 7.35% + 8.35% Interest rate CIl 8 + Purchase or cash-out refinance + Cash-out refinance: 24% ::c ~ + Cash-out refinance: 63% Purchase / refinance 0 t"I ):I t:I + Hybrid ARM: 50% + Hybrid ARM: 70% • Fixed rate; Hybrid ARM Rate structure H Z + Principal & Interest; Interest Only + Interest Only: 65% + Interest Only: 22% Gl Z Payment type CIl 8 + 36% + 39% .42% Debt·to·income avg. H Z + 80% (up to 100% Combined LTV) • 81 % (up to 95% Combined LTV) + <80% Loan·to·value avg. n 10 + Approx 100% + 20% • 60% Documentation % fulJ CIl + Investment: 18% + Primary residence Use of proceeds • Investment: 8% 8 tzJ t:I 2006 U.S. Residential Mortgage Originations Prime AIt·A 1% Subprime 22% LEHMAN BROTHERS 2
~ ~ ~ ~ ~ ttl h:j to< 0 H t"I ):I I-Bank Purchases of Residential Mortgage Originators tzJ n ! I h:j H I-Bank Mortgage Business Acquired Credit Quality Est. Price ($MM) ttl t:I tzJ Z 0 Lehman Brothers Aurora Loan Services 1998 AIt-A $10 8 8 ::c H Finance America 1999 Subprime $36 tzJ ~ Lehman Brothers Bank 1999 NA $8 CIl 8 SPML (U.K.) 1999 Non-conforming $28 ::c ~ 0 BNC Mortgage 2000 Subprime $81 t"I i t:I $40 Financial Fre.edom (Sold in 2004) 2000 NA H Z $134 Prefen-ed Mortgages (U.K.) 2003 Non-conforming Gl Z CIl 8 SIB Mortgage Corp 2004 Alt-A $13 H 2006 Non-conforming $12 London Mortgage Co. (U.K.) Z n Subprime servicing Merrill Lynch Wilshire Credit Corp· 2004 $52 CIl 2004 Mortgages pIc (U.K.) Non-conforming NA 8 tzJ 20% Min. Interest in OwnIt (shut down Dec '06) 2005 Subprime NA t:I Non-conforming Freedom Funding (U.K.) 2006 NA First Franklin Subprime $1,310 2006 Bear Stearns EMC Mortgage Founded in 1990 Subprime NA ECC Capital (Subprime Mortgage Orig. Platform) 2006 Subprime $9 Morgan Stanley Advantage Home Loans (U.K.) 2005 Non-conforming NA Saxon Capital 2006 Subprime $706 CityMortgage Bank (Russia) 2006 Prime NA Delltsche Bank Chapel Funding (DB Home Lending) Subprime 2006 NA MortgageIT 2006 Alt-A $429 t"I ttl Credit Suisse SPS Holdings. ::c 2005 Subprime servicing $100 H Barclays HomeEc Ih:j 2006 Subprime servicing $469 n Egllifirst 2007 Subprime $225 H In 0 LEHMAN BROTHERS 3 0 0 I-' I\) -..J lJ1
~ ~ ~ ~ ~ ~ I~ ttl h:j 0 to< H Lehman Brothers' Subprime Economics ):I t"I tzJ n I I h:j H ttl t:I Lehman Brothers' Subprimc P&L tzJ Z ~ 0 8 8 ::c H BNC + Related Trading Desk tzJ 2004 '1 ' 2005 2006 Q12007 2007E ($ ill millions) 2003'" 2007 Forecast Revenue CIl 8 Assumptions: ::c BNC Origination Volume 6,715 10,789 24,844 14,073 2,754 11,800 0 • Gain on sale / t"I t:I securitization = H Revenue (2.1 876 229 (95) (60) 496 747 100 bps Z ~ Z Gl • Loan loss Compensation 174 282 341 196 44 180 8 CIl reserves = Non-Personnel Expense 48 61 62 54 11 56 $172MM H Z 42 • Cost to originate = 196 bps MCD Admin & Firm Allocations 22 72 45 10 n 20 CIl Pre-Tax Income I;' (67) (160) (338) 254 382 400 8 tzJ t:I Drivers of Decrease in Jll'olitc:lbility Since 200S ... Q12007 2005 • Significant decrease in lUn rate origination volume $24.9B $11.2B annualized 351 basis points 88 basis points • Decline in gain on sale and securitization margins .... &; ::c • Increase in loan loss reserves due to loan performance $40MM $92MM H Ih:j n (I) Tri/dillii Desk rel'eIIHfS & e.rl'eIIse.v,lfn· 2003 WId 2004 are Will/are.'. (2) OIlier .<II0l'rilJle-rel",ed ("(/I'ilillillilrkel.f rel'e!llIf.r: 2003 = $133MM: ]004 = S300MM: 2005 = S50IMM: QI 2007 = $435MM: 2006 = H S60MM: 2007E = S200MM. o LEHMAN BROTHERS 4 o I-' I\) -..J 0"1
~ ~ ·~I>~"'i.'<'."x',"' t<i'f·'ifi!f'~'~1,fi. ~ 'i.r.~· ~ ~l'~1~-gtl'~'l~-oW.1!l ~ >:~:4l~·~1.~jt!Y?;:\f.·~?f:~.m~y~t~;~rfj#~.m~Wt~4~tl!n~(;:(!~.t" ~c~lI;diICl~H\lI~le~l\d~IS" -,~.~2~Pli~- ~ ttl h:j to< 0 H t"I ):I Changes to Subprime Industry Landscape tzJ n ! I h:j H Top 20 Subpdmc OriginatOl's of 2006 ttl t:I tzJ 2006 Pr?duction ($BN) Z 0 8 8 Rank Firm Totar Wholesale Retail Status ::c H .. ;'i<1 .. .. ,'~>:\;:·"~,~,~"'\';."'"'.i' .:",: '.';' 'm'. tzJ ~ .... ('\l·t·~:r,"'"'~\.'¥J.·MC.·~·~. <, "~"'" :. , ...• , '~;~'1~ifl'li~1'ili.lfe~ti'-;{~l\1i'is.";';~.;,\"~4.!i~fi'f'~" .. JB',l~,~'!;~t\li~j1~¥.~_~Jl~i,rt·J.~$:h~{~i~ 2 HSBC 50,8 38.6 12,2 Additional $I.7B write·off; tired senior U,S, managers CIl 8 3 Countrywide 40,6 25.4 15,2 Cutting workforce: foreclosures at 5-yl' high ::c ~ 0 4 CitiMortgage 38,0 17,9 20,2 Buying distressed businesses (took stake in 0pte.u,m unit) t"I ):I WMC Mortgage (GE) 33,2 33,2 0.0 Cutting 20% of workforce; question of long term GE fit t:I 5 H Z Gl Z CIl 8 H Wells Fargo 8,9 Cutting workforce 9 27.9 19.0 Z n 10 ',JO ,'l'irstPranklin'" .,' 27,7 25,4 ,'. 2:3'," ': Bought by Merrill Lynch in 2006 ($I.3B) . , ' II Washington Mutual 26.6 26,6 0,0 Cutting workforce CIl ·ResCilP (G)'vIAC)' '", ' ' "20.9 " . $1 B posl·c1osillg purchase price adjustment; milnagcllll!nt chilnges :' :' . , . 1'2 . ,", 21,2 0,3 8 ': n tzJ 'Aegis Mortgage (Celbclus) -1-7-.0--. 10.2 6,8 Exitl!d wholes:llc subprime bllsim:ss t:I ". " , ,,14 15,1' 16 Chase Home Finance 11.6 6,9 4,6 11.5 17 American General Finance 10.5 1.0 " '18" '. 'Mortgage Lenders Network' , '11.2' , ,', NA' Nt\." Went b;lIlklllptin February; Lehman hired pmloi"salesfllfcC ' " ,19 ' Equilirst ----10.8 Bought by narclays ill 2007 ~- . IO.S 0.0 " , NA NA 10,5 Stock down 78% YTD 20 NovaStar Other Notables LEHMAN BROTHERS . 5
'?~X:;,i;'!i;:~:i'~;.i}"t:~:~.6" Changes to BNC Operating Model I Changc in OllCl-.lting Model New l,cadcD:shi() Team U.cduction in Fo.·cc (lVIHY 2007+) • CEO - Steve Skolnik • Convert from branch model (34 , locations) to regional operational - Ex -First Franklin • Reduced headcount by 23% (510 center model (ultimately 5 locations) employees) vs. yr end 2005 levels • Head of Sales - Tim Owens - 55 Account Executives • Make changes to better align - Ex -Option One compensation with loan performance - 455 admin / ops staff • COO - Scott Anderson • Double Ops staff efficiency by , " ,.,),·200.7. - Ex-Accredited employing best practice file flows • Additional 26% headcount • VP of Process Improvement- • Continue to work with trading desk on reduction planned for May Chuck Hutt new products and optimizing - 49 Account Executives - profitability of existing products Ex-MLN - 372 admin / ops staff • VP of Learning & Development - Kate Perez - Ex-New Century LEHMAN BROTHERS 6
Improvements to BNC Risk and Credit Profile I Imploovcmcnt in Loan Chmoadcristics 2()0(; to March 2007 fl'OI1l M~lrch , , Tightening of Lending Cdtcria .. • 80/20 loans 2nd Lien 6% 0.4% Percentage - Terminated exceptions 34% ., - Raised required applicant credit score Combined Loan-to- Value 9% • r .. First-time homebuyers >95% - Maximum of 90% combined loan-to-value 16% .. - Maximum of 1 unit Non-Owner 10% Occupied • Stated documentation - 100% combined loan-to-value and loan-to-value 44% • eliminated 24% Purchase - Maximum of 50% debt-to-income Full Docs 50% '60% LEHMAN BROTHERS 7
Recommend
More recommend
