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Q2 2007

"Mr. Gordon Gekko Economy You Have Credit Cancer And It Is Spreading!"

The following conversation takes place between our US "Gordon Gekko" Economy (GGE) and a doctor (Doc)
who specializes in patients with Credit Cancer.

Below is the cast of characters in this conversation:

Gordon Gekko Economy (GGE)

The Doctor (Doc)

Clubber Lang
Alan "The Putz" Greenspan

"Helicopter Ben" Bernanke

Jim "Booooyah" Cramer

The Real Estate Agent

The Appraiser
Doc: GGE, I appreciate you taking time out of your busy day to get a physical. As I have told you in the past,
you have to slow down. All of this leverage, deficits, asset bubbles and greed unfortunately has finally caught
up with you. We have run tests on you and you have a severe case of Credit Cancer that is spreading at a very
rapid pace.

GGE: Doc, I appreciate you being candid with me but I had a feeling something was wrong for a while. The
lending industry really got out of control. The ability for anyone to get a loan created a lending bubble that put a
ton of excess money in banks, lenders, mortgage brokers, real estate attorneys, real estate agents, builders and
appraisers pockets. Nobody asked questions because they were to busy making money. There is no doubt that
the easy credit contributed to this cancer:
* The US mortgage back securities market ballooned and has more than tripled since 2000.
* New Century, who imploded on April 2nd 2007, grew from $400 million in loans in 1996 to $59.8 billion in
loans in 2006.
* Implode Meter currently has 112 lenders going Kaput since late 2006.
* Many of the subprime lenders used deceptive high pressure sales tactics on minority borrowers.
* The Center for Responsible Lending estimates that 2.2 million borrowers who got subprime loans since 1998
either have lost or will lose their homes through foreclosure over the next few years. This includes one of every
five borrowers who got subprime loans in 2005-06, a default rate unmatched in the history of the modern
mortgage market.
* Certain subprime lenders would fraudently inflate borrowers' assets to qualify customers for loans.
* Many loans officers had no qualifications originating loans and came into the business for monetary reasons
and literally worked in offices with a Boiler Room mentality.

GGE: Doc, who or what do you think is to blame for my Credit Cancer?

Doc: It's a great question so let's start at the source of the credit which is Wall Street. There is a securitized
product called a CDO, Collateralized Debt Obligation, that is a collection of securities backed by bonds,
mortgages and other loans that offered investors a higher than normal yield they could typically find in the bond
market. CDOs around the world are owned by banks and insurance companies. Back in the good old days most
lenders would hold their own loans in house and they were much more conservative on how they leant money
to their clients. The securitization process of mortgages created a whole new ballgame in the lending arena and
it really created a monster over the past couple of years.

GGE: So what happened with the CDOs?

Doc: Do you remember that movie called "Wall Street" where you made the comment, "Greed is Good?" Our
US economy is driven on greed and money mainly because of the way Wall St. operates. Unfortunately, the
people who regulate the banks and insurance companies rely on rating agencies such as Standard & Poors, Fitch
and Moodys to rate and monitor the CDOs. A major problem with this is that these rating companies will tell
you that policing the CDOs is not their job and they just give out educated opinions even though they are
compensated.
GGE: So the rating companies contributed to my cancer?

Doc: No question about it. These companies help the finance firms divide the CDOs into traunches and they are
involved with every aspect of engineering the CDOs. In the securitization market the rating agencies are basicly
in charge.

GGE: So what led to my condition to worsen?

Doc: The borrowers appetite for credit grew as they got greedy and Wall St. fed their appetite. As demand
increased home sales grew because lenders created a loan for virtually everybody in the US even if they did not
have income or assets. This was called a NINJA Loan. They also created loans for the self employed called
"Stated Income" Loans where the borrower would tell the lender what they earned per year without having to
document their earnings. These loans were nicknamed "liar loans." The mortgage brokers and real estate agents
were loving it because they work on commission and the bigger the loan and purchase price the bigger the
check they received. This cycle led to artificial home appreciation over the past couple of years. Many people
with poor credit scores or overstated incomes received loans that allowed them to buy more house than they
could afford because of the popularity of interest only and negative ammortization loans. These loans offered
borrowers lower monthly payments and the ability to keep up with the Jones by buying bigger houses and more
stuff. It truly got out of control and then recently many of these borrowers began to default on their loans
because they speculated on to many homes at once, leveraged themselves in a risky manner or had their
monthly teaser rate loan suddenly reset to an unaffordable payment.

GGE: Can you show me what these CDOs look like and why they contributed to my cancer?

Doc: Sure. Take a look at the X-Ray below of your Credit Cancer. The bankers call the bottom of the CDO
equity tranches or toxic waste because they consist of these risky subprime loans. When volatility hits this part
of the market these investments do NOT crash they just kind of evaporate leaving investors with little to nothing
from their original investment.
GGE: How did this happen?

Doc: The credit rating firms miscalculated the weakness of the real estate market and the borrowers. The
subprime section of the CDO was more toxic(risky) than anticipated because they use incomplete data to
calculate risk the CDOs could default. The mathematical analysis is complicated and it is an estimated measure
of risk that is not perfect and was wrong.

GGE: Are the issuers of this debt to blame?

Doc: Absolutely! There are conflicts of interest because the rating agencies are paid by the issuers of debt. The
same problem exists in the appraisal business. The appraiser is usually paid their fee by the bank or lender. If
the appraiser gives an honest appraisal that prevents a loan from closing then the lender and real estate agent
will not get paid. There is enormous pressure on appraisers to sometimes "hit the number" (estimate a higher
value than can be proven) if they want to eat each month. These conflicts of interest contributed to the
lending/real estate bubble.

I even know an appraiser who got fired a year ago in Charleston because he told the truth in a Post & Courier
article and said we were in a lending bubble. He did not name any particular bank or broker and the entire
industry turned on him and tried to "throw him under the bus" for being honest.
"I think it's a lending bubble. Lending is out of control. The way some people finance their homes is crazy."
September 14, 2006 - Brad Rundbaken
The Entire Article

30 lenders then had the "gahoonies" to call his employer and request they fire him for making the above
statement. The Appraisal Firm caved to the pressure immediately because they were scared of losing business
from lenders who were clearly in denial and/or ignorant about the status of their own industry. Many of the
lenders that called this company last year are now going out of business. LOL!!!!!!!!!!!!! What a joke! It is
funny how what comes around goes around. The world truly works in mysterious way sometimes.

GGE: So you are saying that the rating agencies and many appraisers are responsible for putting lipstick on a
pig?

Doc: Yes. The appraisal industry has serious isssues to deal with. It is a business with a double edge sword. If
you "hit the number" and intentionally inflate the value of the home and it defaults it could come back to haunt
that appraiser. The very bank or lender who the appraiser was begging and getting business from will turn
around and throw his or her butt in court to make sure the appraiser did a concise job of evaluating the value of
the home. If the data and research in the report does not jive then the appraiser could get fined and lose their
license. Fannie Mae recently addressed the declining market situation by saying:

"Due to recent declining markets and the potential for “the overstatement of property values in appraisal
reports,” Fannie Mae issued an announcement, Collateral Valuation Practices and Declining Markets, July 13.
In the announcement, Fannie reiterated that it expects appraisers to “research, analyze and report on the
factors in the neighborhood that may affect the market value or marketability of the properties in the market
area.”

Since there is no standard industry definition of what constitutes a declining market, Fannie says it is within the
appraiser’s and lender’s discretion to determine if the appraisal accurately reflects the current market
conditions. The appraiser’s role is to provide the lender with an accurate and adequately supported opinion of
value and an accurate description of the property."

GGE: So Doc my Credit Cancer spread because of the securitization of loans on Wall St. which allowed
virtually anyone to get a loan. The rating agencies, issuers of debt, and some appraisers are in bed together and
allowed for loose credit policies and valuation. This caused home prices to continue to escalate and demand just
kept increasing.

Doc: Yes. Probably a pivotal point in the housing and credit market came courtesy of Alan "The Putz"
Greenspan right after 9/11. Greenputz cut interest rates 15 times during a time of high volatility in the stock
market in order to keep the economy going to avoid a recession. This strategy just fed the housing/lending
bubble because these interest cuts put the Treasury Printing Presses into overdrive and flooded the markets with
liquidity. It was during this time frame that home values really took off like a rocket but other demographic
measurements and economic indicators did not support the appreciation. See below:

Greenputz even made comments about the lending industry that gave borrowers a false sense of security
regarding some of the riskier loans. This made many borrowers feel like interest only ARMs might be a better
deal especially if lenders offered more financing alternatives. Below is an example.

"American consumers might benefit if lenders provided greater mortgage product alternatives to the
traditional fixed- rate mortgage,'' Greensputz said in a speech to the Credit Union National Association in
Washington on 2/22/2004.
Lenders took his advice. Borrowers jumped at the opportunity. Everyone suffered the consequences.Yes, it was
only a few years ago that both Greenputz and National Association of Realtors Chief Economist David Lereah
were encouraging homeowners to take on adjustable rate mortgages and other largely unregulated, non-
traditional loan products.

GGE: Greenputz and The Fed really shocked and manipulated me, the economy, with those cuts and comments.
I am pissed!

Doc: Well you should be. It was not over after all the short term cuts. Greenputz then decided to raise short term
rates 17 times after he had created an inflationary environment in the housing market that led to unprecedented
appreciation in real estate and the damage was done. It typcially takes about a year or so for these rate hikes to
kick in and they eventually did. The problem was that many borrowers had 2nd mortgages tied to the Prime
Rate and as these rate hikes were directly linked to their 2nd mortgage payments increasing. Many people were
placed in piggy back loans to avoid paying PMI on their homes because at the time of purchase the rates were
so low. These hikes by Greenputz caused payment shock for many homeowners that started the foreclosure
problem which has only gotten worse. These hikes also effected millions of Americans that got greedy and used
their homes as ATMs to pull equity out with a 2nd mortgage to pay for a lifestyle that was excessive based on
their actual income. Many homeowners believed certain real estate agents who were running around saying,
"Real Estate will never go down in price. It is a much better investment than the stock market. Let me show you
how to build spec homes and then flip them and make a huge profit."
Then the real estate speculation market took a life of its own.

GGE: Wow!

Doc: Then you had TV shows trying to glorify the "Flipping" strategy after the gig was up. A local real estate
firm even developed a show called "Flip This House" on A&E at the top of the real estate market. This type of
show can be very misleading to the uneducated real estate investor and give them a false sense of hope on how
to make a quick buck buying and selling homes. It got to a point where many investors in the US thought they
could buy and sell a house like a stock. The problem is that the real estate market is much less liquid than the
stock market. Many developers and speculators are learning that lesson the hard way right now.

GGE: OK, so we know how my Credit Cancer started and spread but how am I doing right now.

Doc: Unfortunately you are getting worse by the day. You will hear guys on TV like Jim "Booooyah" Cramer
cry and flip out on his stupid show about how "Helicopter Ben" Bernanke and The Fed should cut rates. Rate
cuts are not going to prevent foreclosures and lenders from going out of business. It is to late and the damage
has been done!

The next video shows what a hypocrite Cramer is about his own predictions. About a year ago he was taunting
analysts who were trying to tell the American consumer to slow down and be very careful in the real estate
market.

The problem with Cramer's tantrum and idea is it will not help you GGE. There is simply no pent up demand
for housing, no growth in wages, and no way cash strapped consumers can service current debt loads. There is
also no source of jobs that an overheated housing market created. The key question that needs to be answered is
how many QUALITY jobs this economy will add during a slowdown. The employment data often reflects jobs
at Burger King and Temp Companies not the higher paying jobs. Right now any company that is dependent on
the housing and mortgage markets is looking at increasing layoffs. A prime example would be American Home
Mortgage who just layed off approximately 6000 employees on Aug. 3.

GGE: So The Fed can not save me?

Doc: No. You need to pray and ask for a miracle. The fact is that credit spicket has been turned off.
Almost all stated income loans everywhere vanished last Friday (August 3, 2007).
Almost all 2/28 ARMs vanished last Friday.
While this was eventually expected it was not expected by everyone overnight.
Subprime rates have risen by as much as 190 basis points at his organization in just the last 2 weeks!
Many other lending institutions have done the same thing.
The definition of prime has tightened considerably, everywhere.
Any variance from prime raises the mortgage rate.
Small differences in FICO score now matter (sometimes by a lot).
90% LTV rates are higher than 85% LTV rates which are higher than 80% LTV rates.
100% LTV rates are very difficult to come for subprime and even Alt-A.
There were 3 rate increases in the last 2 weeks even as 10 year treasury rates rallied.
Second mortgages have nearly vanished - no market.
2/28 arms - gone.
Someone who is "really clean" but is not prime (but close) and is putting down 20% has had a 70-80 basis point
hike in the last 2 weeks.
GGE: What does this all mean?

Doc: Well as Clubber Lang said to the reporter about his prediction before his fight with Rocky in Rocky III,
"PAIN." You must go through some pain and somewhat of a cleansing effect before the Cancer will go into
remmission. This could take a while and will not happen overnight.

GGE: What about the borrowers who need to refi out of loans that are getting ready to reset?

Doc: They are screwed. The "Exotic" ARMs are going to be much more expensive. Foreclosures are going to
get worse around the country as ARMs reset. We have just seen $197 billion of mortgage resets so far this year.
That is less than we will see in two months (February and March) of next year. The first six months of next year
will see more than the total for 2007 or $521 billion. This suggests to me that the number of foreclosures is due
to rise dramatically from the already high current levels, putting more homes into a weak housing environment.
These homes that are going to see reset prices are for the most part not going to be able to be rolled over into a
traditional 30 year mortgage because there is not going to be enough equity to get a traditional mortgage.
GGE: How does this affect the real estate market?

Doc: New homes in many areas are starting to sell for less than used homes. Normally, a new home sells for a
premium of about 10%, as everything is new. This suggests that existing home prices are going to have to come
down. Prices for new homes are falling and will fall more. As an aside, when you see that median home sales
prices are not falling all that much, what is really happening is that smaller homes, typically bought by new
families and first time buyers are not being sold as they cannot get subprime financing. It does pose a serious
economic risk to the growth of the US economy.

Housing accounts for about 23% of the US economy, when taking into account all housing-related purchases of
furniture, appliances, and items for new homes, according to the Joint Center for Housing Studies at Harvard
University in Cambridge, Massachusetts.

GGE: Doc, what kind of treatment am I going to need to get rid of this Credit Cancer.

Doc: The treatment has already begun and the crap is rolling downhill. The credit markets are pulling their
funding from many lenders and are reassesssing risk in the market. They are going to force future loans have
much better risk assessment and proof to justify the necessary info on the borrower. The lenders who had poor
quality control of their loans will go out of business and new players will fill the void where there is
opportunity. This will take some time but the mortgage industry will survive and come out better in the long
run.

GGE: Thanks Doc for your help and explanations.

Doc: Anytime GGE. Make sure you go home and get some rest because their is going to be more volatility as
your Cancer reacts to the upcoming changes, market adjustments and re-pricing. It looks ugly right now but rest
up and remember the song by Gloria Gaynor, "I Will Survive." You will survive and the sun will continue to
come up each day. This is not Armageddon as Booooyah Cramer "The Clown" would have you believe but
there will be some pain. See you in a couple of months.
 Disclaimer
The research done to gather the data in The Charleston Market Report involves examining thousands of
listings. With this much data inaccuracies will occur. Care is taken in gathering and processing the data and
information within this report is deemed reliable. IT IS NOT GUARANTEED. The real estate market is
cyclical and will have its ups and downs. Past performance cannot determine future performance. The purpose
of the Charleston Market Report is to educate you on current and consistent market conditions by reporting
leading market indicators with the support of traditional real estate data.

This information is offered with the understanding that the author is not engaged in rendering legal, tax or other
professional services. If legal, tax or other expert assistance is required, the services of a competent
professional are recommended. This is a personal newsletter reflecting the opinions of its author. It is not a
production of my employer. Statements on this site do not represent the views or policies of anyone other than
myself.

Investing in real estate is not a get-rich-quick scheme nor is there any guarantee you will make a profit. Every
effort has been made to make this report as complete and accurate as possible. However, there may be
mistakes. Therefore, this report should be used only as a general guide and not as the ultimate source for
making money in real estate.