October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 1
October 21, 2007
Americas: Specialty Finance: Mortgage Finance
Californian home prices are over-valued by 35-40%
House prices are significantly over-valued in California
Our house price model indicates that Californian homes are 35-40% above
the price range implied by current and forecast economic conditions
(compared to 13-14% over-valuation nationally). As of August the median
house price in California was $589K, but economic conditions support
prices between $350-380K; material price declines are likely, in our view.
From 1985 to 2003, 82% of quarterly variation in the OFHEO index for
Californian home prices could be explained by two factors (state-level
disposable income and interest rates); but this relationship broke down in
2004. We believe that sales of “affordability products” (e.g., subprime,
option ARMs) – which spiked in 2004 – drove Californian home prices
above levels supported by economic conditions; now that the secondary
market for these products has evaporated, we expect home prices to
return to normalized levels (as prices fall and disposable incomes grow).
Countrywide and WaMu have high exposure to California
Countrywide and WaMu are disproportionately exposed to Californian
housing risk; in contrast, Fannie Mae and Freddie Mac are under-exposed.
We estimate that California represents 25% of the U.S. mortgage market.
This compares with our estimate of the proportion of mortgage portfolios
backed by homes in California held by Countrywide and WaMu (45-50%
each) versus Fannie and Freddie (15% each). Limited GSE exposure is due
to a conforming loan limit below the median house price in California.
Californian home prices on the cusp of an abyss?
House prices in California have proven surprisingly resilient (e.g., up 2%
year-on-year last August), given the severe curtailment of credit
availability and rising unemployment. However, we believe that a
downturn is imminent, with sales volumes down 52% from the peak (in
January 2005) and inventory (11.8 months) up 100% since last year.
House price depreciation and credit deterioration go hand-in-hand
We anticipate residential mortgage credit deterioration to follow house
price declines in California. Presently, credit quality (in absolute terms) is
better in California versus the national average, but the rate of
deterioration is much worse. For instance, in 2Q07 delinquency rates for
prime ARMs and subprime ARMs rose 92% and 73% year-on-year
respectively in California, versus 53% and 38% nationally.
OUR CALIFORNIAN HOUSE PRICE MODEL
1. From 1985 to 2003, 82% of quarterly variation in the
OFHEO index of Californian home prices could be explained
by only two economic factors: state-level disposable
income and interest rates.
2. This relationship broke down in 2004; sales of
“affordability products” (e.g., subprime, option ARMs,
home equity loans), which spiked in 2004, drove Californian
home prices well-above levels supported by economic
conditions, in our view.
3. Now that the secondary market for these affordability
products has all but disappeared, we expect home prices to
return to normalized levels (i.e. price levels implied by
current and forecast disposable income in California as well
as U.S. ten-year treasury yields); this implies a 35-40% fall.
RELATED RESEARCH
WM (Neutral): “3Q07: A decidedly pessimistic outlook for
mortgage credit trends”, published October 18, 2007.
CFC (Sell): “Anticipating significant write-downs in
3Q2007”, published October 16, 2007.
“Chaos in context: assessing proportionality and adjusting
targets”, published August 21, 2007.
CFC (Sell): “Californian mortgage trends present a risk for
Countrywide”, published April 20, 2007.
CFC (Sell): “Legislative initiatives for the mortgage
predicament look inevitable”, published March 26, 2007.
“Deteriorating subprime fundamentals as a regulatory
catalyst”, published February 9, 2007.
CFC (Sell): “Credit deteriorating, non-prime gain on sale
margins unsustainable”, published January 31, 2007.
“A two-stage hangover for mortgage stocks”, published
November 16, 2007.
James Fotheringham
(212) 902-1913 james.fotheringham@gs.com Goldman, Sachs & Co.
Daniel Zimmerman, CFA
(212) 357-6191 daniel.zimmerman@gs.com Goldman, Sachs & Co.
Monica Gabel
(917) 343-3195 monica.gabel@gs.com Goldman, Sachs & Co.
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The Goldman Sachs Group, Inc. Global Investment Research
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 2
Californian house prices are not supported by economic conditions
1. Our Californian house price model
From 1985 to 2003, 82% of quarterly variation in the OFHEO index of Californian home
prices could be explained by only two economic factors: disposable income (for the state
of California) and interest rates (U.S. ten-year treasury yield); see Exhibit 1.
Exhibit 1: House prices in California are 35%-40% over-valued, relative to forecast economic conditions
Our hitherto highly-predictive model broke in 2004, when sales of “affordability products” (e.g., subprime, option ARMs, home
equity) spiked as a proportion of total mortgage originations.
OFHEO home price index for California
Quarterly since 1Q1985
Disposable Income / Long-term rates
Total disposable income in California as a multiple of the US 10-year treasury yield ($trillion, quarterly since 1Q1985)
100
200
300
400
500
600
700
$5 $10 $15 $20 $25 $30 $35
2Q07
1Q07
2Q06 3Q06 4Q06
1Q06
4Q05
3Q05
2Q05
1Q05
4Q04
3Q04
2Q04
1Q04
R2=82%
GS Economic Forecasts
Disposable income / Long-term rates
4Q2007-4Q2008
From $28 to $31
Subsequent index level = 399.5
Corresponds to $366,790
Current Index level = 636.3
Current Median House Price = $588,970
Source: OFHEO, FactSet, Goldman Sachs Economic forecasts, Goldman Sachs Research estimates.
2. What happened in 2004?
The relationship between Californian house prices and disposable income as a multiple of
long rates broke down in 2004; we believe that aggressive sales of “affordability products”
(e.g., subprime, option ARMs, home equity loans), which spiked in 2004 (see Exhibit 2),
drove Californian home prices well-above levels supported by economic conditions.
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 3
Exhibit 2: What happened in 2004?
Sales of “affordability products” – subprime, Alt A, home equity loans – as a proportion of total
mortgage originations spiked at the start of 2004.
5%
10%
15%
20%
1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07
“Affordability products” as % of total mortgage originations
Subprime, Alt-A, Home Equity
Subprime
Home
Equity
Alt-A
Source: Inside Mortgage Finance.
3. Home prices in California are 35-40% over-valued
Now that the secondary market for these affordability products has all but evaporated, we
expect home prices in California to return to normalized levels (i.e. levels implied by
current and forecast disposable income in California as well as U.S. ten-year treasury
yields); this implies a 35-40% fall.
As of last August the median house price in California was $589K, but economic conditions
support prices between $350-380K (see Exhibit 1); material price declines are likely, in our
view.
While our model is helpful in estimating the magnitude of house price correction due for
the state of California, forecasting the timing of such a correction is trickier; the typical
response of the average Californian home owner to the prospect of falling house prices is
to not sell. Therefore, a correction of 35-40% could take many years to play out.
Californian mortgage credit quality is deteriorating quickly
Mortgage delinquencies in California are catching up to the national average
From 2000 to early 2006, Californian residential mortgage debt performed much better
than both historical and national averages, thanks to double-digit % annual home price
appreciation throughout that period.
Recently, however, home price appreciation in California has flattened out (e.g., up only
2% year-on-year in August 2007), although many counties have experienced declines.
Given the recent decline in investor demand for Californian residential mortgage debt (and,
subsequently, credit availability for consumers) in tandem with rising state unemployment,
we forecast significant house price depreciation leading to credit deterioration in California,
which is already accelerating above the national average (see Exhibit 3).
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 4
Exhibit 3: Mortgage delinquencies up 63% in California in 2Q2007, versus 16% nationally
year-over-year change (%) in loans past due, Mortgage Bankers Association Delinquency Survey
-12.3%
16.5%
46.4%
-2.2%
5.2% 5.3%
9.8%
16.6%
63.0%
59.8%
39.6%
4.2% 1.1%
-16.9% -16.8%
1.2%
7.3% 2.3%
-3.4% -4.8%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07
California United States
Source: Mortgage Bankers Association.
National housing fundamentals get worse before they get better
We continue to believe that the root cause of current credit fears is related to residential
mortgage lending standards which, distinct from that for other asset classes, remain
perversely influenced by secondary market demand for affordability product debt.
We remain bearish on the U.S. housing market; house prices are 13%-14% over-valued
nationally (which, like in California, could take several years to play out), growth in
mortgage debt outstanding continues to fall (driven by house price depreciation and
declines in the home ownership rate), and we have yet to see the worst of residential
mortgage credit deterioration (reset volumes for subprime ARMs are set to peak in March
2008, and recast volumes for option ARMs are set to peak in June 2010).
U.S. housing fundamentals get worse before they get better, in our view. We monitor
these fundamentals in three categories: (1) house prices, (2) growth in mortgage debt
outstanding, and (3) credit.
1. National house prices are 13%-14% over-valued
House prices are over-valued and a correction is underway (see Exhibits 4 and 5). The
median house price in America today ($234K is 13%-14% above the level implied by
current (and forecast) disposable income and rates ($202K-$204K). These two
macroeconomic factors (total U.S. disposable income and the U.S. 10-year treasury yield),
taken together, can explain 93% of the historical variation in house prices reported since
1972 (see Exhibit 4). The reliability of this relationship was even stronger (96%) prior to
2004; since 1Q2004, house prices have deviated significantly from our model.
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 5
Exhibit 4: National house prices are 13%-14% over-valued, relative to forecast economic
conditions
50,000
100,000
150,000
200,000
$250,000
0 50 100 150 200 $250
Median US House Price
Quarterly since 1Q1972
Disposable income / Long-term rates
Total US disposable income as a multiple of the US 10-year treasury yield ($trillion, quarterly since 1Q1972)
R2 = 93% (1972-2007)
R2 = 96% (1972-2003)
GS Economic Forecasts
Disposable income / Long-term rates
2Q2007-4Q2008
From $201 to 207
Subsequent GS House Price Forecast
from $201,655 to $203,634
Current Median House Price = $234,400
2Q04 1Q04
3Q04
1Q05 4Q04
2Q05
3Q05
2Q06 1Q06
3Q06
4Q06
1Q07
2Q07
4Q05
Source: Census Bureau, FactSet, Goldman Sachs Economic forecasts, Goldman Sachs Research estimates.
As a check, we compared the current median house price to that implied by a long-term
(35-year) trend line; current prices are 8%-14% above the long-term trend (see Exhibit 5).
Deviation from the long-term trend, again, started in 1Q2004.
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 6
Exhibit 5: National house prices are 8%-14% over-valued, relative to the long-term trend
line
Median US House Price
Quarterly since 1Q1972
50,000
100,000
150,000
200,000
$250,000
1Q72 1Q74 1Q76 1Q78 1Q80 1Q82 1Q84 1Q86 1Q88 1Q90 1Q92 1Q94 1Q96 1Q98 1Q00 1Q02 1Q04 1Q06
Recent “bubble”
commenced 1Q04
Subsequent GS House Price Forecast
from $200,807 to $215,749
Current Median House Price = $234,400
Late seventies “housing bubble”
Late eighties “housing bubble”
Source: Census Bureau, FactSet, Goldman Sachs Economic forecasts, Goldman Sachs Research estimates.
In 1Q2004, house prices started trending above levels hitherto predicted (quite accurately)
by two macro factors: disposable income and rates. Also in 1Q2004, house prices broke
away from a 35-year straight-line trend.
Above-trend house price progression (beginning in 1Q2004) coincided with increased sales
of non-traditional mortgage products (see Exhibit 2). Given that lenders – inspired by
secondary market demand for high-yielding debt – often pay their captive sales force
higher commission rates for sales of non-traditional (higher-margin) products, we are
sympathetic to the possibility that commission-encouraged sales of nontraditional
(“affordability”) mortgage products may have contributed significantly to the housing
bubble.
2. Growth in mortgage debt outstanding (MDO) continues to fall
The percent change in mortgage debt outstanding is the sum of percent changes in
median house prices, the U.S. home ownership rate, the average loan-to-value ratio, and
the number of U.S. households:
%Δ MDO = %Δ house prices + %Δ homeownership + %Δ loan-to-value + %Δ households
Historically, these factors, taken together, have had a consistent and positive impact on the
increasing growth in MDO (since 1995). However, recent declines in house prices and the
homeownership rate have had an impact on MDO growth (see Exhibit 6). Our forecast for
house price depreciation of 13%-14% (over three years) and a further decline in the
homeownership rate (back to 65%-66%) implies further downside for MDO growth.
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 7
Exhibit 6: Growth in total U.S. mortgage debt outstanding (MDO) continues to fall
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Forecasts
Actuals House price depreciation
Falling homeownership rate
%Δ MDO = %Δ house prices + %Δ homeownership + %Δ loan-to-value + %Δ households
Change in mortgage debt outstanding (MDO)
%Δ year-on-year
Source: Mortgage Bankers Association, Census Bureau, FactSet, Goldman Sachs Economic forecasts, Goldman Sachs
Research estimates.
3. We have yet to see the worst of residential mortgage credit deterioration
Our estimated national schedule for adjustable rate mortgage resets (when low-interest
teaser rates reset to current rates) and recasts (when the pay-option expires and borrowers
are required to pay the fully-amortized rate) suggests that the worst of residential
mortgage credit deterioration has yet to be seen across this country.
Reset volumes for subprime adjustable-rate mortgages peak (at $42 bn) in March 2008;
recast volumes for pay-option adjustable-rate mortgages peak (at $24 bn) in June 2010
(see Exhibit 7).
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 8
Exhibit 7: We have yet to see the worst of residential mortgage credit deterioration
across America, in our view
5
10
15
20
25
30
35
40
ARM reset and recast schedule
$ billions
0
2007 2008 2009 2010 2011
reset volumes for
subprime ARMs set to
peak in March 2008
recast volumes for payoption
ARMs set to
peak in June 2010
Subprime ARMs
Pay-option ARMs
Source: Goldman Sachs Research estimates.
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 9
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or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific
recommendations or views expressed in this report.
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Disclosures
Coverage group(s) of stocks by primary analyst(s)
James Fotheringham: America-Mortgage Finance, America-Specialty Finance.
America-Mortgage Finance: Countrywide Financial Corp., Fannie Mae, Freddie Mac, Washington Mutual, Inc..
America-Specialty Finance: Advanta Corp., AerCap Holdings N.V., Aircastle Ltd., Ambac Financial Group, Inc., American Express Co., AmeriCredit
Corp., Assured Guaranty Ltd., H&R Block, Inc., CapitalSource Inc., CIT Group Inc., Discover Financial Services, First Marblehead Corp., Genesis Lease
Ltd., iStar Financial Inc., Jackson Hewitt Tax Service Inc., MBIA Inc., Nelnet Inc., NewStar Financial, Inc., Security Capital Assurance Ltd., SLM Corp..
Company-specific regulatory disclosures
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covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.
Goldman Sachs beneficially owned 1% or more of common equity (excluding positions managed by affiliates and business units not required to be
aggregated under US securities law) as of the month end preceding this report: Freddie Mac ($53.05)
Goldman Sachs has received compensation for investment banking services in the past 12 months: Countrywide Financial Corp. ($15.23), Fannie
Mae ($58.85), Freddie Mac ($53.05) and Washington Mutual, Inc. ($29.09)
Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Countrywide Financial
Corp. ($15.23), Fannie Mae ($58.85), Freddie Mac ($53.05) and Washington Mutual, Inc. ($29.09)
Goldman Sachs has received compensation for non-investment banking services during the past 12 months: Countrywide Financial Corp. ($15.23),
Fannie Mae ($58.85), Freddie Mac ($53.05) and Washington Mutual, Inc. ($29.09)
Goldman Sachs had an investment banking services client relationship during the past 12 months with: Countrywide Financial Corp. ($15.23), Fannie
Mae ($58.85), Freddie Mac ($53.05) and Washington Mutual, Inc. ($29.09)
Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: Countrywide Financial
Corp. ($15.23), Fannie Mae ($58.85), Freddie Mac ($53.05) and Washington Mutual, Inc. ($29.09)
Goldman Sachs had a non-securities services client relationship during the past 12 months with: Countrywide Financial Corp. ($15.23), Fannie Mae
($58.85), Freddie Mac ($53.05) and Washington Mutual, Inc. ($29.09)
Goldman Sachs has managed or co-managed a public or Rule 144A offering in the past 12 months: Countrywide Financial Corp. ($15.23), Fannie
Mae ($58.85) and Freddie Mac ($53.05)
Goldman Sachs makes a market in the securities: Countrywide Financial Corp. ($15.23), Fannie Mae ($58.85), Freddie Mac ($53.05) and Washington
Mutual, Inc. ($29.09)
Goldman Sachs is a specialist in the relevant securities and will at any given time have an inventory position, "long" or "short," and may be on the
opposite side of orders executed on the relevant exchange: Fannie Mae ($58.85) and Washington Mutual, Inc. ($29.09)
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 10
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Buy Hold Sell Buy Hold Sell
Global 29% 59% 12% 39% 32% 29%
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N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S
2004 2005 2006 2007
15
20
25
30
35
40
45
50
1,000
1,100
1,200
1,300
1,400
1,500
1,600
OP NA
Nov 4
OP
Sep 14
NA
Jan 31
S
Nov 16
Countrywide Financial Corp. (CFC)
Goldman Sachs rating and stock price target history
Currency: U.S. Dollar
Source: Goldman Sachs Investment Research for ratings and price targets; Reuters for daily closing prices as of 10/02/07.
Rating
Price target
Price target at removal
S&P 500; pricing by
FactSet
Covered by James Fotheringham,
as of Nov 16, 2006
Not covered by current analyst
New rating system as of 6/26/06
35 34.93 33
32
27
20
18
Stock Price
Index
Price
The price targets shown should be considered in the context of all prior published Goldman Sachs research, which may or
may not have included price targets, as well as developments relating to the company, its industry and financial markets.
N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S
2004 2005 2006 2007
32.50
35.00
37.50
40.00
42.50
45.00
47.50
1,000
1,100
1,200
1,300
1,400
1,500
1,600
U NA
Nov 4
IL
Oct 11
N
Jun 26
Washington Mutual, Inc. (WM)
Goldman Sachs rating and stock price target history
Currency: U.S. Dollar
Source: Goldman Sachs Investment Research for ratings and price targets; Reuters for daily closing prices as of 10/02/07.
Rating
Price target
Price target at removal
S&P 500; pricing by
FactSet
Covered by James Fotheringham,
as of Nov 16, 2006
Not covered by current analyst
New rating system as of 6/26/06
46.77
47
46
43
42
43
44
Stock Price
Index
Price
The price targets shown should be considered in the context of all prior published Goldman Sachs research, which may or
may not have included price targets, as well as developments relating to the company, its industry and financial markets.
N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S
2004 2005 2006 2007
50
55
60
65
70
75
1,000
1,100
1,200
1,300
1,400
1,500
1,600
NA N
Nov 16
Freddie Mac (FRE)
Goldman Sachs rating and stock price target history
Currency: U.S. Dollar
Source: Goldman Sachs Investment Research for ratings and price targets; Reuters for daily closing prices as of 10/02/07.
Rating
Price target
Price target at removal
S&P 500; pricing by
FactSet
Covered by James Fotheringham,
as of Nov 16, 2006
Not covered by current analyst
New rating system as of 6/26/06
74
73
Stock Price
Index
Price
The price targets shown should be considered in the context of all prior published Goldman Sachs research, which may or
may not have included price targets, as well as developments relating to the company, its industry and financial markets.
N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S
2004 2005 2006 2007
40
50
60
70
80
1,000
1,100
1,200
1,300
1,400
1,500
1,600
IL NA
Nov 4
N
Nov 16
Fannie Mae (FNM)
Goldman Sachs rating and stock price target history
Currency: U.S. Dollar
Source: Goldman Sachs Investment Research for ratings and price targets; Reuters for daily closing prices as of 10/02/07.
Rating
Price target
Price target at removal
S&P 500; pricing by
FactSet
Covered by James Fotheringham,
as of Nov 16, 2006
Not covered by current analyst
New rating system as of 6/26/06
66
77
Stock Price
Index
Price
The price targets shown should be considered in the context of all prior published Goldman Sachs research, which may or
may not have included price targets, as well as developments relating to the company, its industry and financial markets.
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 11
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Ratings, coverage groups and views and related definitions
Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy
or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as
a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to
a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage
group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment
recommendations focused on either the size of the potential return or the likelihood of the realization of the return.
Return potential represents the price differential between the current share price and the price target expected during the time horizon associated
with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in
each report adding or reiterating an Investment List membership.
Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at
http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlook
on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12
months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the
following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over
the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.
Not Rated (NR). The investment rating and target price, if any, have been removed pursuant to Goldman Sachs policy when Goldman Sachs is
acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended
(RS). Goldman Sachs Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for
this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC).
Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable.
Not Meaningful (NM). The information is not meaningful and is therefore excluded.
Ratings, coverage views and related definitions prior to June 26, 2006
Our rating system requires that analysts rank order the stocks in their coverage groups and assign one of three investment ratings (see definitions
below) within a ratings distribution guideline of no more than 25% of the stocks should be rated Outperform and no fewer than 10% rated
Underperform. The analyst assigns one of three coverage views (see definitions below), which represents the analyst's investment outlook on the
coverage group relative to the group's historical fundamentals and valuation. Each coverage group, listing all stocks covered in that group, is
available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html.
Definitions
Outperform (OP). We expect this stock to outperform the median total return for the analyst's coverage universe over the next 12 months. In-Line
(IL). We expect this stock to perform in line with the median total return for the analyst's coverage universe over the next 12 months. Underperform
(U). We expect this stock to underperform the median total return for the analyst's coverage universe over the next 12 months.
Coverage views: Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical
fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's
historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage
group's historical fundamentals and/or valuation.
Current Investment List (CIL). We expect stocks on this list to provide an absolute total return of approximately 15%-20% over the next 12 months.
We only assign this designation to stocks rated Outperform. We require a 12-month price target for stocks with this designation. Each stock on the
CIL will automatically come off the list after 90 days unless renewed by the covering analyst and the relevant Regional Investment Review
Committee.
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The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and pursuant
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European Union.
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 12
European Union: Goldman Sachs International, authorised and regulated by the Financial Services Authority, has approved this research in
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This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we
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