Confidential & Proprietary

June 2012

Buying & Selling Distressed Mortgage Portfolios Forum

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Disclaimer and Confidentiality

Copyright © 2012 Carrington Holding Company, LLC

No Offer or Solicitation Regarding Securities. This document is for general information purposes only. This document is neither anoffer to sell nor a solicitation of an offer to buy any security mentioned herein. Securities related to Carrington funds (“CarringtonSecurities”) are offered only in jurisdictions where permissible by offering documents available through qualified securities dealers orbanks.

No Warranties; Estimates Subject to Change; Not Advice. This document is based upon information and assumptions (includingfinancial, statistical, or historical data and computations based upon such data) that we consider reliable and reasonable, but we do notrepresent that such information and assumptions are accurate or complete, or appropriate or useful in any particular context, includingthe context of any investment decision, and it should not be relied upon as such. Estimates expressed herein constitute CarringtonHolding Company’s present judgment and are subject to change without notice. They should not be construed as either projections orpredictions of value, performance, or results, nor as legal, tax, financial, or accounting advice. No representation is made that anystrategy, performance, or result illustrated herein can or will be achieved or duplicated. The effect of factors other than thoseassumed, including factors not mentioned, considered, or foreseen, by themselves or in conjunction with other factors, could producedramatically different performance or results. Investors considering purchasing a Carrington Security should consult their own financialand legal advisors for information about such security, the risks and investment considerations arising from an investment in suchsecurity, the appropriate tools to analyze such investment, and the suitability of such investment in such investor’s particularcircumstances.

Confidential; Not for Public Disclosure. This document of Carrington Holding Company, LLC is confidential and not intended for publicreview. No recipient of this document shall use it as a basis for any publication or research report that will be published, distributed orposted in any public domain. This document of Carrington Holding Company, LLC shall not be disclosed to any other party except asrequired by law, regulatory requirements, court order or discovery procedures. No matter contained in the attached document may bereproduced or copied by any means without the prior written consent of Carrington Holding Company, LLC.

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Unlike other Financial Markets, 

Investing in Residential Housing is NOT a Zero‐Sum Proposition

Can offer an Alignment of Interest between Investors, Borrowers and Policymakers

Residential Investment Themes

Investors Play a Critical Role in BOTHthe Recovery and the Future of the Housing Market 

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Investors play a critical role in the cleanup and future of the housing market

Discussion Summary & Themes

Residential Investment Themes

Keep borrower in the home

Keep the property cash‐

flowing

Preserve value of property

Investors and borrowers interests should be aligned during the cleanup phase… 

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Carrington:  Overview

Mortgage Loan Servicer

Tactical ModificationsCustomized Dispositions

Property Management

Rental ManagementDue Diligence ‐ Site Visits

Property Valuation

Mortgage Lending

RefinancingResolution Path Selection

Real Estate Brokerage

Property DispositionsQualitative Market Data

Investment Management Resources

Active residential mortgage loan investor since 2004Acquired in excess of $26 billion in mortgage loans since inception

Utilize internal operational infrastructure to manage pools of distressed loans & residential rental properties

Scaled servicing platform

Extensive default management and loss mitigation capabilities

Fannie Mae on Tenant‐in‐Place Program

Currently managing properties in 18 states for Fannie Mae

Property manager proprietary Buy‐to‐Rent program

Organically grown underwriting and loan origination platform

Focused on quality loan production versus volume

42 branch locations throughout U.S.

Control over property disposition process

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Residential Investment Strategies

Non‐Performing Loan Acquisition & Resolution

Single Family Rental Strategy

Non‐Agency Loan Origination

Control‐based investment strategy in single family residential mortgage loans

“High touch” special servicing capabilities 

Loan mods, short sales, refinancings and rental conversions contribute to returns

The “New” asset class – bringing a regional asset class to institutional world

Developing national strategy for single family rentals

Homeownership is declining – need to reconstitute vacant  homes into rental stock

Private Label – Mortgage Lending 2.0

Fill liquidity gap in private label lending market

Thought leadership necessary to structure new market with proper alignments

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Carrington:  Residential Investment Strategies

Work with struggling homeowners to offer affordable modified mortgage loan payments

Assist consumers during the transition from homeowners to tenants

Remove excess vacant homes from property markets

Re‐vitalize neighborhoods and communities through property rehabilitation

Help reduce government’s footprint in US mortgage lending market

Strategies consistent with US Government policy & housing initiatives:

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Residential Investment Spectrum

2008 2009 2010 2011 2012 2013 2014 2015 2016

Non‐Agency RMBS

NPLs

Single Family Rentals

Non‐Agency Lending 2.0

Evolution of housing investment opportunities since onset of the global financial crisis

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Single Family Housing Statistics

35.1% peak‐to‐trough home price decline

2.6% YoY decline (Mar ‘12 vs Mar ‘11)

Prices have remained range bound since 2009

Trends vary amongst property markets

• Phoenix: Cash investors propping up values

• Atlanta: Lagging market that continues to decline

• Austin: Positive migration is increasing demand

Housing Affordability Index is at all time high

Median Income relative to Qualifying Income

Consumer credit impacted during crisis

Tight underwriting limits loan availability

Affordability not translating into high demand

Source:  S&P Case Shiller, National Association of Realtors

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Single Family Housing Statistics

Large pipeline of delinquent borrowers

Trend is clearly moving in the right direction

Increased efforts to work with borrowers

Strategic resolutions include loan modifications

Visible inventory = Existing Home Sales Inventory

Pending Inventory = Foreclosures

Significant inventory is available on market

Pipeline of distressed properties is increasing

Source:  Mortgage Bankers Association, National Association of Realtors

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Single Family Housing Statistics

Source:  Lender Processing Services

Aging foreclosure inventory:  42% of loans have had no payment in over 24 months

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Single Family Housing Statistics

Source:  Lender Processing Services, RealtyTrac

US Monthly Foreclosure Activity

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Non‐Performing Loans

Top 10 banks hold well over $150bn in delinquent 1st lien mortgage loans*

Delinquent and defaulted mortgage loans are generally priced to liquidation

Liquidation timelines vary significantly among states

Estimated Foreclosure Timeline by State**

Non‐Performing Loans

* Source: FDIC call reports** Timelines based upon Carrington experience

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NPL Strategy

Control‐based strategy 

Optionality exists through “high touch” resolution & disposition strategies

Evaluate strategies aimed at keeping borrowers in homes and asset cash flowing

NPL Acquisition & Resolution

Property Sale

Refinance

Loan Sale

Legend

Current Mortgage

Government RefiProgram

Prepay at Par

Refinance after Debt Forgiveness

Re-Default

Delinquent Mortgage

Deed-in-Lieu /Deed-for-Lease

Loan Modification

Short Sale

Foreclose and Liquidate or Rent

Secondary Whole Loan Sale

Secondary Whole Loan Sale

Customized Disposition Plan for each Loan

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Non‐Performing Loans

Asymmetric risk/return profile for distressed whole loan pools

Basic loan pricing models are generally priced to a liquidation scenario

Liquidation timelines are state specific 

Judicial versus non‐judicial foreclosure has the largest impact on timelines

NPL Risk & Return Profile

Generic Pricing by State

Source:  Carrington Capital Management, LLC‐ “Median Price” means the generic pricing analysis assumes median home price in the particular state‐ “Constant Price” means the generic pricing analysis assumes a constant $200,000 home price for all states

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Non‐Performing Loans

Substantial capital cushion with asymmetric risk/return profile

Low cost basis can provide meaningful downside protection

• Current market prices for non‐performing loans is generically 60% of current property value

• Modeled home values would have to decline 27.25% from current levels to impair invested capital

• Modeled probability of $1 loss of invested capital is less than 1.0%

6.0% Broker

6.75% Carry Costs

‐10.25% HPD

‐3% HPD 

‐17% HPD

‐27% HPD

‐50% HPD

0% HPD 

Home Price (“HP”) Simulation(Stressed Vol over 3‐year Time Horizon)

100.00%

87.25%

77.00%

60.00%

37.25%

Acquisition Price

Price = 60% of Property Value

50% probabilityhome values decline LESS THAN 10.25%

50% probability home values decline MORE THAN 10.25%

Base HPD

Mean Stressed HPD:  10.25%*Standard Deviation: 7.11%

Price as % of Property Value

Less than 1.0% probability of $1 loss of invested capital at 

60% of current property value

Assumes 3‐year Time Horizon2.25% Annual Carry Costs

6.00% Broker Fee at Liquidation

At market price of 60.0% to property value, home prices can decline an 

additional 17.00% from stress case (27.25% in total) 

prior to a loss of $1 of invested capital.

Strength of Invested Capital(Probability of $1 Loss on Investment)

* Generic stressed case home price depreciation. Stressed for median income and unemployment variables.

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Ability to perform loan level due diligence

Ability to perform exterior site visits to reconcile property value

Ability to review all servicing notes and correspondence with borrowers

Non‐Performing Loans

Transparency

Due Diligence

Challenges

Typical diligence pull through rates range between 70% to 90%*

Review loan files for compliance, chain of title, litigation

Accounting constraints keep bank sellers on the sidelines

AG Settlement temporarily put some bank NPL seller programs on hold

Uncertainty surrounding foreclosure moratoriums and legislated modifications

* Based upon Carrington Capital Management, LLC whole loan acquisition experience

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Homeownership Statistics

Structural shift or reversion to normal level?  69.25% peak in homeownership Since 2004 peak in homeownership rate:

• Owners have increased 1.8% (absolute terms)

• Renters have increased 18.5% (absolute terms)

• Vacant homes increased 14.1% (absolute terms)

Assume 100% of 90+ DQs/FCs become renters

• Between 3 – 4 million increase in rent demand

• New formations could add 2+ million in demand

Source:  U.S. Census Bureau, Mortgage Bankers Association, Carrington Capital Management

Total Housing Units 132,596

Vacant housing units 18,474

Owner occupied housing units a 74,601

Renter occupied housing units 39,521

Occupied housing units b 114,122

Homeownership Rate (Owner occ. units / Occ. units) 65.37

Mortgage Loans  c 47,000

90+ days plus FC (%) d 8.91

90+ days plus FC (#) e = [c x d] 4,188

Adjusted Owner occupied housing units f = [a ‐ e] 70,413

Adjusted Homeownership rate (%) g = [f / b]  61.70

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REO Rental Strategy

Increased rental demand, low vacancies and stable rental rates

Multiple sources to acquire properties 

• Auctions, bulk opportunities through banks, MLS, GSEs and NPL loans

Consistent with policy efforts to reduce inventory and reconstitute housing stock

Source:  Mortgage Bankers Association, Carrington Capital Management

REO Rental

Potential New Rental Demand/Stock

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Single Family Rental Strategy

“Even the Oracle of Omaha, billionaire Warren Buffett, told CNBC thatdistressed single‐family homes were one of the best investmentopportunities around, asserting, ‘…It’s a leveraged way of owning a verycheap asset now and I think that’s probably as an attractive an investment asyou can make.’” ‐Warren Buffett, Forbes, April 2012

“…rental markets are strengthening in some areas of the country, reflectingin part a decline in the homeownership rate. Reducing some of the barriersto converting foreclosed properties to rental units will help redeploy theexisting stock of houses in a more efficient way. Such conversions might alsoincrease lenders' eventual recoveries on foreclosed and surrenderedproperties.” – Board of Governors of the Federal Reserve System, HousingWhite Paper, January 2012

“The best opportunities for single‐family REO‐to‐rental investors are in Floridaand the Midwest, which boast high cap rates and a large stock of potentialREO properties” – CoreLogic, Market Pulse, April 2012

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REO Rental Strategy

Rent is not linearly correlated with home prices 

Net cash flow yield targets drive property price point range

Higher running yield targets generally garner the focus of lower value properties

Average Monthly Rent Payment & Rent YieldProperty Value Distribution

Rent‐to‐Property Value Ratio

Source:  Carrington Property Services, LLC

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REO Rental Strategy

Number of Occupants: 3.4 Number of Minors/Property: 1.5 Rent-To-Income: 20% Average Household Income: $6,200/month

Typical Floor Plan

Average Market Value: $120,000 Average Monthly Rent: $1,222 Target Rental Yield: 12%-16% Total Square Footage: 1,750 square feet Rent/Square Foot: $0.70 Bedrooms: 3.3 Bathrooms: 2.3 Total Rooms: 6.8

Typical Tenant Profile

Typical Property Profile

Source:  Carrington Property Services, LLC

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Rental Strategy

Acquire in select markets with significant distressed supply

Acquire, rehabilitate, identify tenants and manage rental portfolio

Investment Approach

Importance of internal operational capabilities and controls

Risks of outsourcing key functions

Ability to manage and control key aspects of rental process is important

Target Properties

Prefer property characteristics conducive to effective rental management

Target square foot range, bed/bath counts and prefer newer/renovated properties

Limit properties with additional maintenance requirements (e.g. swimming pools)

REO Rental Strategy

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REO Rental Strategy

Policy initiatives aimed at GSE REO portfolio is slow to proceed

Operational challenges for new entrants 

• Technology, pricing, acquisition, management

Empirical data concerning key pricing variables 

Limited historical data exists on single family rentals for non‐operators to accurately explore economics…

Select Variables usedto assess Rental Strategy

Challenges to Strategy

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Carrington:  Single Family Rental Platform

Portfolio

34,000+ properties managed

10,000+rental assets managed

13 affiliate operating companies Approx. 1,800+ full-time and contract employees

Vendor management Business analytics Acquisition and disposition tracking

Core portfolio systems Financial results and reporting

National network of field assessors for asset evaluation Manage approx. 5,200 properties, 3,200 in rental Disposed of 34,000 assets and managed 10,000 rental units to date

Established relationships with hundreds of local contractors

Local ContractorsLocal Contractors

RNT Logistics

Over 850 agents and over 40 offices licensed in 22 states

40 employees Two regional offices Nationwide coverage

Over 2,000 real estate professionals in national preferred network

CPS National NetworkCPS National Network

Property Preservation

Technological Infrastructure

Property Sales

Asset Management

Over 35 employees Provide services in 26

states

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Private Label Mortgage Lending

Prior to 2008, US Gov’t provided explicit or implicit support to 50‐60% of loan volume

Recently, Government sponsorship has reached levels approaching 90%

Private label securitization market is extremely limited and economics are challenged

Government versus Private Sector Mortgage Originations

US Mortgage Market –Supplier of Loans

Non‐Agency Mortgage Lending 2.0

Source:  Inside Mortgage Finance

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Private Label Mortgage Lending

Thought and action‐oriented leadership in the private label market is required 

Must improve upon the market’s past inadequacies

Alignment of interests between the lender and the borrower is critical

All participants in the process must have “skin in the game”

The New Private Label Market

Borrowers must be able to provide documentation for fully underwritten loans

• Borrowers must consent to ongoing credit/income requests of servicers

• Re‐think Gramm‐Leach‐Bliley

Lenders must provide plain‐English disclosure 

Borrowers should have complete understanding of loan terms and obligations

Bilateral TransparencyAnd Engagement

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Non‐Performing Loan (“NPL”) and Rental strategies are often consistent with policymaker’s goals

In early innings of developing the Buy‐to‐Rent strategy for residential housing on a national scale

• Concerns about the number of new players that lack the infrastructure and experience

• Concerns about the potential for “rental” operators to become property “flippers”

Future of private lending has yet to be determined

• Must rethink the relationship between the borrower, lender and investor  

• Successful non‐agency market needs to be built on transparency, alignment of interest 

• Rules must be clear and cannot be unilaterally changed

Post election, the discussion concerning long‐term plans for the GSEs will heat up

Investors need to be engaged now to help define the future of the private lending market

Discussion Summary & Themes

Residential Investment Themes