UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

     (Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-16577

(Exact name of registrant as specified in its charter).

Michigan		38-3150651
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)
5151 Corporate Drive, Troy, Michigan		48098-2639
(Address of principal executive offices)		(Zip code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.

Yes þ No o.

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o.

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ.

     As of July 29, 2009, 468,529,878 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.

 

 

FORWARD-LOOKING STATEMENTS

     This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Flagstar Bancorp, Inc. (“Flagstar” or the “Company”) and these statements are subject to risk and uncertainty. Forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, include those using words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions.

     There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under the heading “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and under Part II, Item 1A of this Form 10-Q, including: (1) our business has been and may continue to be adversely affected by conditions in the global financial markets and economic conditions generally; (2) general business, economic and political conditions may significantly affect our earnings; (3) we depend on our institutional counterparties to provide services that are critical to our business. If one of more of our institutional counterparties defaults on its obligations to us or becomes insolvent, it could have a material adverse affect our earnings, liquidity, capital position and financial condition; (4) defaults by another larger financial institution could adversely affect financial markets generally; (5) if we cannot effectively manage the impact of the volatility of interest rates, our earnings could be adversely affected; (6) the value of our mortgage servicing rights could decline with reduction in interest rates; (7) certain hedging strategies that we use to manage our investment in mortgage servicing rights may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates; (8) we use estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; (9) changes in the fair value or ratings downgrades of our securities may reduce our stockholders’ equity, net earnings, or regulatory capital ratios; (10) current and further deterioration in the housing and commercial real estate markets may lead to increased loss severities and further increases in delinquencies and non-performing assets in our loan portfolios. Additionally, the performance of our standby and commercial letters of credit may be adversely affected as well. Consequently, our allowance for loan losses and guarantee liability may not be adequate to cover actual losses, and we may be required to materially increase our reserves; (11) our secondary market reserve for losses could be insufficient; (12) our home lending profitability could be significantly reduced if we are not able to resell mortgages; (13) our commercial real estate and commercial business loan portfolios carry heightened credit risk; (14) our ability to borrow funds, maintain or increase deposits or raise capital could be limited, which could adversely affect our liquidity and earnings; (15) our inability to realize our deferred tax assets may have a material adverse affect on our consolidated results of operations and our financial condition; (16) we may be required to raise capital at terms that are materially adverse to our stockholders; (17) our holding company is dependent on the Bank for funding of obligations and dividends; (18) future dividend payments and equity repurchases are restricted by the terms of the Treasury’s equity investment in us; (19) we may not be able to replace key members of senior management or attract and retain qualified relationship managers in the future; (20) the network and computer systems on which we depend could fail or experience a security breach; (21) our business is highly regulated; (22) our business has volatile earnings because it operates based on a multi-year cycle; (23) our loans are geographically concentrated in only a few states; (24) we are subject to heightened regulatory scrutiny with respect to bank secrecy and anti-money laundering statutes and regulations; (25) we are a controlled company that is exempt from certain NYSE corporate governance requirements; and (26) current and further deterioration in the housing market, as well as the number of programs that have been introduced to address the situation by government agencies and government sponsored enterprises, may lead to increased costs to service loans which could affect our margins or impair the value of our mortgage servicing rights.

     The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

FLAGSTAR BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2009
TABLE OF CONTENTS

PART I. — FINANCIAL INFORMATION
Item 1. Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 3. Quantitative and Qualitative Disclosures about Market Risk			51
Item 4. Controls and Procedures			51
PART II. — OTHER INFORMATION
Item 1. Legal Proceedings			52
Item 1A. Risk Factors			52
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 3. Defaults upon Senior Securities			52
Item 4. Submission of Matters to a Vote of Security Holders			52
Item 5. Other Information			52
Item 6. Exhibits			53
SIGNATURES			54
EX-11
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

     The unaudited condensed consolidated financial statements of the Company are as follows:

     Consolidated Statements of Financial Condition — June 30, 2009 (unaudited) and December 31, 2008.

     Unaudited Consolidated Statements of Operations — For the six and three months ended June 30, 2009 and 2008.

     Consolidated Statements of Stockholders’ Equity and Comprehensive Loss — For the six months ended

            June 30, 2009 (unaudited) and for the year ended December 31, 2008.

     Unaudited Consolidated Statements of Cash Flows — For the six months ended June 30, 2009 and 2008.

     Unaudited Notes to Consolidated Financial Statements.

Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(In thousands, except for share data)

		At June 30,				At December 31,
		2009				2008
		(Unaudited)
Assets
Cash and cash items		$	687,872			$	300,989
Interest-bearing deposits			236,317				205,916
Cash and cash equivalents			924,189				506,905
Securities classified as trading			1,603,480				542,539
Securities classified as available for sale			734,827				1,118,453
Other investments — restricted			39,300				34,532
Loans available for sale ($2,974,186 at fair value on June 30, 2009)			3,009,740				1,484,680
Loans held for investment			8,417,849				9,082,121
Less: allowance for loan losses			(474,000	)			(376,000	)
Loans held for investment, net			7,943,849				8,706,121
Total interest-earning assets			13,567,513				12,092,241
Accrued interest receivable			56,104				55,961
Repossessed assets, net			131,620				109,297
Federal Home Loan Bank stock			373,443				373,443
Premises and equipment, net			244,229				246,229
Mortgage servicing rights at fair value			658,209				511,294
Mortgage servicing rights, net			6,083				9,469
Other assets			698,219				504,734
Total assets		$	16,423,292			$	14,203,657
Liabilities and Stockholders’ Equity Liabilities
Deposits		$	9,470,673			$	7,841,005
Federal Home Loan Bank advances			5,151,907				5,200,000
Security repurchase agreements			108,000				108,000
Long term debt			300,207				248,660
Total interest-bearing liabilities			15,030,787				13,397,665
Accrued interest payable			36,453				36,062
Secondary market reserve			45,000				42,500
Other liabilities			395,531				255,137
Total liabilities			15,507,771				13,731,364
Commitments and Contingencies
Stockholders’ Equity
Preferred stock $0.01 par value, liquidation value $1,000 per share 25,000,000 shares authorized; 266,657 issued and outstanding at June 30, 2009			3				—
Common stock $0.01 par value, 750,000,000 shares authorized; 468,529,878 and 83,626,726 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively			4,685				836
Additional paid in capital — preferred			241,125				—
Additional paid in capital — common			443,070				119,024
Accumulated other comprehensive loss			(96,448	)			(81,742	)
Retained earnings			323,086				434,175
Total stockholders’ equity			915,521				472,293
Total liabilities and stockholders’ equity		$	16,423,292			$	14,203,657

The accompanying notes are an integral part of these consolidated financial statements.

Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(Unaudited)
Interest Income
Loans		$	156,761			$	177,582			$	315,383			$	353,876
Mortgage-backed securities held to maturity			—				—				—				15,576
Securities classified as available for sale and trading			30,659				21,171				56,136				36,761
Interest-bearing deposits			426				1,376				1,283				4,145
Other			2				435				24				1,059
Total interest income			187,848				200,564				372,826				411,417
Interest Expense
Deposits			66,547				70,817				133,897				154,867
FHLB advances			57,284				63,327				114,093				127,885
Security repurchase agreements			1,166				1,207				2,319				4,362
Other			2,834				3,814				5,770				8,106
Total interest expense			127,831				139,165				256,079				295,220
Net interest income			60,017				61,399				116,747				116,197
Provision for loan losses			125,662				43,833				283,876				78,096
Net interest (expense) income after provision for loan losses			(65,645	)			17,566				(167,129	)			38,101
Non-Interest Income
Loan fees and charges			35,022				617				67,944				1,501
Deposit fees and charges			7,984				6,815				15,217				12,846
Loan administration			41,853				37,370				10,053				20,324
Net gain on loan sales			104,664				43,826				300,358				107,252
Net loss on sales of mortgage servicing rights			(2,544	)			(834	)			(2,626	)			(547	)
Net gain on sales of securities available for sale			—				4,869				—				4,869
Total other-than-temporary impairment (losses) recoveries			8,461				—				(103,633	)			—
(Losses) recoveries recognized in other comprehensive income (before taxes)			8,788				—				(86,064	)			—
Net impairment losses recognized in earnings			(327	)			—				(17,569	)			—
Loss on trading securities			(42,485	)			(4,104	)			(31,273	)			(13,586	)
Other fees and charges			(9,630	)			11,718				(16,608	)			20,293
Total non-interest income			134,537				100,277				325,496				152,952
Non-Interest Expense
Compensation and benefits			71,638				52,084				163,427				106,077
Occupancy and equipment			17,499				20,437				36,378				40,258
Asset resolution			17,977				8,039				42,850				11,780
Communication			1,627				1,801				3,350				3,586
Other taxes			1,098				384				2,105				1,276
General and administrative			61,979				10,991				106,377				19,928
Total non-interest expense			171,818				93,736				354,487				182,905
(Loss) earnings before federal income taxes			(102,926	)			24,107				(196,120	)			8,148
(Benefit) provision for federal income taxes			(31,261	)			8,361				(59,957	)			3,002
Net (Loss) Earnings			(71,665	)			15,746				(136,163	)			5,146
Preferred stock dividends/accretion			(4,921	)			—				(7,841	)			—
Net (Loss) Earnings Applicable To Common Stock		$	(76,586	)		$	15,746			$	(144,004	)		$	5,146
(Loss) earnings per share
Basic		$	(0.32	)		$	0.24			$	(0.88	)		$	0.08
Diluted		$	(0.32	)		$	0.22			$	(0.88	)		$	0.08

The accompanying notes are an integral part of these consolidated financial statements.

Flagstar Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss
(In thousands)

																		Accumulated
																		Other												Total
		Preferred				Common				Additional Paid in Capital								Comprehensive				Treasury				Retained				Stockholders’
		Stock				Stock				Preferred				Common				Loss				Stock				Earnings				Equity
Balance at January 1, 2008		$	—			$	637			$	—			$	64,350			$	(11,495	)		$	(41,679	)		$	681,165			$	692,978
Net loss			—				—				—				—				—				—				(275,407	)			(275,407	)
Reclassification of gain on dedesignation of swaps used in cash flow hedges			—				—				—				—				(236	)			—				—				(236	)
Reclassification of gain on sale of securities available for sale			—				—				—				—				(3,262	)			—				—				(3,262	)
Reclassification of loss on securities available for sale due to other than temporary impairment			—				—				—				—				40,541				—				—				40,541
Change in net unrealized loss on securities available for sale			—				—				—				—				(107,290	)			—				—				(107,290	)
Total comprehensive loss			—				—				—				—				—				—				—				(345,654	)
Cumulative effect adjustment due to change of accounting for residential MSR mortgage servicing rights			—				—				—				—				—				—				28,417				28,417
Issuance of preferred stock			1				—				—				45,796				—				—				—				45,797
Issuance of common stock			—				199				—				54,162				—				—				—				54,361
Issuance of treasury stock			—				—				—				—				—				41,092				—				41,092
Conversion of preferred stock			(1	)			—				—				(45,796	)			—				—				—				(45,797	)
Restricted stock issued			—				—				—				(587	)			—				587				—				—
Stock options exercised			—				—				—				77				—				—				—				77
Stock-based compensation			—				—				—				1,227				—				—				—				1,227
Tax effect from stock-based compensation			—				—				—				(205	)			—				—				—				(205	)
Balance at December 31, 2008			—				836				—				119,024				(81,742	)			—				434,175				472,293
(Unaudited)
Net loss			—				—				—				—				—				—				(136,163	)			(136,163	)
Reclassification of loss on securities available for sale due to other-than- temporary impairment			—				—				—				—				11,420				—				—				11,420
Change in net unrealized loss on securities available for sale			—				—				—				—				6,788				—				—				6,788
Total comprehensive loss			—				—				—				—				—				—				—				(117,955	)
Cumulative effect for adoption of FSP FAS 115-2 and FAS 124-2			—				—				—				—				(32,914	)			—				32,914				—
Issuance of preferred stock			6				—				507,488				—				—				—				—				507,494
Conversion of preferred stock			(3	)			3,750				(268,574	)			264,827				—				—				—				—
Issuance of common stock to management			—				67				—				5,254				—				—				—				5,321
Reclassification of Treasury Warrants			—				—				—				49,673				—				—				—				49,673
Issuance of common stock for exercise of May Warrants			—				31				—				4,345				—				—				—				4,376
Restricted stock issued			—				1				—				(46	)			—				—				—				(45	)
Dividends on preferred stock			—				—				—				—				—				—				(5,629	)			(5,629	)
Accretion of preferred stock			—				—				2,211				—				—				—				(2,211	)			—
Stock-based compensation			—				—				—				458				—				—				—				458
Tax effect from stock-based compensation			—				—				—				(465	)			—				—				—				(465	)
Balance at June 30, 2009		$	3			$	4,685			$	241,125			$	443,070			$	(96,448	)		$	—			$	323,086			$	915,521

The accompanying notes are an integral part of these consolidated financial statements.

Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows
(In thousands)

		For the Six Months Ended
		June 30,
		2009				2008
		(Unaudited)
Operating Activities
Net (loss) earning		$	(136,163	)		$	5,146
Adjustments to net (loss) earnings to net cash used in operating activities
Provision for loan losses			283,876				78,096
Depreciation and amortization			11,957				13,011
Increase (decrease) in valuation allowance in mortgage servicing rights			2,016				(55	)
Loss on fair value of residential mortgage servicing rights, net of hedging gains			13,887				44,064
Stock-based compensation expense			458				502
Loss on interest rate swap			227				627
Net loss on the sale of assets			1,464				82
Net gain on loan sales			(300,358	)			(107,252	)
Net loss on sales of mortgage servicing rights			2,626				547
Net loss (gain) on securities classified as available for sale			17,569				(4,869	)
Net loss on trading securities			31,273				13,586
Proceeds from sales of trading securities			518,793
Proceeds from sales of loans available for sale			16,761,330				12,242,515
Origination and repurchase of mortgage loans available for sale, net of principal repayments			(18,692,067	)			(13,593,576	)
Purchase of trading securities, net of principal repayments			(783,370	)			—
(Increase) decrease in accrued interest receivable			(143	)			6,418
Increase in other assets			(193,234	)			(169,183	)
Increase (decrease) in accrued interest payable			391				(4,317	)
Net tax effect for stock grants issued			465				205
Decrease in federal income taxes payable			(10,270	)			(34,161	)
Increase in other liabilities			101,094				22,587
Net cash used in operating activities			(2,368,179	)			(1,486,027	)
Investing Activities
Net change in other investments			(4,768	)			(2,942	)
Repayment of mortgage-backed securities held to maturity			—				90,846
Proceeds from sale of investment securities available for sale			—				899,855
Repayment of investment securities available for sale			56,608				104,090
Proceeds from sales of portfolio loans			29,961				1,265,066
Origination of portfolio loans, net of principal repayments			325,416				182,688
Purchase of Federal Home Loan Bank stock			—				(24,499	)
Investment in unconsolidated subsidiary			1,547				—
Proceeds from the disposition of repossessed assets			122,970				41,419
Acquisitions of premises and equipment, net of proceeds			(7,724	)			(17,305	)
Proceeds from the sale of mortgage servicing rights			27,536				—
Net cash provided by investing activities			551,546				2,539,218
Financing Activities
Net increase in deposit accounts			1,629,668				(758,556	)
Net decrease in Federal Home Loan Bank advances			(48,093	)			(565,000	)
Net receipt of payments of loans serviced for others			35,279				(10,029	)
Net receipt of escrow payments			20,356				17,585
Proceeds from the exercise of stock options			—				77
Net tax effect of stock grants issued			(465	)			(205	)
Issuance of junior subordinated debt			50,000				—
Issuance of preferred stock			544,365				45,797
Issuance of common stock			6,696				8,566

		For the Six Months Ended
		June 30,
		2009				2008
		(Unaudited)
Issuance of treasury stock			—				41,092
Dividends paid to preferred stockholders			(3,889	)			—
Net cash provided by (used in) financing activities			2,233,917				(1,220,673	)
Net increase (decrease) in cash and cash equivalents			417,284				(167,482	)
Beginning cash and cash equivalents			506,905				340,169
Ending cash and cash equivalents		$	924,189			$	172,687
Supplemental disclosure of cash flow information:
Loans held for investment transferred to repossessed assets		$	333,630			$	93,106
Total interest payments made on deposits and other borrowings		$	255,688			$	299,537
Federal income taxes paid		$	590			$	5,808
Reclassification of mortgage loans originated available for sale then transferred to held for investment loans		$	29,961			$	1,255,416
Mortgage servicing rights resulting from sale or securitization of loans		$	191,261			$	203,838
Reclassification of mortgage backed securities held to maturity to securities available for sale		$	—			$	1,163,681
Conversion of mandatory convertible participating voting preferred stock to common stock		$	271,577			$	—

The accompanying notes are an integral part of these consolidated financial statements.

Flagstar Bancorp, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

Note 1. Nature of Business

     Flagstar Bancorp, Inc. (“Flagstar” or the “Company”), is the holding company for Flagstar Bank, FSB (the “Bank”), a federally chartered stock savings bank founded in 1987. With $16.4 billion in assets at June 30, 2009, Flagstar is the largest insured depository institution headquartered in Michigan.

     The Company’s principal business is obtaining funds in the form of deposits and wholesale borrowings and investing those funds in single-family mortgages and other types of loans. Its primary lending activity is the acquisition or origination of single-family mortgage loans. The Company may also originate consumer loans, commercial real estate loans, and non-real estate commercial loans and it services a significant volume of residential mortgage loans for others.

     The Company sells or securitizes substantially all of the mortgage loans that it originates, and it generally retains the right to service the mortgage loans that it sells. These mortgage servicing rights (“MSRs”) are occasionally sold by the Company in transactions separate from the sale of the underlying mortgages. The Company may also invest in a portion of its loan production in order to enhance the Company’s leverage ability and to receive the interest spread between earning assets and paying liabilities.

     The Bank is a member of the Federal Home Loan Bank System (“FHLB”) and is subject to regulation, examination and supervision by the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s deposits are insured by the FDIC through the Deposit Insurance Fund (“DIF”).

Note 2. Recent Developments

Capital Investment

     On December 17, 2008, the Company entered into an investment agreement with MP Thrift Investments L.P. (“MatlinPatterson”), an entity formed by MP Thrift Global Partners III LLC, an affiliate of MatlinPatterson Global Advisors LLC, for the purchase by MatlinPatterson of 250,000 shares of a newly authorized series of our convertible participating voting preferred stock for $250 million. On January 30, 2009, MatlinPatterson consummated the purchase. Upon consummation, the Company became a “controlled company,” as defined in the rules of the New York Stock Exchange (the “NYSE”), based on MatlinPatterson’s beneficial ownership of a majority of the Company’s voting stock. As a “controlled company,” the Company is exempt from certain of the NYSE’s corporate governance requirements, including the requirement to maintain a majority of independent directors and requirements related to the compensation committee and the nomination/corporate governance committee. The terms of the preferred stock allowed MatlinPatterson to vote such shares on an as-converted basis and, as a result, MatlinPatterson controlled approximately 77.6% of the voting power of the Company as of January 30, 2009. Such preferred shares automatically converted, at $0.80 per share, into 312.5 million shares of the Company’s common stock upon stockholder approval authorizing additional shares of common stock on May 26, 2009.

     In addition, on January 30, 2009, certain of the Company’s officers and directors acquired in the aggregate, 6.65 million shares of common stock at a purchase price of $0.80 per share for a total of $5.32 million. The preferred stock and the common stock were each offered and sold to individual accredited investors in an offering exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”).

     Also, on January 30, 2009, the Company entered into a closing agreement with MatlinPatterson pursuant to which it agreed to sell to MatlinPatterson (i) an additional $50 million of convertible preferred stock substantially in the form of the Preferred Stock, in two equal parts, on substantially the same terms as the $250 million investment by MatlinPatterson (the “Additional Preferred Stock”) and (ii) $50 million of trust preferred securities with a 10% coupon (the “Trust Preferred Securities”). On February 17, 2009, MatlinPatterson acquired the first $25 million of the Additional Preferred Stock, pursuant to which the Company issued 25,000 shares of the Additional Preferred Stock with a conversion price of $0.80 per share. On February 27, 2009, MatlinPatterson acquired the second $25 million of the Additional Preferred Stock, pursuant to which the Company issued 25,000 shares of the Additional Preferred Stock with a conversion price of $0.80 per share. Upon receipt of stockholder approval on May 26, 2009, the 50,000 shares of Additional Preferred Stock automatically converted into 62.5 million shares of the Company’s common stock. On June 30, 2009, MatlinPatterson acquired the $50 million of Trust Preferred Securities pursuant to which the Company issued 50,000 shares that are convertible into common stock at the option of MatlinPatterson on April 1, 2010 at a conversion price of 90% of the volume weighted-average price per share of common stock during the period from February 1, 2009 to April 1, 2010, subject to a price per share minimum of $0.80 and maximum

of $2.00. If the Trust Preferred Securities are not converted, they will remain outstanding perpetually unless redeemed by the Company at any time after January 30, 2011.

Troubled Asset Relief Program (“TARP”)

     On January 30, 2009, the Company sold to the United States Department of Treasury (the “Treasury”), 266,657 shares of the Company’s fixed rate cumulative non-convertible perpetual preferred stock for $266.7 million, and a warrant (the “Treasury Warrant”) to purchase up to approximately 64.5 million shares of the Company’s common stock at an exercise price of $0.62 per share, subject to certain anti-dilution and other adjustments. The issuance and the sale of the preferred stock and Treasury Warrant were exempt from the registration requirements of the Securities Act. The preferred stock qualifies as Tier 1 capital and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Treasury Warrant became exercisable upon receipt of stockholder approval on May 26, 2009 and has a 10 year term.

Issuance of Warrants to Certain Stockholders

     In full satisfaction of the Company’s obligations under anti-dilution provisions applicable to certain investors (the “May Investors”) in the Company’s May 2008 private placement capital raise, the Company granted warrants (the “May Investor Warrants”) to the May Investors on January 30, 2009 for the purchase of 14,259,794 shares of the Company’s common stock at $0.62 per share. The holders of such warrants are entitled to acquire the Company’s common shares for a period of ten years. As of June 30, 2009, 3,148,393 shares of the Company’s common stock have been issued upon exercise of certain May Investor Warrants.

     Based on management’s analysis the May Investor Warrants do not meet the definition of a contract that is indexed to the Company’s own stock under accounting principles generally accepted in the United States of America (“U.S. GAAP”). Therefore, the May Investor Warrants are classified as liabilities and are measured at fair value, with changes in fair value recognized through operations. See Note 12, “Warrant Liabilities.”

Note 3. Basis of Presentation

     The accompanying unaudited consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated. In accordance with current accounting principles, the Company’s trust subsidiaries are not consolidated. In addition, certain prior period amounts have been reclassified to conform to the current period presentation.

     The unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying interim financial statements are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three and six month period ended June 30, 2009, are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. We have evaluated the financial statements for subsequent events through the date of the filing of the Form 10-Q. For further information, you should refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, which can be found on the Company’s Investor Relations web page, at www.flagstar.com , and on the website of the SEC, at www.sec.gov.

Note 4. Recent Accounting Developments

     In November 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS 160, Non-controlling Interest in Consolidated Financial Statements — an amendment to ARB No. 51. SFAS 160 changes the way consolidated net earnings are presented. The new standard requires consolidated net earnings to be reported at amounts attributable to both the parent and the non-controlling interest and will require disclosure on the face of the consolidated statement of operations amounts attributable to the parent and the non-controlling interest. The adoption of this statement is intended to result in more transparent reporting of the net earnings attributable to the non-controlling interest. The statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. The statement also requires that a parent recognize a gain or loss in net earnings when a subsidiary is deconsolidated. The adoption of SFAS 160 was effective for the Company on January 1, 2009. The adoption of this statement did not have a material impact on the Company’s consolidated financial condition, results of operation or liquidity.

     In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions. FSP 140-3 requires the initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously with or in contemplation of the initial transfer, to be treated as a linked transaction under SFAS 140, unless certain criteria are met, then the initial transfer and repurchase will not be evaluated as a linked transaction, but will be evaluated separately under SFAS 140. FSP FAS 140-3 is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of FSP FAS 140-3 did not have a material impact on the Company’s consolidated financial condition, results of operations or liquidity.

     In June 2008, the FASB issued SFAS 161, Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133. SFAS 161 requires entities to provide enhanced qualitative disclosures about objectives and strategies with respect to an entity’s derivative and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS 161 did not have a material impact on the Company’s consolidated financial condition, results of operations or liquidity.

     In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP FAS 157-3 clarifies the application of SFAS 157, Fair Value Measurements in an inactive market and provides key considerations in determining the fair value of an asset where the market is not active. FSP FAS 157-3 was effective immediately upon issuance. The adoption of FSP FAS 157-3 did not have a material impact on the Company’s consolidated financial condition, results of operations or liquidity.

     In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interest in Variable Interest Entities. FSP FAS 140-4 and FIN 46(R)-8 require enhanced disclosures about the transfers of financial assets and interests in variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 are effective for interim and annual reporting periods ending after December 15, 2008. The adoption of FSP FAS 140-4 and FIN 46(R)-8 did not have a material impact on the Company’s consolidated financial condition, results of operations or liquidity.

     In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary guidance to make the guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. The FSP modifies the current indicator that, to avoid considering an impairment to be other-than temporary, management must assert that it has both the intent and ability to hold an impaired security for a period of time sufficient to allow for any anticipated recovery in fair value. The new FSP would require management to assert that (a) it does not have the intent to sell the security and (b) it is more likely than not that it will not have to sell the security before its recovery. The FSP changes the total amount recognized in earnings when there are factors other than credit losses associated with an impairment of a debt security. The impairment is separated into impairments related to credit losses and impairments related to all other factors. The adoption of FSP FAS 115-2 and FAS 124-2 resulted in a cumulative adjustment increasing retained earnings and other comprehensive loss by $50.6 million offset by a tax benefit of $17.7 million, or $32.9 million net of tax. The cumulative adjustment represents the non-credit portion of other-than-temporary impairment, related to securities available for sale, that the Company had recorded prior to January 1, 2009. See Accumulated Other Comprehensive Loss in Note 13, “Stockholders Equity”.

     In April 2009, FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. FAS 157-4 provides additional guidance on determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurements under SFAS 157. The adoption of FAS 157-4 did not have a material impact on the Company’s consolidated financial condition, results of operations or liquidity.

     In April 2009, FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which requires disclosures about the fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provision of FSP FAS 107-1 and APB 28-1 were adopted by the Company effective January 1, 2009. As FSP FAS 107-1 and APB 28-1 amends only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS 107-1 and APB 28-1 did not affect the Company’s consolidated statements of operations and financial condition.

     In May 2009, the FASB issued SFAS 165, Subsequent Events. SFAS 165 establishes general standards of accounting for and disclosure of subsequent events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS 165 sets forth the period after the balance sheet date during which management should evaluate events and transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which events or transactions occurring after the balance sheet date should be recognized and disclosures that should be made about events or transactions that occurred after the balance sheet date. The adoption of this statement is effective for interim and annual periods ending after June 15, 2009. The adoption of SFAS 165 did not affect the Company’s consolidated financial position, results of operations or liquidity.

     In June 2009, the FASB issued SFAS 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140. SFAS 166 amends the accounting for transfers of financial assets, and is the principal accounting guidance governing the Company’s private-label asset securitization activities. Under SFAS No. 166, the Company’s securitization transactions will no longer be exempt from consolidation. SFAS 166 modifies the financial-components approach used in SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and limits the circumstances in which a financial asset, or a portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. The statement also requires that a transferor recognize and initially measure at fair value, all assets obtained including beneficial interests and liabilities incurred as a result of the transfer of financial assets accounted for as a sale. SFAS 166 will become effective for the Company on January 1, 2010. The Company is currently evaluating the effect the adoption of SFAS 166 will have on its consolidated financial statements of condition, results of operations or liquidity.

     In June 2009, the FASB issued SFAS 167, Amendments to FASB Interpretation No. 46(R). SFAS 167 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 will become effective for the Company on January 1, 2010. The Company is currently evaluating the effect the adoption of SFAS 167 will have on its consolidated financial statements of condition, results of operations or liquidity .

     In June 2009, the FASB issued SFAS 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. SFAS 168 will become the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting literature. SFAS 168 reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant SEC guidance organized using the same topical structure in separate sections. SFAS 168 will be effective for financial statements issued for reporting periods that end after September 15, 2009. This will have an impact on the Company’s disclosures in its consolidated financial statements since all future references to authoritative accounting literature will be referenced in accordance with SFAS 168.

Note 5. Fair Value Accounting

     On January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements, and SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 was issued to establish a uniform definition of fair value. The definition of fair value under SFAS 157 is market-based as opposed to company-specific and includes the following:

	•		Defines fair value as the price that would be received to sell an asset or paid to transfer a liability, in either case through an orderly transaction between market participants at a measurement date, and establishes a framework for measuring fair value;
	•		Establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date;
	•		Nullifies the guidance in EITF 02-3, which required the deferral of profit at inception of a transaction involving a derivative financial instrument in the absence of observable data supporting the valuation technique;
	•		Eliminates large position discounts for financial instruments quoted in active markets and requires consideration of the company’s creditworthiness when valuing liabilities; and
	•		Expands disclosures about instruments that are measured at fair value.

     SFAS 159 provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized Company commitments and written loan commitments not previously recorded at fair value. In accordance with the provisions of SFAS 159, the Company, as of January 1, 2008, elected the fair value option for certain non-investment grade residual securities from private-label securitizations. The Company elected fair value on these residual securities and reclassified these investments to securities — trading to provide consistency in the accounting for the Company’s residual interests.

      Effective January 1, 2008, the Company elected the fair value measurement method for residential MSRs under SFAS 156, Accounting for Servicing of Financial Assets an amendment of FASB 140. Upon election, the carrying value of the residential MSRs was increased to fair value by recognizing a cumulative effect adjustment to retained earnings of $43.7 million before tax, or $28.4 million after tax. Management elected the fair value measurement method of accounting for residential MSRs to be consistent with the fair value accounting method required for its risk management strategy to hedge the fair value of these assets. Changes in the fair value of MSRs, as well as changes in fair value of the related derivative instruments, are recognized each period within loan administration income (loss) on the consolidated statement of operations.

     Effective January 1, 2009, the Company elected the fair value option for the majority of its loans available for sale in accordance with SFAS 159. Only loans available for sale originated subsequent to January 1, 2009 are affected. Prior to the Company’s fair value election, loans available for sale were carried at the lower of aggregate cost or estimated fair value; therefore, any increase in fair value to such loans was not realized until such loans were sold. The effect on consolidated operations of this election amounted to recording additional gain on loans sales of $20.3 million and $42.3 million for the three and six months ended June 30, 2009, respectively based upon an increase in fair value during the period rather than at a later time when the loans were sold. See Note 7, “Loans Available for Sale.”

Determination of Fair Value

     The Company has an established process for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon internally developed models that use primarily market-based or independently-sourced market parameters, including interest rate yield curves and option volatilities. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, creditworthiness, liquidity and unobservable parameters that are applied consistently over time. Any changes to the valuation methodology are reviewed by management to determine appropriateness of the changes. As markets develop and the pricing for certain products becomes more transparent, the Company expects to continue to refine its valuation methodologies.

     The methods described above may produce a fair value estimate that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in different estimates of fair values of the same financial instruments at the reporting date.

Valuation Hierarchy

     SFAS 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy favors the transparency of inputs to the valuation of an asset or liability as of the measurement date and thereby favors use of Level 1 if appropriate information is available, and otherwise Level 2 and finally Level 3 if Level 2 input is not available. The three levels are defined as follows.

	•		Level 1 — Fair value is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets in which the Company can participate.
	•		Level 2 — Fair value is based upon quoted prices for similar (i.e., not identical) assets and liabilities in active markets, and other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
	•		Level 3 — Fair value is based upon financial models using primarily unobservable inputs.

     A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the fair value measurement.

     The following is a description of the valuation methodologies used by the Company for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

     Assets

     Securities classified as trading. These securities are comprised of U.S. government sponsored agency mortgage-backed securities, U.S. Treasury bonds and non-investment grade residual securities that arose from private-label securitizations of the Company. The U.S. government sponsored agency mortgage-backed securities and U.S. Treasury bonds trade in an active, open market with readily observable prices and are therefore classified within the Level 1 valuation hierarchy. The non-investment grade residual securities do not trade in an active, open market with readily observable prices and are therefore classified within the Level 3 valuation hierarchy. Under Level 3, the fair value of residual securities is determined by discounting estimated net future cash flows using expected prepayment rates and discount rates that approximate current market rates. Estimated net future cash flows include assumptions related to expected credit losses on these securities. The Company maintains a model that evaluates the default rate and severity of loss on the residual securities’ collateral, considering such factors as loss experience, delinquencies, loan-to-value ratios, borrower credit scores and property type. See Note 10, “Private Label Securitization Activity” for the key assumptions used in the residual interest valuation process.

     Securities classified as available for sale. These securities are comprised of U.S. government sponsored agency mortgage-backed securities and CMOs. Where quoted prices for securities are available in an active market, those securities

are classified within Level 1 of the valuation hierarchy. If such quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Due to illiquidity in the markets, the Company determined the fair value of certain non-agency securities using internal valuation models and therefore classified them within the Level 3 valuation hierarchy as these models utilize significant inputs which are unobservable.

     Other Investments. Other investments are primarily comprised of various mutual fund holdings. These mutual funds trade in an active market and quoted prices are available. Other investments are classified within Level 1 of the valuation hierarchy.

     Loans available for sale. At June 30, 2009, the majority of the Company’s loans originated and classified as available for sale were reported at fair value and classified as Level 2. The Company estimates the fair value of mortgage loans based on quoted market prices for securities backed by similar types of loans. Otherwise, the fair value of loans is estimated using discounted cash flows based upon management’s best estimate of market interest rates for similar collateral. At June 30, 2009, the Company continued to have a small number of loans which were originated prior to the fair value election and accounted for at lower of cost or market.

     Loans held for investment. The Company does not record these loans at fair value on a recurring basis. However, from time to time a loan is considered impaired and an allowance for loan losses is established. Loans are considered impaired if it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Once a loan is identified as impaired, the fair value of the impaired loan is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value or discounted cash flows. Impaired loans do not require an allowance if the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral rather than on discounted cash flows. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as a nonrecurring Level 2 valuation.

     Repossessed assets. Loans on which the underlying collateral has been repossessed are adjusted to fair value upon transfer to repossessed assets. Subsequently, repossessed assets are carried at the lower of carrying value or fair value, less anticipated marketing and selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the repossessed asset as a nonrecurring Level 2 valuation.

     Mortgage Servicing Rights. The Company has obligations to service residential first mortgage loans, and consumer loans (i.e. home equity lines of credit (“HELOCs”) and second mortgage loans obtained through private-label securitization transactions). Residential MSRs are accounted for at fair value on a recurring basis. Servicing rights associated with consumer loans are carried at amortized cost and are periodically evaluated for impairment.

          Residential Mortgage Servicing Rights. The current market for residential mortgage servicing rights is not sufficiently liquid to provide participants with quoted market prices. Therefore, the Company uses an option-adjusted spread valuation approach to determine the fair value of residential MSRs. This approach consists of projecting servicing cash flows under multiple interest rate scenarios and discounting these cash flows using risk-adjusted discount rates. The key assumptions used in the valuation of residential MSRs include mortgage prepayment speeds and discount rates. Management periodically obtains third-party valuations of the residential MSR portfolio to assess the reasonableness of the fair value calculated by its internal valuation model. Due to the nature of the valuation inputs, residential MSRs are classified within Level 3 of the valuation hierarchy. See Note 11, “Mortgage Servicing Rights” for the key assumptions used in the residential MSR valuation process.

          Consumer Loan Servicing Rights. Consumer servicing assets are subject to periodic impairment testing. A valuation model, which utilizes a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management, is used in the completion of impairment testing. If the valuation model reflects a value less than the carrying value, consumer servicing assets are adjusted to fair value through a valuation allowance as determined by the model. As such, the Company classifies consumer servicing assets subject to nonrecurring fair value adjustments as Level 3 valuations.

     Derivative Financial Instruments. Certain classes of derivative contracts are listed on an exchange and are actively traded, and they are therefore classified within Level 1 of the valuation hierarchy. These include U.S. Treasury futures, U.S. Treasury options and interest rate swaps. The Company’s forward loan sale commitments may be valued based on quoted prices for similar assets in an active market with inputs that are observable and are classified within Level 2 of the valuation hierarchy. Rate lock commitments are valued using internal models with significant unobservable market parameters and therefore are classified within Level 3 of the valuation hierarchy.

Liabilities

     Warrants. Warrant liabilities are valued using a binomial lattice model and are classified within Level 2 of the valuation hierarchy. Significant assumptions include expected volatility, a risk free range and an expected life.

Assets and liabilities measured at fair value on a recurring basis

     The following table presents the financial instruments carried at fair value as of June 30, 2009, by caption on the Consolidated Statement of Financial Condition and by the valuation hierarchy (as described above) (in thousands):

														Total carrying
														value in the
														Consolidated
														Statement of
														Financial
		Level 1				Level 2				Level 3				Condition
Securities classified as trading:
Residual interests		$	—			$	—			$	16,402			$	16,402
Mortgage-backed securities			1,587,078				—				—				1,587,078
Securities classified as available for sale			180,772				—				554,055				734,827
Loans available for sale			—				2,974,186				—				2,974,186
Residential mortgage servicing rights			—				—				658,209				658,209
Other investments			39,300				—				—				39,300
Derivative financial instruments:
Rate lock commitments			—				—				29,200				29,200
Forward loan commitments			3,463				—				—				3,463
Agency forwards			(24,677	)			—				—				(24,677	)
Treasury futures			5,737				—				—				5,737
Interest rate swaps			(1,240	)			—				—				(1,240	)
Warrant liabilities			—				(5,778	)			—				(5,778	)
Total assets and liabilities at fair value		$	1,790,433			$	2,968,408			$	1,257,866			$	6,016,707

Changes in Level 3 fair value measurements

     A determination to classify a financial instrument within Level 3 of the valuation hierarchy is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources). Accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are included within the valuation methodology. Also, the Company manages the risk associated with the observable components of Level 3 financial instruments using securities and derivative positions that are classified within Level 1 or Level 2 of the valuation hierarchy; these Level 1 and Level 2 risk management instruments are not included below, and therefore the gains and losses in the tables do not reflect the effect of the Company’s risk management activities related to such Level 3 instruments.

Fair value measurements using significant unobservable inputs

     The table below includes a rollforward of the Consolidated Statement of Financial Condition amounts for the six months ended June 30, 2009 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy (in thousands).

																						Changes in
																						unrealized
																						gains and
																						(losses)
																						related to
										Purchases,												financial
						Total				issuances				Transfers								instruments
		Fair value,				realized/				and				in and/or				Fair value,				held at
Six months ended		January 1,				unrealized				settlements,				out of				June 30,				June 30,
June 30, 2009		2009				gains/(losses)				net				Level 3				2009				2009
Securities classified as trading:
Residual interests		$	24,808			$	(8,406	)		$	—			$	—			$	16,402			$	—
Securities classified as available for sale(a)			563,083				15,769				(24,797	)			—				554,055				33,338
Residential mortgage servicing rights			511,294				(44,343	)			191,258				—				658,209				—
Derivative financial Instruments:
Rate lock commitments			78,613				—				(49,413	)			—				29,200				—
Totals		$	1,177,798			$	(36,980	)		$	117,048			$	—			$	1,257,866			$	33,338

     The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These include assets that are measured at the lower of cost or market and had a fair value below cost at the end of the period as summarized below (in thousands).

Assets Measured at Fair Value on a Nonrecurring Basis

		Balance at
		June 30, 2009				Level 1				Level 2				Level 3
Loans held for investment		$	460,400			$	—			$	460,400			$	—
Repossessed assets			131,620				—				131,620				—
Consumer loan servicing rights			6,083				—				—				6,083
Totals		$	598,103			$	—			$	592,020			$	6,083

Financial Disclosures about Fair Value of Financial Instruments Required by FSP FAS 107-1

     FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, requires disclosures of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate their fair values. Certain financial instruments and all nonfinancial instruments are excluded from the scope of FSP FAS 107-1. Accordingly, the fair value disclosures required by FSP FAS 107-1 and APB 28-1 are only indicative of the value of individual financial instruments as of the dates indicated and should not be considered an indication of the fair value of the Company.

     The following table presents the carrying amount and estimated fair value of certain financial instruments (in thousands).

		June 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
Financial instruments:
Assets:
Cash and cash equivalents		$	924,189			$	924,189			$	506,905			$	506,905
Securities — trading			1,603,480				1,603,480				542,539				542,539
Securities available for sale			734,827				734,827				1,118,453				1,118,453
Other investments			39,300				39,300				34,532				34,532
Loans available for sale			3,009,740				3,000,733				1,484,680				1,526,031
Loans held for investment, net			7,943,849				7,910,651				8,706,121				8,845,398
FHLB stock			373,443				373,443				373,443				373,443
Liabilities:
Retail deposits:
Demand deposits and savings accounts			(1,731,608	)			(1,731,608	)			(1,386,330	)			(1,386,330	)
Certificates of deposit			(4,310,498	)			(4,417,843	)			(3,967,985	)			(4,098,135	)
Public funds			(420,512	)			(410,789	)			(597,638	)			(599,849	)
National certificates of deposit			(1,790,892	)			(1,837,798	)			(1,353,558	)			(1,412,506	)
Company controlled deposit			(1,217,163	)			(1,217,163	)			(535,494	)			(535,494	)
FHLB advances			(5,151,907	)			(5,425,087	)			(5,200,000	)			(5,612,624	)
Security repurchase agreements			(108,000	)			(111,795	)			(108,000	)			(113,186	)
Long term debt			(300,207	)			(284,041	)			(248,660	)			(247,396	)
Warrant liabilities			(5,778	)			(5,778	)			—				—
Derivative Financial Instruments:
Forward delivery contracts			3,463				3,463				(61,256	)			(61,256	)
Commitments to extend credit			29,200				29,200				78,613				78,613
Interest rate swaps			(1,240	)			(1,240	)			(1,280	)			(1,280	)
Treasury and agency futures/forwards			(18,940	)			(18,940	)			60,813				60,813
Options			—				—				17,219				17,219

     The methods and assumptions that were used to estimate the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The following methods and assumptions were used to estimate the fair value for other financial instruments for which it is practicable to estimate that value:

     Cash and cash equivalents. Due to their short term nature, the carrying amount of cash and cash equivalents approximates fair value.

     Loans held for investment. The fair value of loans is estimated by using internally developed discounted cash flow models using market interest rate inputs as well as management’s best estimate of spreads for similar collateral.

     FHLB stock. No secondary market exists for FHLB stock. The stock is bought and sold at par by the FHLB. Management believes that the recorded value is the fair value.

     Deposit Accounts. The fair value of demand deposits and savings accounts approximates the carrying amount. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for certificates of deposits with similar remaining maturities.

     FHLB Advances. Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of the existing debt.

     Security Repurchase Agreements. Rates currently available for repurchase agreements with similar terms and maturities are used to estimate fair values for these agreements.

     Long Term Debt. The fair value of the long-term debt is estimated based on a discounted cash flow model that incorporates the Company’s current borrowing rates for similar types of borrowing arrangements.

Note 6. Investment Securities

     As of June 30, 2009 and December 31, 2008, investment securities were comprised of the following (in thousands):

		June 30,				December 31,
		2009				2008
Securities — trading
U.S. government sponsored agencies		$	1,587,078			$	517,731
Non-investment grade residual interests			16,402				24,808
Total securities — trading		$	1,603,480			$	542,539
Securities — available-for-sale
Non-agencies		$	554,055			$	563,083
U.S. government sponsored agencies			180,772				555,370
Total securities — available-for-sale		$	734,827			$	1,118,453
Other investments — restricted
Mutual funds		$	39,300			$	34,532

Trading

     Securities classified as trading are comprised of AAA-rated U.S. government sponsored agency mortgage-backed securities, U.S. Treasury bonds, and non-investment grade residual interests from private-label securitizations. U.S. government sponsored agency mortgage-backed securities held in trading are distinguished from available-for-sale based upon the intent of management to use them as an economic offset against changes in the valuation of the MSR portfolio; however, these securities do not qualify as an accounting hedge as defined in current accounting guidance for derivatives and hedges.

     The non-investment grade residual interests resulting from our private label securitizations were $16.4 million at June 30, 2009 versus $24.8 million at December 31, 2008. Non-investment grade residual securities classified as trading decreased as a result of the increase in the actual and expected losses in the second mortgages and HELOCs that underly these assets.

     The fair value of residual interests is determined by discounting estimated net future cash flows using discount rates that approximate current market rates and expected prepayment rates. Estimated net future cash flows include assumptions related to expected credit losses on these securities. The Company maintains a model that evaluates the default rate and severity of loss on the residual interests’ collateral, considering such factors as loss experience, delinquencies, loan-to-value ratio, borrower credit scores and property type.

Available-for-Sale

     At June 30, 2009 and December 31, 2008, the Company had $0.7 billion and $1.1 billion, respectively, in securities classified as available-for-sale which were comprised of U.S. government sponsored agency and non-agency mortgage-backed securities. Securities available-for-sale are carried at fair value, with unrealized gains and losses reported as a component of other comprehensive loss to the extent they are temporary in nature or “other-than-temporary impairments” (“OTTI”) as to non-credit related issues. If losses are, at any time, deemed to have arisen from OTTI, then the credit related portion is reported as an expense for that period.

     The following table summarizes the amortized cost and estimated fair value of U.S. government sponsored agency and non-agency mortgage-backed securities classified as available-for-sale (in thousands):

		June 30,				December 31,
		2009				2008
Amortized cost		$	883,208			$	1,244,145
Gross unrealized holding gains			4,057				10,522
Gross unrealized holding losses			(152,438	)			(136,214	)
Estimated fair value		$	734,827			$	1,118,453

     The following table summarizes unrealized loss positions, at June 30, 2009, on securities classified as available-for-sale categorized by the duration of the unrealized loss position (dollars in thousands):

		Unrealized Loss Position with Duration												Unrealized Loss Position with
		12 Months and Over												Duration Under 12 Months
										Current												Current
						Number of				Unrealized								Number of				Unrealized
Type of Security		Principal				Securities				Loss				Principal				Securities				Loss
U.S. government sponsored agency securities		$	—				—			$	—			$	1,614				2			$	(34	)
Collateralized mortgage obligations			703,689				12				(152,378	)			37,596				1				(26	)
Totals		$	703,689				12			$	(152,378	)		$	39,210				3			$	(60	)

     The fair value of all other non-agency and U.S. government sponsored agency mortgage-backed securities is estimated based on market information.

     The unrealized losses on securities-available-for-sale amounted to $152.4 million on $742.9 million of principal of agency and non-agency collateralized mortgage obligations (“CMOs”) at June 30, 2009. These CMOs consist of interests in investment vehicles backed by mortgage loans. In the first quarter of 2009, the Company adopted new accounting guidance for investments. The new accounting guidance changed the amount of impairment recognized in operations when there are credit losses associated with an other-than-temporary impairment of a debt security. The other-than-temporary impairment is separated into impairments related to credit losses, which are recorded in operations, and impairments related to all other factors, which are recorded to other comprehensive income.

     During the fourth quarter of 2008, the Company recognized an other-than-temporary impairment of $62.4 million on three collateralized mortgage obligations. Under the new accounting guidance discussed in the previous paragraph, the credit loss portion of the other-than-temporary impairment was $11.8 million while the impairment related to all other factors was $50.6 million. Effective January 1, 2009, the $50.6 million loss, net of $17.7 million of tax benefit, was reclassified from retained earnings to other comprehensive loss as a cumulative adjustment.

     In the three months ended June 30, 2009, additional credit losses on investments with existing other-than-temporary impairment credit losses totaled $0.3 million, which was recognized in current operations. For the six month period ending June 30, 2009, additional credit losses on investments totaled $17.6 million, which was recognized in current operations. No such impairments were recognized during the same three or six month periods in 2008. At June 30, 2009, the total amount of other-than-temporary impairment credit losses totaled $32.1 million.

     At June 30, 2009, the Company had total other-than-temporary impairments of $176.2 million on 11 securities in the available-for-sale portfolio with $32.1 million in total credit losses recognized through operations.

     The following table shows the activity for the credit loss portion of OTTI for the six months ended June 30, 2009 (dollars in thousands):

										Additions on				Reductions
						Additions on				Securities with				for Sold
		January 1, 2009				Securities with				Previous OTTI				Securities				June 30, 2009
		Balance				No Prior OTTI				Recognized				with OTTI				Balance
Collateralized Mortgage Obligations		$	(14,525	)		$	(11,264	)		$	(6,305	)		$	—			$	(32,094	)

     Gains (losses) on the sale of U.S. government sponsored agency mortgage-backed securities available for sale that are recently created with underlying mortgage products originated by the Bank are reported within net gain on loan sale. Securities in this category have typically remained in the portfolio less than 90 days before sale. During the three months ended June 30, 2009, sales of these agency securities with underlying mortgage products originated by the Bank were $45.2 million resulting in $0.8 million of net gain on loan sale versus $1.2 billion resulting in $4.5 million of net gain on loan sale during the same period in 2008. During the six months ended June 30, 2009, sales of agency securities with underlying mortgage products originated by the Bank were $462.5 million resulting in $12.0 million of net gain on loan sale compared with a $1.7 million gain on $2.7 billion during the six months ended June 30, 2008.

     Gain (loss) on sales for all other available for sale securities types are reported in net gain on sale of available for sales securities. There were no such sales in the three months ended June 30, 2009 while in the same period in 2008 the Company sold $0.9 billion in available for sale securities resulting in a gain of $4.9 million. During the six months ended June 30, 2009, we sold no such securities. In the six months ended June 30, 2008, we sold $895.0 million in purchased agency and non-agency securities available for sale. This sale generated a net gain on sale of available for sale securities of $4.9 million.

     As of June 30, 2009, the aggregate amount of available-for-sale securities from each of the following non-agency issuers was greater than 10% of the Company’s stockholders’ equity.

		Amortized				Fair Market
Name of Issuer		Cost				Value
		(In thousands)
Countrywide Alternative Loan Trust		$	96,089			$	60,685
Countrywide Home Loans			223,588				172,336
Flagstar Home Equity Loan Trust 2006-1			211,335				192,927
		$	531,012			$	425,948

Other Investments — Restricted

     The Company has other investments in its insurance subsidiary which are restricted as to their use. These assets can only be used to pay insurance claims in that subsidiary. These securities had a fair value that approximates their recorded amount for each period presented.

Note 7. Loans Available for Sale

     The following table summarizes loans available for sale (in thousands):

		June 30,				December 31,
		2009				2008
Mortgage loans		$	3,009,739			$	1,484,649
Second mortgage loans			1				31
Total		$	3,009,740			$	1,484,680

     Through December 31, 2008, loans available for sale were carried at the lower of aggregate cost or estimated fair value. As of December 31, 2008, these loans had an aggregate fair value that exceeded their recorded amount. Effective January 1, 2009, the Company elected to record the majority of its loans available for sale on the fair value method and as such no longer defers loan fees or expenses related to these loans. Because the fair value method was required to be adopted prospectively, only loans originated for sale subsequent to January 1, 2009 are affected. At June 30, 2009, $3.0 billion of loans available for sale were recorded at fair value. The Company estimates the fair value of mortgage loans based on quoted market prices for securities backed by similar types of loans. Where quoted market prices were available, such market prices were utilized as estimates for fair values. Otherwise, the fair values of loans were estimated by discounting estimated cash flows using management’s best estimate of market interest rates for similar collateral.

Note 8. Loans Held for Investment

     Loans held for investment are summarized as follows (in thousands):

		June 30,				December 31,
		2009				2008
Mortgage loans		$	5,529,395			$	5,958,748
Second mortgage loans			246,895				287,350
Commercial real estate loans			1,692,052				1,779,363
Construction loans			36,599				54,749
Warehouse lending			383,368				434,140
Consumer loans			508,309				543,102
Commercial loans			21,231				24,669
Total			8,417,849				9,082,121
Less allowance for loan losses			(474,000	)			(376,000	)
Total		$	7,943,849			$	8,706,121

     Activity in the allowance for loan losses is summarized as follows (in thousands):

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2009				2008				2009				2008
Balance, beginning of period		$	466,000			$	121,400			$	376,000			$	104,000
Provision charged to operations			125,662				43,833				283,876				78,095
Charge-offs			(119,583	)			(11,987	)			(189,025	)			(29,179	)
Recoveries			1,921				754				3,149				1,084
Balance, end of period		$	474,000			$	154,000			$	474,000			$	154,000

     Loans on which interest accruals have been discontinued totaled approximately $940.8 million and $363.9 million at June 30, 2009 and 2008, respectively. Interest on these loans is recognized as income when collected. Interest that would have been accrued on such loans totaled approximately $18.0 million and $7.2 million during the six months ended June 30, 2009 and 2008, respectively. There were no loans greater than 90 days past due, as determined using the OTS method, still accruing interest at June 30, 2009 and 2008.

     A loan is impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impaired loans were as follows (in thousands):

		June 30,				December 31,
		2009				2008
Impaired loans with no allowance for loan losses allocated(1)		$	229,829			$	77,332
Impaired loans with allowance for loan losses allocated			649,344				373,424
Total impaired loans		$	879,173			$	450,756
Amount of the allowance allocated to impaired loans		$	186,399			$	121,321
Average investment in impaired loans		$	632,237			$	265,448
Cash-basis interest income recognized during impairment		$	13,647			$	10,601

     Those impaired loans with no allowance for loan losses allocated represent loans for which the fair value of the related collateral less estimated selling costs exceeded the recorded investments in such loans. At June 30, 2009, approximately 78.5% of the total impaired loans were evaluated based on the fair value of related collateral.

Note 9. Pledged Assets

     The Company has pledged various assets to collateralize security repurchase agreements and lines of credit and/or borrowings with the Federal Reserve Bank of Chicago or the Federal Home Loan Bank of Indianapolis. The following table sets forth pledged assets by asset class. The principal amount for pledged loans and the market value and range of maturities of pledged securities are presented (dollars in thousands).

		June 30, 2009								December 31, 2008
		Carrying				Investment				Carrying				Investment
		Value				Maturities				Value				Maturities
Securities trading
U.S. government sponsored agencies		$	671,506				2039			$	517,731				2037-2039
Securities available for sale
U.S. government sponsored agencies			118,502				2020-2038				119,951				2020-2038
Non-agencies collateralized mortgage obligations			304,306				2035-2036				563,049				2035-2036
Loans
Mortgage loans			6,344,057								6,724,249
Second mortgage loans			208,065								254,480
HELOCs			317,821								354,076
Commercial loans			787,067								996,649
Totals		$	8,751,324							$	9,530,185