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

For the quarterly period ended ~~March 31,~~June 30, 2007


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 Incorporation or organization)		(I.R.S. Employer Identification No.)

5151 Corporate Drive, Troy, Michigan		~~48098~~48098-2639

(Address of principal executive offices)		(Zip code)

(248) 312-2000

(Registrant’s telephone number, including area 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.

Yesþ Noo.

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

Large accelerated filero Accelerated filerþ Non-accelerated filero

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

Yeso Noþ.

As of ~~May 7,~~August 6, 2007, ~~60,445,709~~60,261,799 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.

~~FORWARD—~~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, 2006, including: (1) competitive pressures among depository institutions increase significantly; (2) changes in the interest rate environment reduce interest margins; (3) the Company’s estimates of prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions differ materially from actual results; (4) general economic conditions, either national or in the states in which the Company does business, are less favorable than expected; (5) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions adversely affect the businesses in which the Company is engaged; (7) changes and trends in the securities markets result in an adverse effect to the Company; (8) a delayed or incomplete resolution of regulatory issues; (9) the impact of reputational risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity; and (10) the outcome of regulatory and legal investigations and proceedings.

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.

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, 2007 (unaudited) and December 31, 2006.


~~Consolidated Statements of Financial Condition — March 31, 2007 (unaudited) and December 31, 2006.~~

~~Unaudited Consolidated Statements of Earnings — For the three months ended March 31,~~Unaudited Consolidated Statements of Earnings — For the three and six months ended June 30, 2007 and 2006.

~~Consolidated Statements of Stockholders’ Equity and Comprehensive Income — For the three months ended March 31, 2007 (unaudited) and for the year ended December 31, 2006.~~

~~Unaudited Consolidated Statements of Cash Flows — For the three months ended March 31, 2007 and 2006.~~

~~Unaudited Notes to Consolidated Financial Statements.~~
~~Statement regarding Computation of Net Earnings per Share~~
~~Section 302 Certification of Chief Executive Officer~~
~~Section 302 Certification of Chief Financial Officer~~
~~Section 906 Certification of Chief Executive Officer~~
~~Section 906 Certification of Chief Financial Officer~~

~~Flagstar Bancorp, Inc.~~

~~Consolidated Statements of Financial Condition~~

~~(In thousands, except for share data)~~

At March 31, At December 31,
2007 2006
(Unaudited)
Assets

Cash and cash items $ 111,735 $ 136,675
Interest-bearing deposits 398,188 140,561

Cash and cash equivalents 509,923 277,236
Securities classified as trading 16,247 —
Securities classified as available for sale 983,825 617,450
Mortgage-backed securities held to maturity (fair value $1.2 billion and $1.6 billion at March 31, 2007, and December 31, 2006, respectively) 1,156,805 1,565,420
Other investments 23,773 24,035
Loans available for sale 3,791,142 3,188,795
Loans held for investment 7,981,945 8,939,685
Less: allowance for loan losses (48,500 ) (45,779 )

Loans held for investment, net 7,933,445 8,893,906

Total interest-earning assets 14,303,425 14,430,167
Accrued interest receivable 50,312 52,758
Repossessed assets, net 76,765 80,995
Federal Home Loan Bank stock 329,027 277,570
Premises and equipment, net 221,911 219,243
Mortgage servicing rights, net 226,794 173,288
Other assets 112,153 126,509

Total assets $ 15,432,122 $ 15,497,205

Liabilities and Stockholders’ Equity

Liabilities

Deposits $ 7,975,382 $ 7,623,488
Federal Home Loan Bank advances 5,604,000 5,407,000
Security repurchase agreements 625,426 990,806
Long term debt 207,472 207,472

Total interest-bearing liabilities 14,412,280 14,228,766
Accrued interest payable 48,597 46,302
Federal income taxes payable 32,747 29,674
Secondary market reserve 26,500 24,200
Payable for securities purchased — 249,694
Other liabilities 114,340 106,335

Total liabilities 14,634,464 14,684,971
Commitments and Contingencies — —
Stockholders’ Equity

Common stock $.01 par value, 150,000,000 shares authorized; 63,644,139 and 63,604,590 shares issued and outstanding at March 31, 2007, and December 31, 2006, respectively 636 636
Additional paid in capital 63,451 63,223
Accumulated other comprehensive income 6,834 5,182
Retained earnings 743,203 743,193
Treasury stock, at cost, 1,284,300 shares at March 31, 2007, and none at December 31, 2006 (16,466 ) —

Total stockholders’ equity 797,658 812,234

Total liabilities and stockholders’ equity $ 15,432,122 $ 15,497,205

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

~~Flagstar Bancorp, Inc.~~

~~Consolidated Statements of Earnings~~

~~(In thousands, except per share data)~~

For the Three Months Ended
March 31,
2007 2006
(Unaudited)
Interest Income

Loans $ 187,252 $ 171,773
Mortgage-backed securities 14,617 17,152
Securities available for sale 13,598 —
Interest-bearing deposits 3,501 —
Other 1,602 2,374

Total interest income 220,570 191,299

Interest Expense

Deposits 85,026 75,217
FHLB advances 67,852 39,973
Security repurchase agreements 12,393 13,496
Other 3,327 3,938

Total interest expense 168,598 132,624

Net interest income 51,972 58,675
Provision for loan losses 8,293 4,063

Net interest income after provision for loan losses 43,679 54,612

Non-Interest Income

Loan fees and charges 638 1,611
Deposit fees and charges 4,978 4,811
Loan administration 2,615 4,355
Net gain on loan sales 25,154 17,084
Net gain on sales of mortgage servicing rights 115 8,586
Net gain (loss) on securities available for sale 729 (3,557 )
Other fees and charges 5,669 9,731

Total non-interest income 39,898 42,621

Non-Interest Expense

Compensation and benefits 39,492 36,274
Occupancy and equipment 16,768 16,887
Communication 1,074 1,224
Other taxes (573 ) 2,029
General and administrative 14,637 11,656

Total non-interest expense 71,398 68,070

Earnings before federal income taxes 12,179 29,163
Provision for federal income taxes 4,420 10,253

Net Earnings
$ 7,759 $ 18,910

Earnings per share
Basic $ 0.12 $ 0.30

Diluted $ 0.12 $ 0.29

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

~~Flagstar Bancorp, Inc.~~

Consolidated Statements of Stockholders’ Equity and Comprehensive Income — For the six months ended June 30, 2007 (unaudited) and for the year ended December 31, 2006.

~~(In thousands, except per share data)~~

Accumulated
Additional Other Total
Common Paid in Comprehensive Retained Treasury Stockholders
Stock Capital Income Earnings Stock Equity
Balance at January 1, 2006
$ 632 $ 57,304 $ 7,834 $ 706,113 $ — $ 771,883
Net earnings — — — 75,202 — 75,202
Reclassification of gain on swap extinguishment — — (1,167 ) — — (1,167 )
Change in net unrealized loss on swaps used in cash flow hedges — — (1,874 ) — — (1,874 )
Change in net unrealized gain on securities available for sale — — 389 — — 389

Total comprehensive income — — — — — 72,550
Stock options exercised 4 2,201 — — — 2,205
Stock-based compensation — 2,718 — — — 2,718
Tax benefit from stock-based compensation — 1,000 — — — 1,000
Dividends paid ($0.60 per share) — — — (38,122 ) — (38,122 )

Balance at December 31, 2006
636 63,223 5,182 743,193 — 812,234
(Unaudited)
Net earnings — — — 7,759 — 7,759
Reclassification of gain on swap extinguishment — — (30 ) — — (30 )
Change in net unrealized loss on swaps used in cash flow hedges — — (1,000 ) — — (1,000 )
Change in net unrealized gain on securities available for sale — — 2,682 — — 2,682

Total comprehensive income — — — — — 9,411
Adjustment to initially apply FIN 48 — — — (1,428 ) — (1,428 )
Stock options exercised — 24 — — — 24
Stock-based compensation — 263 — — — 263
Tax effect from stock-based compensation — (59 ) — — — (59 )
Purchase of treasury stock — — — — (16,466 ) (16,466 )
Dividends paid ($0.10 per share) — — — (6,321 ) — (6,321 )

Balance at March 31, 2007
$ 636 $ 63,451 $ 6,834 $ 743,203 $ (16,466 ) $ 797,658

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

~~Flagstar Bancorp, Inc.~~

Unaudited Consolidated Statements of Cash Flows — For the six months ended June 30, 2007 and 2006 (restated).

~~(In thousands)~~Unaudited Notes to Consolidated Financial Statements.

For the Three Months Ended
March 31,
2007 2006
(Unaudited)
Operating Activities

Net earnings $ 7,759 $ 18,910
Adjustments to net earnings to net cash used in operating activities
Provision for loan losses 8,293 4,063
Depreciation and amortization 21,449 31,618
Decrease in valuation allowance in mortgage servicing rights (448 ) —
Stock-based compensation expense 374 683
Net gain on the sale of assets (878 ) (106 )
Net gain on loan sales (25,154 ) (17,084 )
Net loss on securities available for sale — 3,557
Net gain on sales of mortgage servicing rights (115 ) (8,586 )
Net gain on securities classified as available for sale (729 ) —
Proceeds from sales of loans available for sale 5,335,697 3,895,767
Investment in securities classified as trading (16,247 ) —
Origination and repurchase of mortgage loans available for sale, net of principal repayments (5,349,048 ) (3,963,205 )
Decrease in accrued interest receivable 2,446 1,037
Decrease (increase) in other assets 12,817 (13,982 )
Increase in accrued interest payable 2,295 937
Net tax effect for stock grants issued 59 (156 )
Increase in federal income taxes payable 6,204 7,119
Decrease in payable for securities purchased (249,694 ) —
Decrease in other liabilities (5,628 ) (3,331 )

Net cash used in operating activities (250,548 ) (42,759 )

Investing Activities

Net change in other investments 262 (1,336 )
Repayment of mortgage-backed securities held to maturity 92,238 29,558
Proceeds from sale of investment securities available for sale 171,441 —
Purchase of investment securities available for sale (218,023 ) —
Origination of portfolio loans, net of principal repayments 363,458 133,615
Purchase of Federal Home Loan Bank stock (51,457 ) —
Proceeds from the disposition of repossessed assets 26,255 10,693
Acquisitions of premises and equipment, net of proceeds (8,102 ) (13,715 )
Increase in mortgage servicing rights (68,039 ) (46,368 )
Proceeds from the sale of mortgage servicing rights 116 25,560

Net cash provided by investing activities 308,149 138,007

Financing Activities

Net increase in deposit accounts 351,894 287,887
Net (decrease) increase in security repurchase agreements (365,380 ) 43,439
Net increase (decrease) in Federal Home Loan Bank advances 197,000 (381,000 )
Net receipt (disbursement) of payments of loans serviced for others 8,170 (2,198 )
Net receipt of escrow payments 6,335 9,561
Proceeds from the exercise of stock options (87 ) 2,181
Net tax effect of stock grants issued (59 ) 156
Dividends paid to stockholders (6,321 ) (9,522 )
Purchase of treasury stock (16,466 ) —

Net cash provided by (used in) financing activities 175,086 (49,496 )

Net increase in cash and cash equivalents 232,687 45,752
Beginning cash and cash equivalents 277,236 201,163

Ending cash and cash equivalents $ 509,923 $ 246,915

Supplemental disclosure of cash flow information

Loans held for investment transferred to repossessed assets $ 26,720 $ 22,317

Total interest payments made on deposits and other borrowing $ 166,303 $ 131,687

Federal income taxes paid $ — $ —

Mortgage loans available for sale transferred to held for investment $ 125,721 $ 91,539

Mortgage loans held for investment transferred to available for sale $ 693,283 $ 674,263

Statement Regarding Computation of Net Earnings Per Share

Section 302 Certification of Chief Executive Officer

Section 302 Certification of Chief Financial Officer

Section 906 Certification of Chief Executive Officer

Section 906 Certification of Chief Financial Officer

Flagstar Bancorp, Inc.

Consolidated Statements of Financial Condition

(In thousands, except for share data)


	At June 30,			At December 31,
	2007			2006
	(Unaudited)
Assets
Cash and cash items	$	107,541		$	136,675
Interest-bearing deposits		167,367			140,561

Cash and cash equivalents		274,908			277,236
Securities classified as trading		20,487			—
Securities classified as available for sale		973,787			617,450
Mortgage-backed securities held to maturity (fair value $1.1 billion and $1.6 billion at June 30, 2007, and December 31, 2006, respectively)		1,069,350			1,565,420
Other investments		24,233			24,035
Loans available for sale		5,110,768			3,188,795
Loans held for investment		7,655,473			8,939,685
Less: allowance for loan losses		(53,400	)		(45,779	)

Loans held for investment, net		7,602,073			8,893,906

Total interest-earning assets		14,968,065			14,430,167
Accrued interest receivable		56,144			52,758
Repossessed assets, net		78,916			80,995
Federal Home Loan Bank stock		329,027			277,570
Premises and equipment, net		223,330			219,243
Mortgage servicing rights, net		266,545			173,288
Other assets		149,910			126,509

Total assets	$	16,179,478		$	15,497,205

Liabilities and Stockholders’ Equity
Liabilities
Deposits	$	7,697,810		$	7,623,488
Federal Home Loan Bank advances		5,529,055			5,407,000
Security repurchase agreements		1,705,418			990,806
Long term debt		233,246			207,472

Total interest-bearing liabilities		15,165,529			14,228,766
Accrued interest payable		47,813			46,302
Federal income taxes payable		36,188			29,674
Secondary market reserve		27,300			24,200
Payable for securities purchased		—			249,694
Other liabilities		132,373			106,335

Total liabilities		15,409,203			14,684,971
Commitments and Contingencies		—			—
Stockholders’ Equity
Common stock $0.01 par value, 150,000,000 shares authorized; 63,648,041 and 63,604,590 shares issued and outstanding at June 30, 2007, and December 31, 2006, respectively		637			636
Additional paid in capital		63,758			63,223
Accumulated other comprehensive income (loss)		(4,736	)		5,182
Retained earnings		752,321			743,193
Treasury stock, at cost, 3,388,430 shares at June 30, 2007, and none at December 31, 2006		(41,705	)		—

Total stockholders’ equity		770,275			812,234

Total liabilities and stockholders’ equity	$	16,179,478		$	15,497,205

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

Flagstar Bancorp, Inc.

Consolidated Statements of Earnings

(In thousands, except per share data)


	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
	(Unaudited)
Interest Income
Loans	$	189,958		$	170,121		$	377,208		$	341,893
Mortgage-backed securities		13,768			21,148			28,385			38,300
Securities available for sale		13,524			—			27,122			—
Interest-bearing deposits		2,674			—			6,176			—
Other		2,540			1,379			4,142			3,754

Total interest income		222,464			192,648			443,033			383,947

Interest Expense
Deposits		86,038			82,055			171,064			157,272
FHLB advances		64,882			42,497			132,734			82,470
Security repurchase agreements		18,041			13,051			30,434			26,546
Other		3,586			4,307			6,913			8,246

Total interest expense		172,547			141,910			341,145			274,534

Net interest income		49,917			50,738			101,888			109,413
Provision for loan losses		11,452			5,859			19,745			9,923

Net interest income after provision for loan losses		38,465			44,879			82,143			99,490

Non-Interest Income
Loan fees and charges		837			1,239			1,475			2,850
Deposit fees and charges		5,710			5,692			10,688			10,503
Loan administration		3,149			309			5,764			4,664
Net gain on loan sales		28,144			9,650			53,298			26,735
Net gain on sales of mortgage servicing rights		5,610			34,932			5,725			43,518
Net gain (loss) on securities available for sale		—			—			729			(3,557	)
Other fees and charges		13,994			9,750			19,663			19,481

Total non-interest income		57,444			61,572			97,342			104,194

Non-Interest Expense
Compensation and benefits		39,150			34,943			78,642			71,217
Occupancy and equipment		17,014			16,722			33,782			33,609
Communication		2,330			963			3,404			2,187
Other taxes		(10	)		(3,659	)		(583	)		(1,630	)
General and administrative		13,750			13,385			28,387			25,041

Total non-interest expense		72,234			62,354			143,632			130,424

Earnings before federal income taxes		23,675			44,097			35,853			73,260
Provision for federal income taxes		8,544			15,457			12,963			25,710

Net Earnings	$	15,131		$	28,640		$	22,890		$	47,550

Earnings per share
Basic	$	0.25		$	0.45		$	0.37		$	0.75

Diluted	$	0.25		$	0.44		$	0.37		$	0.74

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

Flagstar Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

(In thousands, except per share data)


						Accumulated
			Additional			Other									Total
	Common		Paid in			Comprehensive			Retained			Treasury			Stockholders’
	Stock		Capital			Income (Loss)			Earnings			Stock			Equity
Balance at January 1, 2006	$	632	$	57,304		$	7,834		$	706,113		$	—		$	771,883
Net earnings		—		—			—			75,202			—			75,202
Reclassification of gain on swap extinguishment		—		—			(1,167	)		—			—			(1,167	)
Change in net unrealized loss on swaps used in cash flow hedges		—		—			(1,874	)		—			—			(1,874	)
Change in net unrealized gain on securities available for sale		—		—			389			—			—			389

Total comprehensive income		—		—			—			—			—			72,550
Stock options exercised		4		2,201			—			—			—			2,205
Stock-based compensation		—		2,718			—			—			—			2,718
Tax benefit from stock-based compensation		—		1,000			—			—			—			1,000
Dividends paid ($0.60 per share)		—		—			—			(38,122	)		—			(38,122	)

Balance at December 31, 2006 (Unaudited)		636		63,223			5,182			743,193			—			812,234
Net earnings		—		—			—			22,890			—			22,890
Reclassification of gain on swap extinguishment		—		—			(60	)		—			—			(60	)
Change in net unrealized loss on swaps used in cash flow hedges		—		—			(1,323	)		—			—			(1,323	)
Change in net unrealized gain on securities available for sale		—		—			(8,535	)		—			—			(8,535	)

Total comprehensive income		—		—			—			—			—			12,972
Adjustment to initially apply FIN 48		—		—			—			(1,428	)		—			(1,428	)
Stock options exercised		1		31			—			—			—			32
Stock-based compensation		—		547			—			—			—			547
Tax effect from stock-based compensation		—		(43	)		—			—			—			(43	)
Purchase of treasury stock		—		—			—			—			(41,705	)		(41,705	)
Dividends paid ($0.20 per share)		—		—			—			(12,334	)		—			(12,334	)

Balance at June 30, 2007	$	637	$	63,758		$	(4,736	)	$	752,321		$	(41,705	)	$	770,275

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,
	2007			2006
	(Unaudited)
				(as restated)
Operating Activities

Net earnings	$	22,890		$	47,550
Adjustments to net earnings to net cash used in operating activities
Provision for loan losses		19,745			9,923
Depreciation and amortization		46,147			62,464
Decrease in valuation allowance in mortgage servicing rights		(408	)		—
Stock-based compensation expense		725			1,415
Net gain on the sale of assets		(1,777	)		(172	)
Net gain on loan sales		(53,298	)		(26,735	)
Net (gain) loss on securities classified as available for sale		(729	)		3,557
Net gain on sales of mortgage servicing rights		(5,725	)		(43,518	)
Proceeds from sales and securitizations of loans available for sale		10,433,710			7,048,928
Origination and repurchase of mortgage loans available for sale, net of principal repayments		(12,477,316	)		(7,950,092	)
Increase in accrued interest receivable		(3,386	)		(1,867	)
Increase in other assets		(25,438	)		(76,989	)
Increase in accrued interest payable		1,511			4,803
Net tax effect for stock grants issued		43			(831	)
(Decrease) increase in federal income taxes payable		(1,412	)		16,564
Decrease in payable for securities purchased		(249,694	)		—
(Decrease) increase in other liabilities		(2,813	)		3,033

Net cash used in operating activities		(2,297,225	)		(901,967	)

Investing Activities
Net change in other investments		(198	)		(2,363	)
Purchase of mortgage-backed securities held to maturity		—			(39,649	)
Repayment of mortgage-backed securities held to maturity		178,823			223,937
Proceeds from sale of investment securities available for sale		171,441			—
Purchase of investment securities available for sale, net of principal repayments		(202,794	)		—
Proceeds from sales of portfolio loans		693,283			814,560
Origination of portfolio loans, net of principal repayments		526,147			(392,329	)
Purchase of Federal Home Loan Bank stock		(51,457	)		—
Investment in unconsolidated subsidiary		774			—
Proceeds from the disposition of repossessed assets		47,927			22,699
Acquisitions of premises and equipment, net of proceeds		(14,793	)		(22,963	)
Proceeds from the sale of mortgage servicing rights		33,459			194,502

Net cash provided by investing activities		1,382,612			798,394

Financing Activities
Net increase (decrease) in deposit accounts		74,322			(80,181	)
Net increase in security repurchase agreements		714,612			85,481
Net increase in Federal Home Loan Bank advances		122,055			65,000
Issuance of junior subordinated debt		25,000			—
Net receipt of payments of loans serviced for others		6,226			2,127
Net receipt of escrow payments		24,298			19,307
Proceeds from the exercise of stock options		(146	)		3,045
Net tax effect of (benefit for) stock grants issued		(43	)		831
Dividends paid to stockholders		(12,334	)		(19,050	)
Purchase of treasury stock		(41,705	)		—

Net cash provided by financing activities		912,285			76,560

Net decrease in cash and cash equivalents		(2,328	)		(27,013	)
Beginning cash and cash equivalents		277,236			201,163

Ending cash and cash equivalents	$	274,908		$	174,150

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

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


	For the Six Months Ended June 30,
	2007		2006
	(Unaudited)
			(as restated)
Supplemental Disclosure of Cash Flow Information
Loans held for investment transferred to repossessed assets	$	56,315	$	53,388

Total interest payments made on deposits and other borrowing	$	339,634	$	269,130

Federal income taxes paid	$	—	$	8,353

Mortgage loans available for sale transferred to held for investment	$	167,943	$	156,584

Mortgage loans held for investment transferred to available for sale	$	693,283	$	814,560

Recharacterization of loans held for investment to mortgage-backed securities held to maturity	$	—	$	435,380

Mortgage servicing rights resulting from sale or securitization of loans	$	154,000	$	113,538

Retention of residual interests in securitization transactions	$	29,398	$	8,733

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 ~~$15.4~~$16.2 billion in assets at ~~March 31,~~June 30, 2007, Flagstar is the largest savings institution and second largest banking 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. ~~The~~Its primary lending activity is the acquisition or origination of single-family mortgage ~~loans is the Company’s primary lending activity.~~loans. The Company also originates consumer loans, commercial real estate loans, and non-real estate commercial ~~loans.~~loans and services a significant volume of residential mortgage loans for others.

The Company sells or securitizes most of the mortgage loans that it ~~originates. The Company~~originates and 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 significant amount of its loan production in order to ~~maximize~~enhance the Company’s leverage ability and to receive the related interest spread between earning assets and paying liabilities. ~~The Company also acquires funds on a wholesale basis from a variety of sources and services a significant volume of loans for others.~~

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.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. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. The accompanying interim consolidated 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~~periods ended ~~March 31,~~June 30, 2007, are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. 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, 2006. The Form 10-K can be found on the Company’s Investor Relations web page, atwww.flagstar.com, and on the website of the Securities and Exchange Commission, atwww.sec.gov.

Note 3.Recent Accounting Developments

Establishing Standards on Measuring Fair Value

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 157, “Fair Value Measurements.”SFAS 157 defines the term “fair value” for U.S. GAAP purposes to include the use of an exit price, establishes a framework for measuring fair value by reference to an exit price, and expands disclosures about fair value measurements. It also clarifies that the ~~exchange~~exit price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at a measurement date. SFAS 157 emphasizes that fair value is a market-based measurement and not an entity-specific measurement. It also establishes a hierarchy used in such measurement and expands the required disclosures of assets and liabilities measured at fair value. Management will be required to adopt SFAS 157 beginning in 2008. The adoption of this standard is not expected to have a material impact on the Company’s financial condition, results of operation or liquidity.

Fair Value Option

In February 2007, the FASB issued SFAS 159,“The Fair Value Option for Financial Assets and Financial Liabilities.”SFAS 159 allows entities to elect to measure those financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The election may be applied instrument by instrument, is irrevocable once made and must be applied to the entire instrument and not to specified risks, specific cash flows or other limited aspects of that instrument. An entity is restricted in choosing the dates to elect the fair value option for an eligible item. SFAS 159 applies to the Company effective January 1, 2008. Management of the Company is currently evaluating the potential impact of SFAS 159 on the Company’s financial condition, results of operation or liquidity.

Note 4.Investment Securities

As of ~~March 31,~~June 30, 2007 and December 31, 2006, investment securities were comprised of the following (in thousands):


	March 31,		December 31,		June 30,		December 31,
	2007		2006		2007		2006
Securities — trading	$	16,247	$	—	$	20,487	$	—

Securities — available for sale
AAA-rated non-agency securities	$	937,654	$	497,089	$	922,425	$	497,089
AAA-rated agency securities		—		77,910		—		77,910
Non-investment grade residual securities		46,171		42,451		51,362		42,451

Total mortgage-backed securities—available for sale	$	983,825	$	617,450	$	973,787	$	617,450

Mortgage-backed securities — held to maturity
AAA-rated non-agency securities	$	—	$	332,362	$	—	$	332,362
AAA-rated agency securities		1,156,805		1,233,058		1,069,350		1,233,058

Total mortgage-backed securities — held to maturity	$	1,156,805	$	1,565,420	$	1,069,350	$	1,565,420

Other investments
Mutual funds	$	23,060	$	23,320	$	23,523	$	23,320
U.S. Treasury bonds		713		715		710		715

Total other investments	$	23,773	$	24,035	$	24,233	$	24,035

At ~~March 31,~~June 30, 2007, the Company had ~~$16.2~~$20.5 million in securities classified as trading. These securities are non-investment grade residual assets from a private securitization ~~completed on~~that was closed in March ~~15,~~with a secondary closing in June 2007. The securities are recorded at fair value with any unrealized gains and losses reported in the consolidated statement of earnings. Prior to this transaction, the Company had no securities classified as trading.

At ~~March 31,~~June 30, 2007, the Company had ~~$983.8~~$973.8 million in securities classified as available for sale, which were comprised of ~~AAA rated~~AAA-rated agency securities, AAA-rated non-agency securities and non-investment grade residual securities arising from its private securitizations. Securities available for sale are carried at fair value, with unrealized gains and losses reported as a component of other comprehensive ~~income.~~income to the extent they are temporary in nature. If losses are, at any time, deemed to have arisen from “other-than-temporary impairments” (OTTI), then they are reported as an expense for that period. There are no securities that have been in an unrealized loss position for twelve months or more. At June 30, 2007, $880.0 million of the securities classified as available for sale were pledged as collateral for security repurchase agreements.

During the quarter ended March 31, 2007, the Company received written guidance from the OTS on regulatory capital treatment being used by the Bank for securities retained from a guaranteed mortgage securitization of fixed second mortgage loans completed in April 2006. The securities had been initially recorded as held to maturity because the underlying bonds were ~~AAA rated~~AAA-rated and insured by a private insurance company and, therefore, the Bank expected that the securities would receive 20% risk-weighted capital treatment rather than 50% or 100% risk-weighted treatment. At the time, the Company had both the ability and intent to hold the securities to maturity. In its guidance, the OTS advised the Company that the recharacterization of the underlying loans in the guaranteed mortgage securitization did not decrease the risk associated with carrying fixed second mortgage loans because the capital rules did not recognize private insurance companies as eligible guarantors. Because of this information received from the OTS, the Company’s capital treatment of the underlying securities changed significantly. As a result, the Company no longer intends to hold the securities to maturity and during the quarter ended March 31, 2007, reclassified $321.1 million in securities associated with the guaranteed mortgage securitization of fixed second mortgage loans completed in April 2006 to available for sale. Upon reclassification of the securities to available for sale, the Company recognized a $1.3 million loss, before taxes, to other comprehensive income. Management does not believe that this capital treatment could have been reasonably anticipated and the reclassification to available for sale will not impact the held to maturity status of the Company’s other held to maturity securities.

At ~~March 31,~~June 30, 2007, the Company had ~~$1.2~~$1.1 billion in ~~AAA rated~~AAA-rated mortgage-backed securities classified as held to maturity. Of such securities, ~~$624.4~~$869.0 million were pledged as collateral for security repurchase agreements at ~~March 31,~~June 30, 2007.

The Company has other investments because of interim investment strategies in trust subsidiaries, collateral requirements required in swap and deposit transactions, and Community Reinvestment Act investment requirements. U.S. Treasury bonds in the amount of ~~$514,000~~$710,000 and ~~$517,000~~$715,000 are pledged as collateral in association with the issuance of certain trust preferred securities at ~~March 31,~~June 30, 2007 and December 31, 2006, respectively.

Note 5.Securitization Activity

On March 15, 2007, the Company sold $620.9 million in closed-ended, fixed and adjustable rate mortgage loans (the “Second Mortgage Securitization”) and recorded $22.6 million in residual interests and servicing assets as a result of the non-agency securitization. The residual interests are categorized as securities classified as trading and are therefore recorded at fair value. Any gains or losses realized on the sale of such securities and any subsequent changes in unrealized gains and losses are reported in the consolidated statement of earnings.

Certain cash flows received from securitization trusts outstanding ~~including the trust arising from the Second Mortgage Securitization,~~ were as follows (in thousands):


						For the Three Months Ended						For the Six Months Ended
	For the Three Months Ended March 31,					June 30,						June 30,
	2007		2006			2007			2006			2007			2006
Proceeds from new securitizations	$	620,866	$	—		$	98,231		$	—		$	719,097		$	—
Proceeds from collections reinvested in securitizations		42,230		25,296			48,719			18,953			90,949			63,203
Servicing fees received		1,215		726			1,907			973			3,122			2,342
Loan repurchases for representations and warranties		—		(500	)
Provision for loan repurchases for representations and warranties							(642	)		(227	)		(642	)		(727	)

Note 6.Stock-Based Compensation

On January 1, 2006, the Company adopted SFAS ~~No.~~ 123R, “Share-Based Payment,” using the modified prospective method. SFAS ~~No.~~ 123R requires all share-based ~~payment~~payments to employees, including grants of employee stock options and stock appreciation rights, to be recognized as expense in the consolidated statement of earnings based on their fair values. The total amount of compensation is determined based on the fair value of the options when granted and is expensed over the required service period, which is normally the vesting period of the options. SFAS ~~No.~~ 123R applies to awards granted or modified on or after January 1, 2006, and to any unvested awards that were outstanding at December 31, 2005. Consequently, compensation expense is recorded for prior option grants that vest on or after January 1, 2006, the date of adoption. In accordance with SFAS ~~No.~~ 123R, for the period beginning January 1, 2006, only the excess tax benefits from the exercise of stock options are presented as financing cash flows. ~~The~~For the six months ended June 30, 2007 and 2006, the excess tax effect totaled $(0.1) million and ~~$0.2~~$0.8 million, ~~for the three months ended March 31, 2007, and 2006,~~ respectively. During the ~~quarter~~six months ended ~~March 31,~~June 30, 2007, there were no options granted.

Cash-Settled Stock Appreciation Rights

The Company used the following weighted average assumptions in applying the Black-Scholes model to determine the fair value of cash-settled stock appreciation rights issued and outstanding during the three months ended ~~March 31,~~June 30, 2007: dividend yield of ~~3.2%~~3.20%; expected volatility range of ~~21.44%~~19.40% to 21.55%; a risk-free rate range of ~~4.51%~~4.50% to 4.59%; and an expected life range of ~~4.2~~3.90 to ~~4.8~~4.85 years. The cash-settled stock appreciation rights generally vest over a four year period at the rate of 25% on each anniversary date of the grant.

The following table presents the status and changes in cash-settled stock appreciation ~~rights:~~rights for the period presented:


											Weighted Average
				Weighted Average					Weighted Average		Grant Date
	Shares			Exercise Price		Shares			Exercise Price		Fair Value
Stock Appreciation Rights Awarded:
Non-vested balance at December 31, 2006		328,873		$	16.28		328,873		$	16.28	$	2.99
Granted		552,554		$	14.48		590,692		$	14.34	$	2.20
Vested		(82,197	)	$	16.28		(82,228	)	$	16.28	$	2.99
Forfeited		(545	)	$	14.48		(2,217	)	$	14.48	$	2.20

Non-vested balance at March 31, 2007		798,685
Non-vested balance at June 30, 2007							835,120				$	2.43

For the three months ended ~~March 31,~~June 30, 2007 and 2006, the Company recorded stock-based compensation expense of $0.4 million ($0.2 million net of tax) and $0.7 million ($0.4 million net of tax), ~~respectively.~~respectively, or less than $0.01 per share, diluted. For the six months ended June 30, 2007 and 2006, the company recorded stock-based compensation expense of $0.7 million ($0.5 million net of tax) and $1.4 million ($0.9 million net of tax), respectively, or less than $0.01 per share, diluted, for each such period.

1011

Restricted Stock Units

The Company issues restricted stock units to officers, directors and key employees in connection with year-end compensation. Restricted stock units generally vest over a period of two years as outlined in the applicable restricted stock unit agreements, and are delivered shortly after the grant date. The Company incurred expenses of approximately $0.3 million and $0.2 million with respect to restricted stock units for ~~each of~~ the ~~periods~~quarter ended ~~March 31,~~June 30, 2007 and ~~2006.~~2006, respectively. For the six months ended June 30, 2007 and 2006, the Company incurred expenses of approximately, $0.6 million and $0.4 million, respectively. As of ~~March 31,~~June 30, 2007, restricted stock units outstanding had a market value of ~~$1.7~~$1.8 million.

Note 7.Stockholders’ Equity

On January 31, 2007, the Company announced that the board of directors had adopted a Stock Repurchase Program under which the Company was authorized to repurchase up to $40.0 million worth of shares of outstanding common stock. On February 27, 2007, the Company announced that the board of directors had increased the authorized repurchase amount to $50.0 million. On April 26, 2007, the Board increased the authorized repurchase amount to $75.0 million. This program expires on January 31, 2008. At ~~March 31,~~June 30, 2007, ~~$16.5~~$41.7 million has been used to repurchase 3.4 million shares under the plan.

Note 8.Segment Information

The Company’s operations are broken down into two business segments: banking and home lending. Each business operates under the same banking charter, but is reported on a segmented basis for this report. Each of the business lines is complementary to each other. The banking operation includes the gathering of deposits and investing those deposits in duration-matched assets primarily originated by the home lending operation. The banking group holds these loans in the investment portfolio in order to earn income based on the difference or “spread” between the interest earned on loans and the interest paid for deposits and other borrowed funds. The home lending operation involves the origination, packaging, and sale of loans in order to receive transaction income. The home lending operation also services mortgage loans for others and sells MSRs into the secondary market. Funding for the home lending operation is provided by deposits and borrowings garnered by the banking group. All of the non-bank consolidated subsidiaries are included in the banking segment. No such subsidiary is material to the Company’s overall operations.

Following is a presentation of financial information by segment for the periods indicated (in thousands):


											For the Three Months Ended June 30, 2007
	For the Three Months Ended March 31, 2007										Bank		Home Lending
	Bank		Home Lending								Operations		Operations			Elimination			Combined
2007:	Operations		Operations			Elimination			Combined
Net interest income	$	33,493	$	18,479		$	—		$	51,972	$	30,520	$	19,397		$	—		$	49,917
Gain on sale revenue		—		25,269			—			25,269		—		33,754			—			33,754
Other income		10,652		3,977			—			14,629		18,553		5,137			—			23,690
Total net interest income and non-interest income		44,145		47,725			—			91,870		49,073		58,288			—			107,361
Earnings before federal income taxes		7,636		4,543			—			12,179		9,213		14,462			—			23,675
Depreciation and amortization		2,504		18,945			—			21,449		2,480		22,218			—			24,698
Capital expenditures		4,779		3,320			—			8,099		6,714		—			—			6,714
Identifiable assets		14,810,835		4,241,287			(3,620,000	)		15,432,122		15,477,401		5,623,077			(4,921,000	)		16,179,478
Inter-segment income (expense)		27,150		(27,150	)		—			—		36,908		(36,908	)		—			—


	For the Three Months Ended March 31, 2006										For the Six Months Ended June 30, 2007
	Bank		Home Lending								Bank		Home Lending
2006:	Operations		Operations			Elimination			Combined
											Operations		Operations			Elimination			Combined
2007:
Net interest income	$	43,949	$	14,726		$	—		$	58,675	$	64,013	$	37,875		$	—		$	101,888
Gain on sale revenue		—		25,670			—			25,670		—		59,023			—			59,023
Other income		5,383		11,568			—			16,951		29,205		9,114			—			38,319
Total net interest income and non-interest income		49,332		51,964			—			101,296		93,218		106,012			—			199,230
Earnings before federal income taxes		22,644		6,519			—			29,163		16,849		19,004			—			35,853
Depreciation and amortization		3,145		28,018			—			31,163		4,984		41,163			—			46,147
Capital expenditures		11,991		1,408			—			13,399		14,812		—			—			14,812
Identifiable assets		14,126,573		3,064,885			(2,140,000	)		15,051,458		15,477,401		5,623,077			(4,921,000	)		16,179,478
Inter-segment income (expense)		16,050		(16,050	)		—			—		64,058		(64,058	)		—			—

1112


	For the Three Months Ended June 30, 2006
	Bank		Home Lending
	Operations		Operations			Elimination			Combined
2006:
Net interest income	$	38,738	$	12,000		$	—		$	50,738
Gain on sale revenue		—		44,582			—			44,582
Other income		8,867		8,123			—			16,990
Total net interest income and non-interest income		47,605		64,705			—			112,310
Earnings before federal income taxes		14,002		30,095			—			44,097
Depreciation and amortization		2,308		28,737			—			31,045
Capital expenditures		9,438		—			—			9,438
Identifiable assets		14,278,882		3,396,982			(2,450,000	)		15,225,864
Inter-segment income (expense)		18,375		(18,375	)		—			—


	For the Six Months Ended June 30, 2006
	Bank		Home Lending
	Operations		Operations			Elimination			Combined
2006:
Net interest income	$	82,687	$	26,726		$	—		$	109,413
Gain on sale revenue		—		70,253			—			70,253
Other income		14,251		19,690			—			33,941
Total net interest income and non-interest income		96,938		116,669			—			213,607
Earnings before federal income taxes		33,211		40,049			—			73,260
Depreciation and amortization		4,717		57,747			—			62,464
Capital expenditures		22,097		740			—			22,837
Identifiable assets		14,278,882		3,396,982			(2,450,000	)		15,225,864
Inter-segment income (expense)		34,425		(34,425	)		—			—

Note 9.Accounting for Uncertainty in Income Taxes

In June 2006, FASB issued FASB Interpretation 48,“Accounting for Uncertainty in Income Taxes —– an Interpretation of FASB Statement ~~No.~~ 109,”(“FIN 48”), to clarify the accounting treatment for uncertain income tax positions when applying FASB Statement ~~No.~~ 109,“Accounting for Income Taxes.”This interpretation prescribes a financial statement recognition threshold and measurement attribute for any tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Effective January 1, 2007, the Company adopted FIN 48. As a result, the Company recorded the estimated value of its uncertain tax positions by increasing its tax liability by an additional $1.4 million and recording a corresponding reduction to retained earnings. The liability for uncertain tax ~~position~~positions is carried in other liabilities in the consolidated statement of financial position as of ~~March 31,~~June 30, 2007. The Company does not expect any reasonably possible material changes to the estimated amount in its liability associated with its uncertain tax position through December 31, 2007.

The Company recognizes accrued interest and penalties related to uncertain tax positions in federal and other tax expense. At January 1, 2007, the Company had accrued approximately $0.7 million for the payment of tax related interest. As of June 30, 2007, there have been no material changes to the disclosures noted above.

The Company’s income tax returns are subject to review and examination by federal, state, and local government authorities. On an ongoing basis, numerous federal, state, and local examinations are in progress and cover multiple tax years. As of June 30, 2007, the federal taxing authority has completed its examination of the Company through the taxable year ended December 31, 2003. The years open to examination by state and local government authorities vary by jurisdiction.

Note 10.Restatement of Previously Issued Consolidated Financial Statements

Subsequent to filing the Company’s Form 10-Q for the quarterly period ended March 31, 2007, the Company determined that its previously issued Consolidated Statements of Cash Flows contained errors in the classification of certain loan and securitization activities. As a result, the Company has restated the accompanying unaudited Consolidated Statement of Cash Flows for the six months ended June 30, 2006.

1213

The restatement resulted from the misclassification of cash flows from the sale of certain mortgage loans originally held for investment, which had been inappropriately classified as operating activities, and cash flows from certain mortgage loans originated as available for sale, which had been inappropriately classified as investing activities. In accordance with SFAS 102, “Statement of Cash Flows-Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale,” cash flows from the sale of mortgage loans originally held for investment should have been classified as investing activities, rather than operating activities and cash flows from mortgage loans originated to be sold, should have been classified as operating activities, rather than as investing activities.

The restatement also resulted from the treatment of capitalized mortgage servicing rights and residual interests retained from the sale or securitization of loans. Previously, the Company had treated the retention of such interests as cash activities. In accordance with SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” the mortgage servicing rights and residual interests do not exist until they are separated from the associated loans when the loans are sold. Specifically, upon the sale of loans, the amounts related to the mortgage servicing rights or residual interests are reclassified on the consolidated statement of financial condition from loans held for sale and are, therefore, a non-cash transaction. As a result, the Company will show these mortgage servicing rights and residual interests as non-cash transactions in the supplemental disclosures within the Consolidated Statement of Cash Flows.

As a result of the errors described above, the restatement affects the classification of these activities and the subtotals of cash flows from operating and investing activities presented in the affected Consolidated Statement of Cash Flows, but they have no impact on the total Cash and Cash Equivalents for the six months ended June 30, 2006. The restatement does not affect the Unaudited Consolidated Statement of Financial Condition, Consolidated Statement of Earnings or Consolidated Statement of Stockholders’ Equity and Comprehensive Income as of or for the period ended June 30, 2006.

The effects of the restatement on the Consolidated Statement of Cash Flows for the six month period ended June 30, 2006 are reflected in the following table.


	June 30, 2006
	(Unaudited)
	(Dollars in Thousands)
Originally Reported:

Proceeds from sales of loans available for sale	$	7,863,488
Origination and repurchase of loans available for sale, net of principal repayments		(8,231,544	)

Net cash used in operating activities	$	(368,859	)


Proceeds from sales of loans held for investment	$	—
Origination and repurchase of portfolio loans, net of principal repayments		2,661
Increase in mortgage servicing rights		(113,538	)

Net cash used in investing activities	$	265,286


As Restated:

Proceeds from sales of loans available for sale	$	7,048,928
Origination and repurchase of loans available for sale, net of principal repayments		(7,950,092	)

Net cash used in operating activities	$	(901,967	)


Proceeds from sales of portfolio loans	$	814,560
Origination and repurchase of portfolio loans, net of principal repayments		(392,329	)
Increase in mortgage servicing rights		—

Net cash used in investing activities	$	798,394


Difference:

Proceeds from sales of loans available for sale	$	(814,560	)
Origination and repurchase of loans available for sale, net of principal repayments		281,452

Net cash used in operating activities	$	(533,108	)


Proceeds from sales of portfolio loans	$	814,560
Origination and repurchase of portfolio loans, net of principal repayments		(394,990	)
Increase in mortgage servicing rights		113,538

Net cash used in investing activities	$	533,108

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Where we say “we,” ~~“us,~~��us,” or “our,” we usually mean Flagstar Bancorp, Inc. In some cases, a reference to “we,” “us,” or “our” will include our wholly-owned subsidiary Flagstar Bank, FSB, and Flagstar Capital Markets Corporation, its wholly-owned subsidiary, which we collectively refer to as the “Bank.”

General

Operations of the Bank are categorized into two business segments: banking and home lending. Each segment operates under the same banking charter, but is reported on a segmented basis for financial reporting purposes. For certain financial information concerning the results of operations of our banking and home lending operations, see Note 8 of the Notes to Consolidated Financial Statements, in Item 1, Financial Statements, herein.

Banking Operation.We provide a full range of banking services to consumers and small businesses in Michigan, Indiana and Georgia. Our banking operation involves the gathering of deposits and investing those deposits in duration-matched assets consisting primarily of mortgage loans originated by our home lending operation. The banking operation holds these loans in its loans held for investment portfolio in order to earn income based on the difference, or “spread,” between the interest earned on loans and investments and the interest paid for deposits and other borrowed funds. At ~~March 31,~~June 30, 2007, we operated a network of ~~155~~156 banking centers and provided banking services to approximately ~~201,200~~121,000 customers. During the first ~~three~~six months of 2007, we opened ~~four~~five banking centers, including three in Michigan and ~~one~~two in Georgia. During the remainder of 2007, we expect to open ~~five~~four additional branches in the Atlanta, Georgia area, ~~and four~~three additional branches in ~~Michigan.~~Michigan, and one in Indiana.

Home Lending Operation.Our home lending operation originates, acquires, securitizes and sells residential mortgage loans on one-to-four family residences in order to generate transactional income. The home lending operation also services mortgage loans on a fee basis for others and occasionally sells mortgage servicing rights into the secondary market. Funding for our home lending operation is provided primarily by deposits and borrowings obtained by our banking operation.

Critical Accounting Policies

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified five policies that, due to the judgment, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to: (a) the determination of our allowance for loan losses; (b) the valuation of our MSRs; (c) the valuation of our residuals; (d) the valuation of our derivative instruments; and (e) the determination of our secondary market reserve. We believe that the judgment, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. For further information on our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2006, which is available on our website,www.flagstar.com, under the Investor Relations section, or on the website of the SEC, atwww.sec.gov.

1315

Selected Financial Ratios ~~(Dollars~~
(Dollars in thousands, except share data)


	For the Three Months Ended						For the Three Months Ended						For the Six Months Ended
	March 31,						June 30,						June 30,
	2007			2006			2007			2006			2007			2006
Return on average assets		0.19	%		0.50	%		0.38	%		0.76	%		0.29	%		0.63	%
Return on average equity		3.85	%		9.73	%		7.69	%		14.46	%		5.79	%		12.12	%
Efficiency ratio		77.7	%		67.2	%		67.3	%		55.5	%		72.1	%		61.1	%
Equity/assets ratio (average for the period)		5.06	%		5.20	%		4.99	%		5.22	%		4.93	%		5.18	%
Mortgage loans originated or purchased	$	5,489,329		$	4,348,153		$	7,162,855		$	4,900,850		$	12,652,185		$	9,249,003
Other loans originated or purchased	$	263,819		$	325,939		$	258,936		$	358,057		$	522,754		$	684,997
Mortgage loans sold	$	5,289,617		$	3,894,070		$	5,730,633		$	3,964,625		$	11,020,249		$	7,858,695
Interest rate spread — Bank only¹		1.34	%		1.56	%
Net interest margin — Bank only²		1.43	%		1.65	%
Interest rate spread — Consolidated¹		1.33	%		1.57	%
Net interest margin — Consolidated²		1.42	%		1.72	%
Interest rate spread – Bank only¹								1.30	%		1.30	%		1.26	%		1.45	%
Net interest margin – Bank only²								1.43	%		1.54	%		1.42	%		1.64	%
Interest rate spread – Consolidated¹								1.27	%		1.41	%		1.21	%		1.48	%
Net interest margin – Consolidated²								1.35	%		1.49	%		1.39	%		1.60	%
Dividend payout ratio		81.5	%		50.4	%		39.7	%		33.3	%		53.9	%		40.1	%
Average common shares outstanding		63,427			63,367			60,691			63,509			62,051			63,438
Average fully diluted shares outstanding		64,041			64,181			61,110			64,446			62,552			64,333
Charge-offs to average investment loans (annualized)		0.26	%		0.15	%		0.36	%		0.23	%		0.33	%		0.20	%


	March 31,			December 31,			March 31,			June 30,			March 31,			December 31,			June 30,
	2007			2006			2006			2007			2007			2006			2006
Equity-to-assets ratio		5.17	%		5.24	%		5.20	%		4.76	%		5.17	%		5.24	%		5.28	%
Core capital ratio³		6.29	%		6.37	%		6.33	%		6.04	%		6.29	%		6.37	%		6.39	%
Total risk-based capital ratio³		11.42	%		11.55	%		11.20	%		10.96	%		11.42	%		11.55	%		11.15	%
Book value per share	$	12.79		$	12.77		$	12.33		$	12.78		$	12.79		$	12.77		$	12.65
Number of common shares outstanding		62,360			63,605			63,488			60,260			62,360			63,605			63,529
Mortgage loans serviced for others	$	19,124,378		$	15,032,504		$	29,242,906		$	21,508,835		$	19,124,378		$	15,032,504		$	22,379,937
Capitalized value of mortgage servicing rights		1.19	%		1.15	%		1.10	%		1.24	%		1.19	%		1.15	%		1.03	%
Ratio of allowance to non-performing loans		65.0	%		80.2	%		68.2	%		53.8	%		65.0	%		80.2	%		79.2	%
Ratio of allowance to loans held for investment		0.61	%		0.51	%		0.40	%		0.70	%		0.61	%		0.51	%		0.42	%
Ratio of non-performing assets to total assets		1.04	%		1.03	%		1.00	%		1.18	%		1.04	%		1.03	%		0.99	%
Number of banking centers		155			151			141			156			155			151			145
Number of home lending centers		72			76			97			73			72			76			87
Number of salaried employees		2,522			2,510			2,421			2,689			2,522			2,510			2,548
Number of commissioned employees		448			444			594			462			448			444			530


¹		Interest rate spread is the difference between the annualized average yield earned on average interest-earning assets for the period and the annualized average rate of interest paid on average interest-bearing liabilities for the period.

²		Net interest margin is the annualized effect of the net interest income divided by that period’s average interest-earning assets.

³		Based on adjusted total assets for purposes of tangible capital and core capital, and risk-weighted assets for purposes of risk-based capital and total risk based capital. These ratios are applicable to the Bank only.

Results of Operations

Net Earnings

Three months.Net earnings for the three months ended ~~March 31,~~June 30, 2007 was ~~$7.8~~$15.1 million ($~~0.12~~0.25 per share-diluted), ~~an $11.1~~a $13.5 million decrease from the ~~$18.9~~$28.6 million ($~~0.29~~0.44 per share-diluted) reported in the comparable 2006 period. The overall decrease resulted from a ~~$2.7~~$4.2 million decrease in non-interest income, a ~~$3.3~~$9.8 million increase in non-interest expense and a ~~$10.9~~$6.4 million decrease in net interest income after provision for loan losses, offset in part by a ~~$5.8~~$7.0 million decrease in federal income tax expense.

Six months.Net earnings for the six months ended June 30, 2007 was $22.9 million ($0.37 per share-diluted), a $24.7 million decrease from the $47.6 million ($0.74 per share-diluted) reported in the comparable 2006 period. On a period-to-period comparison basis, there was a $6.9 million decrease in non-interest income, a $13.2 million increase in non-interest expense in the 2007 period, and a $17.4 million decrease in net interest income after provision for loan losses offset by a $12.7 million decrease in federal income tax expense.

Net Interest Income

Three months.We recorded ~~$52.0~~$49.9 million in net interest income before provision for loan losses for the three months ended ~~March 31,~~June 30, 2007, a ~~11.4%~~1.6% decline from ~~$58.7~~$50.7 million recorded for the comparable 2006 period. The decline reflects a ~~$29.3~~$29.9 million increase in interest income offset by a ~~$36.0~~$30.6 million increase in interest expense, primarily as a result of rates paid on deposits, FHLB advances and security repurchase agreements that increased more frequently and to a greater extent than the increase in yields earned on loans, mortgage-backed securities and ~~mortgage-backed securities.~~other investments. In addition, in the three months ended ~~March 31,~~June 30, 2007, as compared to the same period in 2006, we increased our average interest-earning assets by ~~$1.0~~$1.1 billion and our average interest-paying liabilities by ~~$1.1~~$1.2 billion.

Average interest-earning assets as a whole repriced up 4537 basis points during the three months ended ~~March 31,~~June 30, 2007 while average interest-bearing liabilities repriced up 6951 basis points during the same period, resulting in the decrease in our interest rate spread of 2414 basis points to ~~1.33%~~1.27% for the three months ended ~~March 31,~~June 30, 2007, from ~~1.57%~~1.41% for the comparable 2006 period. The Company recorded a net interest margin of ~~1.42%~~1.35% at ~~March 31,~~June 30, 2007 as compared to ~~1.72%~~1.49% at ~~March 31,~~June 30, 2006. At the Bank level, the net interest margin was 1.43% at ~~March 31,~~June 30, 2007, as compared to ~~1.65%~~1.54% at June 30, 2006.

Six months.We recorded $101.9 million in ~~March 31,~~net interest income for the six months ended June 30, 2007, a 6.9% decline from the $109.4 million recorded for the comparable 2006 period. The decline reflects a $59.1 million increase in interest revenue offset by a $66.6 million increase in interest expense, primarily as a result of increasing rates paid on deposits, FHLB advances and security repurchase agreements, which were greater than the increase in yields earned on loans, mortgage-backed securities and other investments. In this same period, our average paying liabilities and our average interest-earning assets both increased $1.1 billon. This caused a decrease in the ratio of average interest-earning assets to average interest-bearing liabilities for the six months ended June 30, 2007 to 101% from 102% for the six months ended June 30, 2006. This decrease is reflected in the reduction in the net interest margin, to 1.39% for the second quarter 2007 from 1.60% for the second quarter 2006.

Average Yields Earned and Rates Paid.The following table presents interest income from average interest-earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates at the Company rather than the Bank. Interest income from earning assets includes the amortization of net premiums and net deferred loan origination costs of ~~$7.2~~$7.8 million and ~~$6.5~~$9.4 million for the three months ended ~~March 31,~~June 30, 2007 and 2006, respectively. For the six months ended June 30, 2007 and 2006, interest income from earning assets included $14.0 million and $16.0 million of amortization of net premiums and net deferred loan origination costs, respectively. Non-accruing loans were included in the average loan amounts outstanding.


	Three months ended March 31,														Three Months Ended June 30,
	2007							2006							2007							2006
	Average				Yield			Average				Yield			Average				Yield			Average				Yield
	Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate
	(Dollars in thousands)														(Dollars in thousands)
Interest-earning assets:
Loans receivable, net	$	12,300,421	$	187,252		6.09	%	$	12,326,019	$	171,773		5.57	%	$	12,473,096	$	189,958		6.09	%	$	11,862,874	$	170,121		5.74	%
Mortgage-backed securities held to maturity		1,337,862		14,617		4.43	%		1,411,406		17,152		4.86	%		1,124,507		13,768		4.91	%		1,622,432		21,148		5.21	%
Other		1,154,015		18,701		6.57	%		108,092		2,374		8.79	%		1,201,833		18,738		6.25	%		164,713		1,379		3.35	%

Total interest-earning assets		14,792,298		220,570		5.98	%		13,845,517		191,299		5.53	%		14,799,436		222,464		6.02	%		13,650,019		192,648		5.65	%
Other assets		1,149,618							1,270,082							963,243							1,512,362

Total assets	$	15,941,916						$	15,115,599						$	15,762,679						$	15,162,381

Interest-bearing liabilities
Deposits	$	7,582,031	$	85,026		4.55	%	$	8,138,226		75,217		3.75	%	$	7,529,648		86,038		4.58	%	$	8,132,394		82,055		4.05	%
FHLB advances		5,845,473		67,852		4.71	%		3,996,170		39,973		4.06	%		5,513,739		64,882		4.72	%		4,007,320		42,497		4.25	%
Security repurchase agreements		1,021,812		12,393		4.92	%		1,198,474		13,496		4.57	%		1,331,090		18,041		5.44	%		1,045,762		13,051		5.01	%
Other		252,959		3,327		5.33	%		258,214		3,938		6.19	%		207,873		3,586		6.92	%		241,943		4,307		7.14	%

Total interest-bearing liabilities		14,702,275		168,598		4.65	%		13,591,084		132,624		3.96	%		14,582,350		172,547		4.75	%		13,427,419		141,910		4.24	%
Other liabilities		433,531							746,895							393,561							942,964
Stockholders’ equity		806,110							777,620							786,768							791,998

Total liabilities and stockholders’ equity	$	15,941,916						$	15,115,599						$	15,762,679						$	15,162,381

Net interest-earning assets	$	90,023						$	254,433						$	217,086						$	222,600


Net interest income			$	51,972						$	58,675						$	49,917						$	50,738

Interest rate spread¹						1.33	%						1.57	%						1.27	%						1.41	%

Net interest margin²						1.42	%						1.72	%						1.35	%						1.49	%

Ratio of average interest-earning assets to average interest-bearing liabilities						101	%						102	%						101	%						102	%


	Six Months Ended June 30,
	2007							2006
	Average				Yield			Average				Yield
	Balance		Interest		Rate			Balance		Interest		Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net	$	12,386,759	$	377,208		6.09	%	$	12,094,447	$	341,893		5.58	%
Mortgage-backed securities held to maturity		1,231,184		28,385		4.61	%		1,515,919		38,300		5.05	%
Other		1,177,924		37,440		6.36	%		136,403		3,754		5.50	%

Total interest-earning assets		14,795,867		443,033		5.99	%		13,746,769		383,947		5.59	%
Other assets		1,221,206							1,392,172

Total assets	$	16,017,073						$	15,138,941

Interest-bearing liabilities
Deposits	$	7,555,840		171,064		4.58	%	$	8,135,310		157,272		3.91	%
FHLB advances		5,679,606		132,734		4.71	%		4,001,745		82,470		4.17	%
Security repurchase agreements		1,176,451		30,434		5.22	%		1,122,118		26,546		4.78	%
Other		230,416		6,913		6.07	%		250,078		8,246		6.67	%

Total interest-bearing liabilities		14,642,313		341,145		4.78	%		13,509,251		274,534		4.11	%
Other liabilities		584,350							844,862
Stockholders’ equity		790,410							784,828

Total liabilities and stockholders’ equity	$	16,017,073						$	15,138,941

Net interest-earning assets	$	153,554						$	237,518


Net interest income			$	101,888						$	109,413

Interest rate spread¹						1.21	%						1.48	%

Net interest margin²						1.39	%						1.60	%

Ratio of average interest- earning assets to average interest-bearing liabilities						101	%						102	%


¹		Interest rate spread is the difference between the annualized average yield earned on average interest-earning assets for the period and the annualized average rate of interest paid on average interest-bearing liabilities for the period.

²		Net interest margin is the annualized effect of the net interest income divided by that period’s average interest-earning assets.

1519

Rate/Volume Analysis.The following table presents the dollar amount of changes in interest income and interest expense for the components of interest-earning assets and interest-bearing liabilities, which are presented in the preceding table. The table below distinguishes between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates (changes in average rates while holding the initial balance constant). Changes attributable to both a change in volume and a change in rates are included as changes in rate.


	Three Months Ended March 31,									Three Months Ended June 30,
	2007 Versus 2006												2007 Versus 2006
	Increase (Decrease) due to:												Increase (Decrease) due to:
	Rate			Volume			Total			Rate			Volume			Total
	(In thousands)									(In thousands)
Interest-earning assets:
Loans receivable, net	$	15,835		$	(356	)	$	15,479		$	11,079		$	8,757		$	19,836
Mortgage-backed securities-held to maturity		(1,641	)		(894	)		(2,535	)		(895	)		(6,485	)		(7,380	)
Other		(6,657	)		22,984			16,327			8,674			8,686			17,360

Total		7,537			21,734			29,271			18,858			10,958			29,816

Interest-bearing liabilities:
Deposits		14,952			(5,143	)		9,809			10,069			(6,086	)		3,983
FHLB advances		9,366			18,513			27,879			6,422			15,962			22,384
Security repurchase agreements		888			(1,991	)		(1,103	)		1,426			3,564			4,990
Other		(531	)		(80	)		(611	)		(114	)		(606	)		(720	)

Total		24,675			11,299			35,974			17,803			12,834			30,637

Change in net interest income	$	(17,138	)	$	10,435		$	(6,703	)	$	1,055		$	(1,876	)	$	(821	)


	Six Months Ended June 30,
				2007 Versus 2006
				Increase (Decrease) due to:
	Rate			Volume			Total
	(In thousands)
Interest-earning assets:
Loans receivable, net	$	27,160		$	8,156		$	35,316
Mortgage-backed securities-held to maturity		(2,725	)		(7,190	)		(9,915	)
Other		5,044			28,642			33,686

Total		29,479			29,608			59,087

Interest-bearing liabilities:
Deposits		25,027			(11,236	)		13,791
FHLB advances		15,567			34,696			50,263
Security repurchase agreements		2,600			1,288			3,888
Other		(682	)		(650	)		(1,332	)

Total		42,512			24,098			66,610

Change in net interest income	$	(13,033	)	$	5,510		$	(7,523	)

Three Months.Although our interest rate spread declined for the three months ended June 30, 2007 as compared to the three months ended June 30, 2006, the rate volume table indicates that increases in our interest rate yield on assets outpaced the interest rate that we paid on funding liabilities. This is due to changes attributable to both a change in volume and a change in rates being included as changes in rate.

The ~~rate/~~rate volume table ~~above indicates~~also shows that net interest income declined due to volume despite a sizeable growth in ~~general,~~interest-earning assets during the comparable period, but this also is due to changes attributable to both a change in volume and a change in rates being included as changes in rate.

Six Months.For the six months ended June 30, 2007 as compared to the six months ended June 30, 2006, interest rates on deposits and other liabilities increased to a greater extent than the interest rates on our ~~loan products and securities during the three months ended March 31, 2007. The~~assets. This adverse ~~impact of these rate changes~~effect on ~~our~~ net interest ~~margin for the periods~~income was ~~only~~ partially offset by ~~the increased volume of~~our sizeable growth in interest-earning ~~assets over interest-bearing liabilities.~~assets.

Our interest income on loans increased as a result of increased yields on new loan production. This increase offset the decline in interest income attributable to a slightly reduced volume of loans, which declined as certain loans were pooled and sold. Similarly, the increase in interest income arising from other interest-earning assets related principally to the increase in the volume of securities classified as available for sale and interest-bearing deposits.

The increase in interest rates occurred despite our use of security repurchase agreements, which had lower funding costs than FHLB advances or borrowings with similar short-term maturities. Our interest expense from security repurchase agreements was $12.4 million for the three months ended March 31, 2007 and $13.5 million for the three months ended March 31, 2006. Interest expense on FHLB advances increased to $67.9 million for the three months ended March 31,2007, as average FHLB advances increased to handle funding needs as average deposit volumes decreased. Also, as FHLB advances matured or were called they were replaced at the higher current market rate.

Our interest expense related to deposits increased because of increases in our rates offset in part by a decrease in our volume of deposits. The rate increase reflects the continuing competition for deposits we face with our Midwest branches.

Provision for Loan Losses

Three months.During the three months ended ~~March 31,~~June 30, 2007, we recorded a provision for loan losses of ~~$8.3~~$11.5 million as compared to ~~$4.1~~$5.9 million recorded during the same period in 2006. The provisions reflect our estimates to maintain the allowance for loan losses at a level management believes is appropriate to cover probable and inherent losses in the portfolio. Net charge-offs increased in the 2007 period to $6.6 million, compared to $5.8 million for the same period in 2006, and as a percentage of investment loans, increased to an annualized 0.36% from 0.23%. The increase in charge-offs as a percentage of investment loans reflects the increase in net charge-off activity in the current quarter coupled with the relative decrease in the balance of our investment loan portfolio as we continue to originate the majority of loans for sale as part of our overall risk management and funding cost containment strategies. See “Analysis of Items on Statement of Financial Condition – Allowance for Loan Losses,” below, for further information.

Six months.During the six months ended June 30, 2007, we recorded a provision for loan losses of $19.7 million as compared to $9.9 million recorded during the same period in 2006. The provisions reflect our estimates to maintain the allowance for loan losses at a level management believes is appropriate to cover probable and inherent losses in the portfolio ~~and had~~for each of the ~~effect of increasing our allowance for loan losses by $2.7 million.~~respective periods. Net charge-offs ~~increased~~ in the 2007 period ~~to $5.6~~totaled $12.1 million compared to ~~$3.7~~$9.5 million for the same period in 2006 and ~~as a percentage~~were an annualized 0.33% and 0.20% of average investment loans for the six months ended June 30, 2007 and 2006, respectively, also reflecting the declining balance of investment ~~loans, increased to an annualized 0.26% from 0.15%. The increase in charge-offs as a percentage~~loans. See “Analysis of ~~investment loans reflects the relative decline in the balance~~Items on Statement of our investment loan portfolio as we continue to convert investment loans to mortgage-backed securities held to maturity as part of our overall risk management and funding cost containment strategies coupled with an increase in net charge-offs. See “FinancialFinancial Condition —– Allowance for Loan Losses,” below, for further information.

Non-Interest Income

Our non-interest income consists of (i) loan fees and charges, (ii) deposit fees and charges, (iii) loan administration fees, (iv) net gains from loan sales, (v) net gains from sales of MSRs, (vi) net gain (loss) on securities available for sale and (vii) other fees and charges. During the three months ended ~~March 31,~~June 30, 2007, non-interest income decreased to ~~$39.9~~$57.4 million from ~~$42.6~~$61.6 million in the comparable 2006 period. During the six months ended June 30, 2007, non-interest income decreased $6.9 million to $97.3 million from $104.2 million in the comparable 2006 period.

Loan Fees and Charges. Both our home lending operation and banking operation earn loan ~~origination~~ fees and collect other charges in connection with ~~originating~~ residential mortgages and other types of loans.

Three months.Loan fees collected during the three months ended ~~March 31,~~June 30, 2007 totaled ~~$18.1~~$0.8 million compared to ~~$11.4~~$1.2 million collected during the comparable 2006 period. ~~This increase is~~

Six months. Loan fees collected during the ~~result of the $1.1 billion increase in total loan production to $5.8 billion for the quarter~~six months ended ~~March 31,~~June 30, 2007 totaled $1.5 million compared to ~~$4.7 billion in~~$2.9 million collected during the ~~same~~comparable 2006 period.

Deposit Fees and Charges. Our banking operation collects deposit fees and other charges such as fees for non-sufficient funds checks, cashier check fees, ATM fees, overdraft protection, and other account fees for services we provide to our banking customers. The amount of these fees tends to increase as a function of the growth in our average deposit base.

Three months. During the three months ended ~~March 31,~~June 30, 2007 and 2006, we collected $5.7 million in deposit fees.

Six months.During the six months ended June 30, 2007, we collected ~~$5.0~~$10.7 million in deposit fees versus ~~$4.8~~$10.5 million collected in the comparable 2006 period. This increase is attributable to the increase in the number of our ~~average~~ deposit ~~base~~accounts as our banking franchise continues to ~~expand, as well as our general increase in deposit fees during 2007.~~expand.

Loan Administration. When our home lending operation sells mortgage loans in the secondary market, it usually retains the right to ~~continue to~~ service these loans and earn a servicing fee. When an underlying loan is prepaid or refinanced, the remaining balance of the mortgage servicing right for that loan is fully amortized as no further fees will be earned for servicing that loan. During periods of falling interest rates, prepayments and refinancings generally increase and, unless we

provide replacement loans, it will usually result in a reduction in loan servicing fees and increases in amortization recorded on the MSR portfolio.

Three months. Net loan administration fee income ~~decreased~~increased to ~~$2.6~~$3.1 million during the three months ended ~~March 31,~~June 30, 2007, from ~~$4.4~~$0.3 million in the 2006 period. The ~~$1.8~~$2.8 million ~~decrease~~increase was the result of a ~~$10.7 million decrease in the servicing fee revenue, which was offset by an $8.9~~$4.8 million decrease in amortization expense of the ~~MSRs.~~MSRs offset by a $2.0 million decrease in servicing fee revenue. The decrease in amortization expense was the result of the lower average balance that also had relatively fewer prepayments and a greater proportion of more seasoned loans in comparison to the corresponding period in 2006, as well as fewer servicing sales than in 2006. The decrease in the servicing fee revenue was the result of a decline in loans serviced for others ~~averaging $17.2~~to an average of $21.2 billion during the 2007 period versus ~~$28.9~~$25.9 billion during the 2006 period.

The unpaid principal balance of loans serviced for others was $21.5 billion at June 30, 2007, versus $15.0 billion serviced at December 31, 2006, and $22.4 billion serviced at June 30, 2006. At June 30, 2007, the weighted average servicing fee on these loans was 0.369% (i.e., 36.9 basis points) and the weighted average seasoning was 6 months.

Six months. Net loan administration fee income increased to $5.8 million during the six months ended June 30, 2007, from $4.7 million in the 2006 period. This $1.1 million increase was the result of the $13.8 million decrease in amortization expense of the MSRs, which was offset by the $12.7 million decrease in the servicing fee revenue. The decrease in amortization expense was the result of a lower average balance that also had relatively fewer prepayments and a greater proportion of more seasoned loans in comparison to the corresponding period in 2006.

The ~~unpaid principal balance~~decrease in the servicing fee revenue was the result of loans serviced for others ~~was $19.1~~averaging $19.2 billion ~~at March 31,~~during the 2007 period versus ~~$15.0~~$27.0 billion ~~serviced at December 31,~~during the 2006 ~~and $29.2 billion serviced at March 31, 2006. At March 31, 2007, the weighted average servicing fee on these loans was 0.37% (i.e., 37 basis points) and the weighted average age was 15 months.~~period.

Net Gain on Loan Sales. Our home lending operation records the transaction fee income it generates from the origination, securitization, and sale of mortgage loans in the secondary market. The amount of net gain on loan sales recognized is a function of the volume of mortgage loans sold and the gain on sale spread achieved, ~~net of~~less related selling expenses. Net gain on loan sales is also increased or decreased by any mark to market pricing adjustments on loan commitments and forward sales commitments in accordance with SFAS 133,“Accounting for Derivative Instruments” (“SFAS 133”), increases to the secondary market reserve related to loans sold during the period, and related administrative expenses. The volatility in the gain on sale spread is attributable to market pricing, which changes with demand and the general level of interest rates. Generally, we are able to sell loans into the secondary market at a higher margin during periods of low or decreasing interest rates. Typically, as the volume of acquirable loans increases in a lower or falling interest rate environment, we are able to pay less to acquire loans and are then able to achieve higher spreads on the eventual sale of the acquired loans. In contrast, when interest rates rise, the volume of acquirable loans decreases and, therefore, we may need to pay more in the acquisition phase, thus decreasing our net gain achievable. Our net gain was also affected by declining spreads available from securities we sell that are guaranteed by Fannie Mae and Freddie Mac, and by an over-capacity in the mortgage business that has placed continuing downward pressure on loan pricing opportunities for conventional residential mortgage products.

We determine net gain on loan sales in accordance with U.S. GAAP and accordingly reflect this amount in our consolidated statement of earnings. However, we also provide the schedule below to identify several key factors that we use in our determination of net gain on sale. The following table provides a reconciliation of the net gain on loan sales reported in our consolidated financial statements to our total gain on loans sold within the period (dollars in thousands):


							For the Three Months Ended						For the Six Months Ended
							June 30,						June 30,
	For the Three Months Ended March 31,						2007			2006			2007			2006
	2007			2006
Net gain on loan sales	$	25,154		$	17,084		$	28,144		$	9,650		$	53,298		$	26,735
Add: SFAS 133 adjustments		(3,945	)		(10,127	)		(3,604	)		(3,337	)		(7,549	)		(8,719	)
Add: LOCOM adjustment		26			4,745			63			—			89			—
Add: provision to secondary market reserve		2,163			1,006			2,379			1,420			4,543			2,426

Total gain on loans sold	$	23,398		$	12,708		$	26,982		$	7,733		$	50,381		$	20,442

Loans sold or securitized	$	5,289,617		$	3,894,070		$	5,730,633		$	3,964,625		$	11,020,249		$	7,858,695

Spread achieved		0.44	%		0.33	%		0.47	%		0.20	%		0.46	%		0.26	%

Three months. For the three months ended ~~March 31,~~June 30, 2007, there was a net gain on loan sales of ~~$25.2~~$28.1 million, as ~~opposed~~compared to a ~~$17.1~~$9.7 million gain in the 2006 period, an increase of ~~$8.1~~$18.4 million. The 2007 period reflects the sale of ~~$5.3~~$5.7 billion in loans versus ~~$3.9~~$4.0 billion sold in the 2006 period. Management believes changes in market conditions during the 2007 period resulted in an increased mortgage loan origination volume ($~~5.5~~7.2 billion in the 2007 period vs. ~~$4.3~~$4.9 billion in the 2006 period) and an increased overall gain on sale spread ~~(44~~(47 basis points in the 2007 period versus 3320 basis points in the 2006 period).

Six months. For the six months ended June 30, 2007, net gain on loan sales increased $26.6 million to $53.3 million from the $26.7 million in the 2006 period. The 2007 period reflects the sale of $11.0 billion in loans versus $7.9 billion sold in the 2006 period. Management believes changes in market conditions during the 2007 period resulted in an increased mortgage loan origination volume ($12.7 billion in the 2007 period versus $9.2 billion in the 2006 period) and a higher overall gain on sale spread (46 basis points in the 2007 versus 26 basis points in the 2006 period).

Net Gain on the Sale of Mortgage Servicing Rights. As part of our business model, our home lending operation occasionally sells MSRs from time to time in transactions separate from the sale of the underlying loans. At the time of the MSR sale, we record a gain or loss based on the selling price of the MSRs less our carrying value and transaction costs. Accordingly, the amount of net gains on MSR sales depends upon the related gain on sale spread and the volume of MSRs sold. The spread is attributable to market pricing, which changes with demand and the general level of interest rates. In general, if an MSR is sold on a “flow basis” shortly after it is acquired, little or no gain will be realized on the sale. MSRs created in a lower interest rate environment generally will have a higher market value because the underlying loan is less likely to be prepaid. Conversely, an MSR created in a higher interest rate environment will generally sell at a market price below the original fair value recorded because of the increased likelihood of prepayment of the underlying loans, resulting in a loss.

Three months.We sold MSRs attributable to underlying loans totaling $2.5 billion during the three month period ending June 30, 2007 versus $10.0 billion during the 2006 period. During the three month period ending ~~March 31,~~June 30, 2007, we ~~did not sell any~~sold $2.0 billion of servicing rights on a bulk basis and ~~we sold~~ $0.5 billion of loans on a servicing released basis. We sold ~~$2.4 million~~$9.9 billion in servicing rights on a bulk basis, and ~~$0.8~~$0.1 billion of loans on a servicing released basis during the 2006 period.

For the three months ended ~~March 31,~~June 30, 2007, the net gain on the sale of MSRs decreased from ~~$8.6~~$34.9 million during the 2006 period to ~~$0.1~~$5.6 million. The decrease in the 2007 period reflected the ~~absence~~substantially lower volume of ~~any~~bulk sales in the 2007 period.

Six months.We sold MSRs attributable to underlying loans totaling $2.9 billion during the six month period ending June 30, 2007 versus $13.2 billion during the 2006 period. During the six month period ending June 30, 2007, we sold $2.0 billion of servicing rights on a bulk basis and $0.9 billion of loans on a servicing released basis. For the same period in 2006, we sold $12.3 billion of servicing rights on a bulk basis and $0.9 billion of loans on a servicing released basis for 2006.

For the six months ended June 30, 2007, the net gain on the sale of MSRs decreased from $43.5 million during the 2006 period to $5.7 million. The decrease in the 2007 period reflected the substantially lower volume of bulk sales in the 2007 period.

Net Gain (Loss) on Securities Available for Sale.Securities classified as available for sale are comprised of residual interests from private securitizations and mortgage-backed and collateralized mortgage obligation securities. In addition to recognizing any gains or losses upon the sale of the securities, we may also incur net losses on securities available for sale as a result of a reduction in the estimated fair value of the security when that decline has been deemed to be an other-than-temporary impairment.

Three months.During the three months ended ~~March 31,~~June 30, 2007 and 2006, we sold no securities available for sale. During the three months ended June 30, 2007 and 2006, we had no other-than-temporary impairment on our residual interest that arose from securitizations completed in 2006 and 2007.

Six months. During the six months ended June 30, 2007, we sold collateralized mortgage obligation securities amounting to approximately $171.0 million, which resulted in a gain of ~~$729,000.~~$0.7 million. We sold no available for sale securities during the six month period ended June 30, 2006. During the ~~three~~six months ended ~~March 31,~~June 30, 2007, we did not recognize any other-than-temporary ~~impairment on our residual interest that arose from securitizations completed in 2005 and 2006.~~impairments. For the ~~three~~six months ended ~~March 31,~~June 30, 2006, we recognized a $3.6 million impairment of our residual interest in the securitization completed in 2005. ~~For additional information, see Note 4 to the Notes to the Consolidated Financial Statements, in Item 1, Financial Statements, herein.~~

Other Fees and Charges. Other fees and charges generally include certain miscellaneous fees, including dividends received on FHLB stock and income generated by our subsidiaries.

Three months. During the three months ended ~~March 31,~~June 30, 2007, we recorded ~~$4.0~~$3.3 million in cash dividends received on FHLB stock, compared to ~~$3.5~~$3.6 million received during the three months ended ~~March 31,~~June 30, 2006. At ~~March 31,~~June 30, 2007 and 2006, we owned $329.0 million and $292.1 million of FHLB stock, respectively. We also recorded ~~$1.0~~$0.8 million and $0.9 million in subsidiary income for the three months ended ~~March 31,~~June 30, 2007 and 2006, respectively. In addition, a significant portion of other fees and charges for the second quarter of 2007 relates to amounts that we realized as part of our continual efforts to mitigate losses incurred in connection with a fraud discovered in March 2004 relating to a series of warehouse loans.

Six months.During the six months ended June 30, 2007, we recorded $7.4 million in cash dividends received on FHLB stock, compared to the $7.1 million received during the six months ended June 30, 2006. We also recorded $1.6 million and $2.0 million in subsidiary income for the six months ended June 30, 2007 and 2006, respectively. In addition, a

1823

significant portion of other fees and charges for the second quarter of 2007 relates to amounts that we realized as part of our continual efforts to mitigate losses incurred in connection with a fraud discovered in March 2004 relating to a series of warehouse loans.

Non-Interest Expense

The following table sets forth the components of our non-interest expense, along with the allocation of expenses related to loan originations that are deferred pursuant to SFAS 91, "“Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Lease” (“SFAS 91”). As required by SFAS 91, mortgage loan fees and ~~certain~~ direct origination costs (principally compensation and benefits) are capitalized as an adjustment to the basis of the loans originated during the period and amortized to expense over the lives of the respective loans rather than immediately expensed. ~~Certain other expenses~~Expenses not directly associated with a specific loan, ~~production,~~ however, are not required or allowed to be capitalized and are, therefore, expensed when incurred.

For the Three Months Ended
March 31,
2007 2006
Compensation and benefits $ 42,424 $ 39,873
Commissions 15,306 16,967
Occupancy and equipment 16,786 16,908
Advertising 1,849 1,489
Federal insurance premium 782 297
Communications 1,446 1,653
Other taxes (573 ) 2,447
Other 12,007 9,871

Subtotal 90,027 89,505
Less: capitalized direct costs of loan closings, under SFAS 91 (18,629 ) (21,435 )

Non-interest expense $ 71,398 $ 68,070

Efficiency ratio¹
77.7 % 67.2 %

Non-Interest Expense
(Dollars in thousands)


	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006

Compensation and benefits	$	42,847		$	38,758		$	85,271		$	78,631
Commissions		19,517			20,911			34,822			37,878
Occupancy and equipment		17,038			16,748			33,824			33,656
Advertising		2,804			2,149			4,654			3,638
Federal insurance premium		1,039			279			1,821			576
Communications		1,533			1,478			2,980			3,131
Other taxes		(10	)		(3,157	)		(583	)		(710	)
Other		11,178			10,957			23,183			20,828

Subtotal		95,946			88,123			185,972			177,628
Less: capitalized direct costs of loan closings, under SFAS 91		(23,712	)		(25,769	)		(42,340	)		(47,204	)

Non-interest expense	$	72,234		$	62,354		$	143,632		$	130,424

Efficiency ratio¹		67.3	%		55.5	%		72.1	%		61.1	%


¹		Operating and administrative expenses divided by the sum of net interest income and non-interest income.

Three months.Non-interest expense, before the capitalization of ~~direct~~ loan origination costs, increased ~~$0.5~~$7.8 million to ~~$90.0~~$95.9 million during the three months ended ~~March 31,~~June 30, 2007, from ~~$89.5~~$88.1 million for the comparable 2006 period. The following are the major changes affecting non-interest expense as reflected in the consolidated statements of earnings:

	•		~~The banking operation~~We conducted business from 1411 more retail banking facilities at ~~March 31,~~June 30, 2007 than at ~~March 31,~~June 30, 2006.

	•		We conducted business from 2514 fewer home lending centers at ~~March 31,~~June 30, 2007 than at ~~March 31,~~June 30, 2006.

	•		The home lending operation originated ~~$5.5~~$7.2 billion in residential mortgage loans during the 2007 quarter versus ~~$4.3~~$4.9 billion in the comparable 2006 quarter.

	•		We employed ~~2,522~~2,689 salaried employees at ~~March 31,~~June 30, 2007 versus ~~2,421~~2,548 salaried employees at ~~March 31,~~June 30, 2006.

	•		We employed ~~160~~168 full-time national account executives at ~~March 31,~~June 30, 2007 versus ~~123~~122 at ~~March 31,~~June 30, 2006.

	•		We employed ~~288~~294 full-time retail loan originators at ~~March 31,~~June 30, 2007 versus ~~471~~408 at ~~March 31,~~June 30, 2006.

	•		We reinstated the base salaries for the Chairman and the CEO for 2007.

Compensation and benefits expense increased ~~$2.5~~$4.0 million during the 2007 period from the comparable 2006 period to ~~$42.4~~$42.8 million, with the increase primarily attributable to regular salary increases for employees and additional staff and support personnel for the newly opened banking centers. In addition, as stated above, the base salaries for the Chairman and the CEO were reinstated for 2007.

The change in commissions paid to the commissioned sales staff, on a period over period basis, was a ~~$1.7~~$1.4 million decrease. This decrease ~~reflects~~was primarily due to the reduced number of full-time loan originators during the period offset in part by a change in the ~~compensation~~commission structure.

The ~~21.6%~~2.0% increase in other expense during the 2007 period from the comparable 2006 period is reflective of the increased mortgage loan originations and the increased number of banking centers in operation during the period offset in part by the decreased number of home lending centers.

During the three months ended ~~March 31,~~June 30, 2007, we capitalized direct loan origination costs of ~~$18.6~~$23.7 million, a decrease of ~~$2.8~~$2.1 million from ~~$21.4~~$25.8 million for the comparable 2006 period. This ~~13.1%~~8.0% decrease is a result of a ~~$1.7~~$1.4 million decrease in commission expense and a reduction in ~~the~~other direct loan origination costs during the 2007 period versus the 2006 period.

Six months.Non-interest expense, before capitalization of direct loan origination costs, increased $8.4 million to $186.0 million during the six months ended June 30, 2007, from $177.6 million for the comparable 2006 period.

Compensation and benefits expense increased $6.7 million during the 2007 period from the comparable 2006 period to $85.3 million and was primarily attributable to regular salary increases for employees and additional staff and support personnel for the newly-opened banking centers. Also, the base salaries for the Chairman and CEO were reinstated in 2007.

Commissions paid to the commissioned sales staff, on a year-over-year basis, decreased $3.1 million.

During the six months ended June 30, 2006, we transferred our secondary mortgage activities into a newly formed wholly-owned subsidiary of the Bank to allow us a higher profile in the marketplace and to permit a more robust development of our capital market activities. It also had the benefit of reducing our overall state tax exposure going forward.

The 11.3% increase in other expense during the 2007 period from the comparable 2006 period is reflective of the increased mortgage loan originations and the decreased number of home lending centers offset in part by the increased number of banking centers in operation during the period.

During the six months ended June 30, 2007, we capitalized direct loan origination costs of $42.3 million, a decrease of $4.9 million from $47.2 million for the comparable 2006 period. This 10.3% decrease is a result of the decrease in commission expense and other direct loan origination costs.

Provision for Federal Income Taxes

For the three months ended ~~March 31,~~June 30, 2007, our provision for federal income taxes as a percentage of pretax earnings was ~~36.3%~~36.1% compared to ~~35.2%~~35.1% in 2006. For the six months ended June 30, 2007 and 2006, respectively, our provision for federal income taxes as a percentage of pretax earnings was 36.2% and 35.0%. For each period, the provision for federal income taxes varies from statutory rates primarily because of certain non-deductible corporate expenses.

Analysis of Items on Statement of Financial Condition

Assets

Securities Classified as Trading.Securities classified as trading are comprised of residual interests from the private securitization prefunded in March 2007 and completed in ~~March~~June 2007. The residual interest in this securitization was ~~$16.2~~$20.5 million at ~~March 31,~~June 30, 2007. In accordance with FAS 155,“Accounting for Certain Hybrid ~~Instruments"~~Instruments,”, management has elected to initially and subsequently measure this residual interest from the ~~March~~June 2007 securitization, and subsequent securitizations, at fair value. This does not affect the classification of the residuals from prior securitizations. Subsequent changes to fair value will be recorded in ~~earnings.~~earnings in the period of the change.

Securities Classified as Available for Sale.Securities classified as available for sale, which are comprised of mortgage-backed securities, collateralized mortgage obligations and residual interests from securitizations of mortgage loan products, increased from $617.5 million at December 31, 2006, to ~~$983.8~~$973.8 million at ~~March 31,~~June 30, 2007. At June 30, 2007, approximately $880.0 million of these securities classified as available for sale were pledged as collateral under security repurchase agreements. See Note 4 ofin the ~~Notes~~“Notes to ~~the~~ Consolidated Financial Statements,” in Item 1. Financial Statements herein.

Mortgage-backed Securities Held to Maturity.Mortgage-backed securities held to maturity decreased from $1.6 billion at December 31, 2006 to ~~$1.2~~$1.1 billion at ~~March 31,~~June 30, 2007. The decrease was attributable to the reclassification of ~~$321.1~~$321.2 million in mortgage-backed securities resulting from a private on-balance sheet securitization of second mortgage fixed rate loans ~~in April 2006.~~from mortgage-backed securities held to maturity to securities classified as available for sale. See Note 4 ofin the ~~Notes~~“Notes to ~~the~~ Consolidated Financial Statements,” in Item 1. Financial Statements herein. At ~~March 31,~~June 30, 2007, approximately ~~$624.4~~$869.0 million of mortgage-backed securities were pledged as collateral under security repurchase ~~agreements. At~~agreements as compared to $1.0 billion at December 31, ~~2006, $1.0 billion of the mortgage-backed securities were pledged as collateral under security repurchase agreements.~~2006.

Other Investments.Our investment portfolio ~~decreased~~increased from $24.0 million at December 31, 2006, to ~~$23.8~~$24.2 million at ~~March 31,~~June 30, 2007. Investment securities consist of contractually required collateral, regulatory required collateral, and investments made by our non-bank subsidiaries.

Loans Available for Sale.We sell a majority of the mortgage loans we produce into the secondary market on a whole loan basis or by securitizing the loans into mortgage-backed securities. We generally sell or securitize our longer-term, fixed-rate mortgage loans, while we hold the shorter duration and adjustable rate mortgage loans for investment. At ~~March 31,~~June 30, 2007, we held loans available for sale of ~~$3.8~~$5.1 billion, which was an increase of ~~$0.6~~$1.9 billion from $3.2 billion held at December 31, 2006. The amount of our loans available for sale depends upon the rate of production, our strategy to accumulate loans for private securitizations and the demand for loans in the secondary market. Our loan production is typically inversely related to the level of long-term interest rates. As long-term rates decrease, we tend to originate an increasing number of mortgage loans. A significant amount of the loan origination activity during periods of falling interest rates is derived from refinancing of existing mortgage loans. Conversely, during periods of increasing long-term rates increase, loan originations tend to decrease. Our loan production may also be affected by the number of competitors in the residential mortgage market.

Loans Held for Investment. Loans held for investment at ~~March 31,~~June 30, 2007 decreased ~~$0.9~~$1.3 billion from December 31, 2006. ~~The~~A majority of the decrease was ~~principally~~ attributable to a reclassification of approximately $693.3 million of second mortgage loans to loans available for sale. Substantially all of such loans were subsequently sold into the secondary market.

The following table sets forth the composition of our investment loan portfolio as of the dates ~~indicated.~~indicated (in thousands).

Loans Held for Investment


	March 31, 2007			December 31, 2006			June 30,			December 31,			June 30,
	(Dollars in thousands)						2007			2006			2006
Mortgage loans	$	5,909,807		$	6,211,765		$	5,542,471		$	6,211,765		$	7,091,818
Second mortgage loans		65,601			715,154			61,107			715,154			470,885
Commercial real estate loans		1,325,057			1,301,819			1,381,552			1,301,819			1,210,212
Construction loans		75,178			64,528			82,301			64,528			62,847
Warehouse lending		271,493			291,656			267,740			291,656			190,466
Consumer loans		315,267			340,157			302,047			340,157			389,168
Non-real estate commercial loans		19,542			14,606			18,255			14,606			11,670

Total loans held for investment portfolio		7,981,945			8,939,685
Loans held for investment								7,655,473			8,939,685			9,427,066
Allowance for loan losses		(48,500	)		(45,779	)		(53,400	)		(45,779	)		(39,606	)

Total loans held for investment portfolio, net	$	7,933,445		$	8,893,906
Loans held for investment, net							$	7,602,073		$	8,893,906		$	9,387,460

Allowance for Loan Losses.The allowance for loan losses represents management’s estimate of probable losses in our loans held for investment portfolio as of the date of the consolidated financial statements. The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent in the loan portfolio, but that have not been specifically identified.

The allowance for loan losses increased to ~~$48.5~~$53.4 million at ~~March 31,~~June 30, 2007 from $45.8 million at December 31, ~~2006, respectively.~~2006. The allowance for loan losses as a percentage of non-performing loans decreased to ~~65.0%~~53.8% from 80.2% at ~~March 31, 2007 and~~ December 31, 2006, ~~respectively. Our~~which reflects the increase in non-performing loans (i.e., loans that are past due 90 days or more) ~~increased~~ to ~~$74.6~~$99.3 million ~~from~~at June 30, 2007 compared to $57.1 million at ~~March 31, 2007 and~~ December 31, ~~2006, respectively.~~2006. The allowance for loan losses as a percentage of investment loans increased to ~~0.61%~~0.70% from 0.51% at ~~March 31, 2007 and~~ December 31, ~~2006, respectively.~~2006. The increase in the allowance for loan losses at ~~March 31,~~June 30, 2007, reflects management’s assessment of the effect of increased level of charge-offs within the higher risk loan categories, i.e. home equity lines of credit, second mortgages and other consumer ~~loans.~~loans, as well as the increase in delinquencies in most loan categories. The overall delinquency rate increased in the ~~first three months~~second quarter of ~~the year~~2007 to ~~1.64%~~2.35% as of ~~March 31,~~June 30, 2007, up from 1.34% as of December 31, 2006.

The allowance for loan losses is considered ~~adequate~~appropriate based upon management’s assessment of relevant factors, including the types and amounts of non-performing loans, historical and current loss experience on such types of loans, and the current economic environment. The following table provides the amount of delinquent loans at the dates ~~listed.~~listed (dollars in thousands). At ~~March 31,~~June 30, 2007, ~~84.4%~~75.2% of all delinquent loans are loans in which we had a first lien position on residential real estate.

Delinquent Loans


	March 31,			December 31,			June 30,			December 31,			June 30,
	2007			2006
Days Delinquent	(Dollars in thousands)
Days Delinquent:							2007			2006			2006
30	$	32,251		$	40,140		$	50,202		$	40,140		$	28,703
60		23,863			22,163			30,451			22,163			15,253
90		74,570			57,071			97,789			56,554			49,530

Matured-Delinquent								1,509			517			497

Total	$	130,684		$	119,374		$	179,951		$	119,374		$	93,983

Investment loans	$	7,981,945		$	8,939,685		$	7,655,473		$	8,939,685		$	9,427,066

Delinquency %		1.64	%		1.34	%
Delinquency % (Total)								2.35	%		1.34	%		1.00	%

Delinquency % (90 days and matured)								1.30	%		0.64	%		0.53	%

~~We currently calculate~~The table above reflects our calculations of delinquent loans using a method required by the Office of Thrift Supervision, when we prepare regulatory reports that we submit to the OTS each quarter. This method, also called the “OTS ~~Method”,~~Method,” considers a loan to be delinquent if no payment is received after the first day of the month following the month of the missed payment. Other companies with mortgage banking operations similar to ours usually use the Mortgage Bankers Association Method (“MBA Method”), which considers a loan to be delinquent if payment is not received by the end of the month of the missed

payment. The key difference between the two methods is that a loan considered “delinquent” under the MBA Method would not be considered “delinquent” under the OTS Method for another 30 days. Under the MBA Method of calculating delinquent loans, 30 day delinquencies equaled ~~$116.1~~$154.0 million, 60 day delinquencies equaled ~~$32.3~~$50.2 million and 90 day delinquencies equaled ~~$101.0~~$130.5 million at ~~March 31,~~June 30, 2007. Total delinquent loans under the MBA Method ~~total $249.4~~were $334.7 million or ~~3.12%~~4.37% of loans held for investment at ~~March 31, 2007. By comparison, delinquent loans~~June 30, 2007, and, at December 31, 2006, totaled $237.9 million, or 2.66% of total loans held for investment.

The following table shows the activity in the allowance for loan losses during the indicated periods (dollars in thousands):

Activity Within the Allowance For Loan Losses


										Six Months Ended						Year Ended
	Three Months Ended						Year Ended			June 30,						December 31,
	March 31,			March 31,			December 31,			2007			2006			2006
	2007			2006			2006
Beginning balance	$	45,779		$	39,140		$	39,140		$	45,779		$	39,140		$	39,140
Provision for loan losses		8,293			4,063			25,450			19,745			9,923			25,450
Charge-offs
Mortgage loans		(3,400	)		(1,913	)		(9,833	)		(8,424	)		(4,781	)		(9,833	)
Consumer loans		(2,529	)		(1,572	)		(7,806	)		(4,711	)		(3,124	)		(7,806	)
Commercial loans		—			(315	)		(1,414	)		—			(1,305	)		(1,414	)
Construction loans		—			—			—			—			—			—
Other		(370	)		(686	)		(2,560	)		(716	)		(1,742	)		(2,560	)

Total charge-offs		(6,299	)		(4,486	)		(21,613	)		(13,851	)		(10,952	)		(21,613	)

Recoveries
Mortgage loans		315			160			665			408			285			665
Consumer loans		331			603			1,720			1,145			988			1,720
Commercial loans		—			40			40			—			40			40
Construction loans		—			—			—			—			—			—
Other		81			—			377			174			182			377

Total recoveries		727			803			2,802			1,727			1,495			2,802

Charge-offs, net of recoveries		(5,572	)		(3,683	)		(18,811	)		(12,124	)		(9,457	)		(18,811	)

Ending balance	$	48,500		$	39,520		$	45,779		$	53,400		$	39,606		$	45,779

Net charge-off ratio		0.26	%		0.15	%		0.20	%		0.33	%		0.20	%		0.20	%

Accrued Interest Receivable.Accrued interest receivable ~~decreased~~increased from $52.8 million at December 31, 2006, to ~~$50.3~~$56.1 million at ~~March 31,~~June 30, 2007, due to the timing of payments. We typically collect interest in the month following the month in which it is earned.

Repurchased Assets.We sell a majority of the mortgage loans we produce into the secondary market on a whole loan basis or by securitizing the loans into mortgage-backed securities. When we sell or securitize mortgage loans, we make ~~customary~~ representations and warranties to the purchasers about various characteristics of each loan, such as the manner of origination, the nature and extent of underwriting standards applied and the types of documentation being provided. When a loan that we have sold or securitized fails to perform according to its contractual terms, the purchaser will typically review the loan file to

determine whether defects in the origination process occurred and, if so, whether such defects constitute a violation of our representations and warranties. If there are no such defects, we have no liability to the purchaser for losses it may incur on such loan. If a defect is identified, we may be required to either repurchase the loan or indemnify the purchaser for losses it ~~sustains~~incurs on the loan. Loans that ~~are repurchased~~we repurchase and that are performing according to their terms are included within our loans held for investment portfolio. ~~Repurchased assets are loans~~Loans that we ~~have reacquired because of representations and warranties issues related to loan sales or securitizations~~repurchase and that are ~~non-performing.~~non-performing are included within our repurchased assets category. Upon obtaining title to such repurchased assets, the asset is transferred to repossessed assets for disposal.

~~Repurchased~~The estimated fair value of repurchased assets totaled $12.5 million at June 30, 2007 and $9.6 million at December 31, ~~2006 and $9.2 million at March 31, 2007.~~2006. During the three months ended ~~March 31,~~June 30, 2007 and 2006, we repurchased ~~$16.6~~$16.5 million and ~~$12.3~~$16.7 million in unpaid principal balance of non-performing loans, respectively. In the six months ended June 30, 2007 and 2006, we repurchased $33.1 million and $29.0 million in unpaid principal balance of non-performing loans, respectively. Repurchased assets are included within other assets in our consolidated financial statements.

Premises and Equipment.Premises and equipment, net of accumulated depreciation, totaled ~~$221.9~~$223.3 million at ~~March 31,~~June 30, 2007, an increase of ~~$2.7~~$4.1 million, or ~~1.2%~~1.9%, from $219.2 million at December 31, 2006. The increase reflects the continued expansion of our retail banking center network.

Mortgage Servicing Rights.During the three months ended ~~March 31,~~June 30, 2007, we capitalized ~~$68.0~~$86.0 million, amortized ~~$15.0~~$18.5 million, and sold no$27.7 million of MSRs on a bulk basis. MSRs totaled ~~$226.8~~$266.5 million at ~~March 31,~~June 30, 2007 with a fair value of approximately ~~$263.6~~$333.3 million based on an internal valuation model ~~which~~that utilized an average discounted cash flow rate equal to ~~10.1%~~10.7%, an average cost to service of $42 per conventional loan and $55 per government or adjustable rate loan, and a weighted prepayment rate assumption of ~~18.3%~~17.3%. The portfolio contained ~~140,952~~154,879 loans and had a weighted average interest rate of ~~6.48%~~6.53%, a weighted average remaining term of ~~315~~328 months, and ~~had been seasoned~~a weighted average seasoning of 6 months. At December 31, 2006, the MSR balance was $173.3 million with a fair value of $197.6 million based on our internal valuation model.

During the six months ended June 30, 2007, we capitalized $154.0 million, amortized $33.4 million and sold $27.7 million in MSRs.

The principal balance of the loans underlying the MSRs was ~~$19.1~~$21.5 billion at ~~March 31,~~June 30, 2007 versus $15.0 billion at December 31, 2006, with the increase primarily attributable to having noa lower volume of bulk MSR sales during the 2007 period. The capitalized value of the MSRs was ~~1.19%~~1.24% at ~~March 31,~~June 30, 2007 and 1.15% at December 31, ~~2006.~~2006 of the principal balance of the loans being serviced.

The following table sets forth activity in loans serviced for others during the indicated periods (in thousands):

Activity of Mortgage Loans Serviced for Others
~~(In thousands)~~


							For the Three Months Ended						For the Six Months Ended
							June 30,						June 30,
	For the Three Months Ended March 31,						2007			2006			2007			2006
	2007			2006
Balance, beginning of period	$	15,032,504		$	29,648,088		$	19,124,378		$	29,242,906		$	15,032,504		$	29,648,088
Loan servicing originated		5,289,617			3,894,070			5,730,633			3,964,625			11,020,249			7,858,695
Loan amortization / prepayments		(746,171	)		(1,162,681	)		(850,509	)		(818,138	)		(1,596,679	)		(1,980,819	)
Loan servicing sales		(451,572	)		(3,136,571	)		(2,495,667	)		(10,009,456	)		(2,947,239	)		(13,146,027	)

Balance, end of period	$	19,124,378		$	29,242,906		$	21,508,835		$	22,379,937		$	21,508,835		$	22,379,937

Other Assets.Other assets ~~decreased $14.4~~increased $23.4 million, or ~~11.4%~~18.5%, to ~~$112.1~~$149.9 million at ~~March 31,~~June 30, 2007, from $126.5 million at December 31, 2006. The majority of this ~~decrease~~increase was attributable to ~~receivables that were offset against escrow accounts upon~~ the ~~settlement~~sale of ~~certain litigation.~~MSRs during the quarter. Upon sale of the MSRs, a receivable is recorded for a portion of the sale proceeds. The balance is normally received within 180 days after the sale date.

Liabilities

Deposit Accounts.Deposit accounts increased ~~$0.4~~$0.1 billion to ~~$8.0~~$7.7 billion at ~~March 31,~~June 30, 2007, from $7.6 billion at December 31, 2006, as certificates of deposit ~~increased~~and national accounts decreased while all other deposit types ~~(except municipals) decreased.~~increased. The composition of our deposits was as follows:

Deposit Portfolio
(Dollars in thousands)


	March 31, 2007								December 31, 2006								June 30, 2007								December 31, 2006
			Weighted			Percent					Weighted			Percent					Weighted			Percent					Weighted			Percent
			Average			of					Average			of					Average			of					Average			of
	Balance		Rate			Balance			Balance		Rate			Balance			Balance		Rate			Balance			Balance		Rate			Balance

Demand accounts	$	392,476		1.52	%		4.92	%	$	380,162		1.28	%		4.99	%	$	404,837		1.58	%		5.26	%	$	380,162		1.28	%		4.99	%
Savings accounts		140,349		1.50			1.76			144,460		1.55			1.89			133,099		1.48			1.73			144,460		1.55			1.89
MMDA		609,754		4.13			7.65			608,282		4.05			7.98			611,506		4.19			7.94			608,282		4.05			7.98
Certificates of deposit⁽¹⁾		3,775,817		4.97			47.34			3,763,781		4.86			49.37			3,756,718		5.00			48.80			3,763,781		4.86			49.37

Total Retail Deposits		4,918,396		4.49			61.67			4,896,685		4.38			64.23
Total retail deposits																		4,906,160		4.52			63.73			4,896,685		4.38			64.23

Municipal deposits		1,772,324		5.36			22.22			1,419,964		5.33			18.63			1,540,177		5.35			20.01			1,419,964		5.33			18.63
National accounts		979,284		3.70			12.28			1,062,646		3.66			13.94			881,612		3.72			11.46			1,062,646		3.66			13.94
Company controlled deposits⁽²⁾		305,378		0.00			3.83			244,193		0.00			3.20			369,861		0.00			4.80			244,193		0.00			3.20

Total Deposits	$	7,975,382		4.42	%		100.0	%	$	7,623,488		4.30	%		100.0	%
Total deposits																	$	7,697,810		4.38	%		100.00	%	$	7,623,488		4.30	%		100.0	%


(1)		The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately ~~$3.0~~$2.8 billion and $2.6 billion at ~~March 31,~~June 30, 2007 and December 31, 2006, respectively.

(2)		These accounts represent the portion of the investor custodial accounts controlled by Flagstar that have been placed on deposit with the Bank.

The municipal deposit channel was ~~$1.8~~$1.5 billion at ~~March 31,~~June 30, 2007, a ~~28.6%~~7.1% increase, as compared $1.4 billion at December 31, 2006. These deposits ~~have been~~were garnered from local government units within our retail banking market area.

In past years, our national accounts division garnered funds through nationwide advertising of deposit rates and the use of investment banking firms. ~~Since~~From 2005 through June 30, 2007, we ~~have~~did not ~~solicited~~solicit any funds through the division asbecause we ~~have been able to access more attractive~~believed other funding sources to be more attractive. Beginning in the third quarter of 2007, we began to again solicit funds through ~~FHLB advances, security repurchase agreements and other forms of deposits that provide the potential for a long term customer relationship.~~our national accounts division. National deposit accounts decreased a net ~~$0.1 billion~~$181.0 million to ~~$1.0 billion~~$881.6 million at ~~March 31,~~June 30, 2007, from $1.1 billion at December 31, 2006. ~~These accounts were generally gathered in a lower interest rate environment, resulting in a lower average cost.~~ At ~~March 31,~~June 30, 2007, the national deposit accounts had a weighted maturity of ~~3.7 months and are used for interest rate risk management.~~8.51 months.

The company controlled accounts increased ~~$0.1 billion~~$125.7 million to ~~$0.3 billion~~$369.9 million at ~~March 31,~~June 30, 2007. This increase reflects the increase in mortgage loans serviced for others.

FHLB Advances.Our borrowings from the FHLB, known as ~~FHLB~~ advances, may include floating rate daily adjustable advances, fixed rate convertible (i.e., “putable”) advances, and fixed rate term (i.e., “bullet”) advances. Putable advances are usually for three or five-year terms and allow the FHLB to call the entire debt due on the six month anniversary or any quarter thereafter, at its discretion. In return, such advances usually offer lower rates than bullet advances. The following is a breakdown of the advances outstanding (dollars in thousands):


											June 30, 2007					December 31, 2006
	March 31, 2007					December 31, 2006							Weighted					Weighted
			Weighted					Weighted					Average					Average
			Average					Average			Amount		Rate			Amount		Rate
	Amount		Rate			Amount		Rate
Short-term fixed rate term advances	$	2,304,000		4.93	%	$	2,757,000		4.95	%	$	2,129,055		5.08	%	$	2,757,000		4.95	%
Long-term fixed rate term advances												2,650,000		4.41	%		2,150,000		4.28	%
Fixed rate putable advances		750,000		4.28	%		500,000		4.24	%		750,000		4.36	%		500,000		4.24	%
Long-term fixed rate term advances		2,550,000		4.45	%		2,150,000		4.28	%

Total	$	5,604,000		4.62	%	$	5,407,000		4.62	%	$	5,529,055		4.66	%	$	5,407,000		4.62	%

FHLB advances increased ~~$0.2~~$0.1 billion to ~~$5.6~~$5.5 billion at ~~March 31,~~June 30, 2007, from $5.4 billion at December 31, 2006. ~~We rely upon such advances as a source of funding for the origination or purchase of loans for sale in the secondary market and for providing duration specific medium-term financing.~~ The outstanding balance of FHLB advances fluctuates from time to time depending upon our current inventory of loans available for sale that we fund with the advances and upon the availability of lower cost funding from our retail deposit base, the escrow accounts we hold, or alternative funding sources such as security repurchase agreements. Our approved line with the FHLB was $7.5 billion at ~~March 31,~~June 30, 2007.

Security Repurchase Agreements.Securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were sold plus accrued interest. Securities, generally ~~mortgage backed~~mortgage-backed securities, are pledged as collateral under these financing arrangements. The fair value of collateral provided to a party is continually monitored and additional collateral is provided by or returned to us, as

appropriate. Counterparties to these borrowings may require us to increase the amount of securities pledged as collateral if the fair value is adversely affected by market concerns about interest rates or general credit issues. Such events could therefore increase our borrowing costs and, as more collateral is pledged, reduce our borrowing capacity.

The following table presents security repurchase agreements outstanding (dollars in thousands):


	June 30,
	2007					2006
			Weighted					Weighted
			Average					Average
	Amount		Rate			Amount		Rate

Security repurchase agreements	$	1,705,418		5.34	%	$	990,806		5.31	%

These repurchase agreements have maturities of less than six months. At ~~March 31,~~June 30, 2007, security repurchase agreements were collateralized by $869.0 million of mortgage-backed securities held to maturity and $880.0 million of securities classified as available for sale. At December 31, 2006, ~~we had~~ security repurchase agreements ~~amounting to $0.6 billion and~~were collateralized by $1.0 billion ~~respectively.~~of mortgage-backed securities held to maturity.

Long Term Debt.Our long-term debt principally consists of junior subordinated notes related to trust preferred securities issued by our special purpose trust subsidiaries under the Company rather than the Bank. The notes mature 30 years from issuance, are callable after five years and pay interest quarterly. Our long-term debt increased as a result of a $25 million issuance of junior sub-ordinated notes related to trust preferred securities during the quarter ended June 30, 2007. The new 30-year junior sub-ordinated notes carry an interest rate of 3-month LIBOR plus 1.45%, which equaled 6.81% at June 30, 2007 and are first redeemable on or after September 15, 2012. At ~~both March 31,~~June 30, 2007 and December 31, 2006, we had $233.2 million and $207.5 million of long-term ~~debt.~~debt, respectively.

Accrued Interest Payable.Our accrued interest payable increased ~~$2.3~~$1.5 million from December 31, 2006 to ~~$48.6~~$47.8 million at ~~March 31,~~June 30, 2007. The increase was principally due to the increase in interest rates during 2007 on our interest-bearing liabilities.

Federal Income Taxes Payable.Federal income taxes payable increased ~~$3.0~~$6.5 million to ~~$32.7~~$36.2 million at ~~March 31,~~June 30, 2007, from $29.7 million at December 31, 2006. This increase is attributable to the provision for federal income taxes on earnings and the change in federal income tax on other comprehensive income during the three months ended ~~March 31,~~June 30, 2007.

Secondary Market Reserve.We sell most of the residential mortgage loans that we originate into the secondary mortgage market. When we sell mortgage loans, we make ~~customary~~ representations and warranties to the purchasers about various characteristics of each loan, such as the manner of origination, the nature and extent of underwriting standards applied and the types of documentation being provided. If a defect in the origination process is identified, we may be required to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. If there are no such defects, we have no liability to the purchaser for losses it may incur on such loan. We maintain a secondary market reserve to account for the expected losses related to loans we may be required to repurchase (or the indemnity payments we may have to make to purchasers). The secondary market reserve takes into account both our estimate of expected losses on loans sold during the current accounting period, as well as adjustments to our previous estimates of expected losses on loans sold. In each case, these estimates are based on our most recent data regarding loan repurchases, actual credit losses on repurchased loans and

recovery history, among other factors. Increases to the secondary market reserve due to current loan sales reduce our net gain on loan sales. Adjustments to our previous estimates are recorded as an increase or decrease into our other fees and charges.

The secondary market reserve increased ~~$2.3~~$3.1 million to ~~$26.5~~$27.3 million at ~~March 31,~~June 30, 2007, from $24.2 million at December 31, 2006. This increase is attributable to the Company’s increase in expected losses and historical experience of repurchases and claims.

The following table provides a reconciliation of the secondary market reserve within the periods shown (in thousands):

Secondary Market Reserve


							For the Three Months Ended						For the Six Months Ended
							June 30,						June 30,
	For the Three Months Ended March 31,						2007			2006			2007			2006
	2007			2006
Balance, beginning of period	$	24,200		$	17,550		$	26,500		$	18,000		$	24,200		$	17,550
Provision
Charged to gain on sale for current loan sales		2,163			1,006			2,379			1,420			4,542			2,426
Charged to other fees and charges for changes in estimates		2,733			3,075			2,659			3,805			5,392			6,880

Total		4,896			4,081			5,038			5,225			9,934			9,306
Charge-offs, net		(2,596	)		(3,631	)		(4,238	)		(2,625	)		(6,834	)		(6,256	)

Balance, end of period	$	26,500		$	18,000		$	27,300		$	20,600		$	27,300		$	20,600

Reserve levels are a function of expected losses based on actual pending and expected claims and repurchase requests, historical experience and loan volume. While the ultimate amount of repurchases and claims is uncertain, management believes that the reserves are adequate.

Payable for Securities Purchased.During the ~~three~~six months ended ~~March 31,~~June 30, 2007, we settled our payable ~~for securities purchased~~ relating to security purchases made prior to December 31, 2006. At ~~March 31,~~June 30, 2007, there were no unsettled trades pending for securities purchased.

Liquidity and Capital

Liquidity.Liquidity refers to the ability or the financial flexibility to manage future cash flows in order to meet the needs of depositors and borrowers and fund operations on a timely and cost-effective basis. Our primary sources of funds are ~~customer~~ deposits, loan repayments and sales, advances from the FHLB, security repurchase agreements, cash generated from operations and customer escrow accounts. WeWhile we believe that these sources of funds will continue to be adequate to meet our liquidity needs for the foreseeable ~~future.~~future, there is currently illiquidity in the non-agency secondary mortgage market and reduced investor demand for mortgage-backed securities and loans in that market. Under these conditions, we use our liquidity, as well as our capital capacity, to hold increased levels of both securities and loans. While our liquidity and capital positions are currently sufficient, our capacity to retain loans and securities on our consolidated statement of financial condition is not unlimited, and we could have to tighten our lending guidelines as a result of a prolonged period of secondary market illiquidity, resulting in lower origination volumes.

Retail deposits remained ~~relatively unchanged~~constant in the 2007 period from the comparable 2006 period, ~~and totaled~~totaling $4.9 billion at ~~March 31,~~June 30, 2007 and 2006.

Mortgage loans sold during the ~~three~~six months ended ~~March 31,~~June 30, 2007 totaled ~~$5.3~~$11.0 billion, an increase of ~~$1.4~~$3.1 billion from the ~~$3.9~~$7.9 billion sold during the same period in 2006. This increase reflects ~~a $1.2~~our $3.6 billion increase in mortgage loan originations during the ~~three~~six months ended ~~March 31,~~June 30, 2007. We attribute this increase to a rising interest rate environment, resulting in an ~~increased~~increase in demand for fixed-rate mortgage ~~loans.~~loans and a shift in consumer demand away from non-traditional loans that we did not competitively offer. We sold ~~96.3% and 89.6%~~87.1% of our mortgage loan originations during both the ~~three~~six month ~~period~~periods ended ~~March 31,~~June 30, 2007 and ~~2006, respectively.~~2006.

We use FHLB advances and security repurchase agreements to fund our daily operational liquidity needs and to assist in funding loan originations. We will continue to use these sources of funds as needed to supplement funds from deposits, loan and MSR sales and escrow accounts. We currently have an authorized line of credit equal to $7.5 billion secured by eligible residential mortgage loans. At June 30, 2007, we had ~~$5.6~~available collateral sufficient to access $7.4 billion of ~~FHLB~~the line and had $5.5 billion of advances ~~outstanding at March 31, 2007.~~outstanding. Such advances are usually repaid with the proceeds from the sale of mortgage loans or from alternative sources of financing. ~~We currently have an authorized line~~

At June 30, 2007, we had arrangements to enter into security repurchase agreements, which is a form of ~~credit equal to $7.5 billion,~~collateralized short-term borrowing, with six different financial institutions (each of which ~~$7.3 billion was collateralized at March 31, 2007, by non-delinquent residential mortgage loans.~~

is a primary dealer for Federal Reserve purposes) and had borrowed funds from all six of these counterparties. Because we borrow money under these agreements based on the fair value of our mortgage-backed securities, and because changes in interest rates can negatively impact the valuation of mortgage-backed securities, our borrowing ability under these agreements could be limited and lenders could initiate margin calls (i.e., require us to provide additional collateral) in the event interest rates change or the value of our mortgage-backed securities declines for other reasons. At ~~March 31,~~June 30, 2007, our security repurchase agreements totaled ~~$0.6~~$1.7 billion.

During May 2007, we completed arrangements with the Federal Reserve Bank of Chicago (FRB) to borrow as needed from its discount window. The discount window is a borrowing facility that is intended to be used only for short-term liquidity needs arising from special or unusual circumstances. The amount we are allowed to borrow is based on the lendable value of the collateral that we provide. To collateralize the line, we pledge commercial loans that are eligible based on FRB guidelines. At June 30, 2007, we had pledged commercial loans amounting to $1.2 billion with a lendable value of $0.9 billion. At June 30, 2007, we had no borrowings outstanding against this line of credit.

At ~~March 31,~~June 30, 2007, we had outstanding rate-lock commitments to lend ~~$3.1~~$3.3 billion in mortgage loans, along with outstanding commitments to make other types of loans totaling ~~$6.3~~$4.6 million. As such commitments may expire without being drawn upon, they do not necessarily represent future cash commitments. Also, at ~~March 31,~~June 30, 2007, we had outstanding commitments to sell ~~$2.5~~$3.5 billion of mortgage loans. We expect that our lending ~~commitments~~commitment will be funded within 90 days. Total commercial and consumer unused lines of credit totaled $1.7 billion at ~~March 31,~~June 30, 2007, including $907.3 million of unused warehouse lines of credit to various mortgage companies, of which we had advanced ~~$284.1~~$279.3 million at ~~March 31,~~June 30, 2007. There was an additional ~~$182.3~~$175.2 million in undrawn lines of credit contained within ~~our HELOC Securitizations.~~consumer loans.

Stock Repurchase Plan.On January 31, 2007, the Company announced that the board of directors had adopted a Stock Repurchase Program under which the Company was authorized to repurchase up to $40.0 million worth of outstanding common stock. On February 27, 2007, the Company announced that the board of directors had increased the authorized repurchase amount to $50.0 million. On April 26, 2007, the Board increased the authorized repurchase amount to $75.0 million. This program expires on January 31, 2008. At ~~March 31,~~June 30, 2007, ~~$16.5~~$41.7 million has been used to repurchase 3.4 million shares under the plan. Subsequent to June 30, 2007, management announced that it does not expect to repurchase additional shares under the plan at this time.

Regulatory Capital Adequacy.At ~~March 31,~~June 30, 2007, the Bank exceeded all applicable bank regulatory minimum capital requirements and was considered “well capitalized.” The Company is not subject to regulatory capital requirements.

The Bank’s regulatory capital includes proceeds from trust preferred securities that were issued in ~~seven~~eight separate private offerings to the capital markets and as to which ~~$206.2~~$232.0 million of such securities were outstanding at ~~March 31,~~June 30, 2007. This includes a $25 million trust preferred issuance in June 2007.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

In our home lending operations, we are exposed to market risk in the form of interest rate risk from the time the interest rate on a mortgage loan application is committed to by us through the time we sell or commit to sell the mortgage loan. On a daily basis, we analyze various economic and market factors and, based upon these analyses, project the amount of mortgage loans we expect to sell for delivery at a future date. The actual amount of loans sold will be a percentage of the amount of mortgage loans on which we have issued binding commitments (and thereby locked in the interest rate) but have not yet closed (“pipeline loans”) to actual closings. If interest rates change in an unanticipated fashion, the actual percentage of pipeline loans that close may differ from the projected percentage. The resultant mismatching of commitments to fund mortgage loans and commitments to sell mortgage loans may have an adverse effect on the results of operations in any such period. For instance, a sudden increase in interest rates can cause a higher percentage of pipeline loans to close than projected. To the degree that this is not anticipated, we will not have made commitments to sell these additional pipeline loans and may incur losses upon their sale as the market rate of interest will be higher than the mortgage interest rate committed to by us on such additional pipeline loans. To the extent that the hedging strategies utilized by us are not successful, our profitability may be adversely affected.

In addition to the home lending operations, Flagstar’s banking operations can be exposed to market risk due to differences in the timing of the maturity or repricing of assets versus liabilities, as well as the potential shift in the yield curve. This risk is evaluated and managed on a Company-wide basis using a net portfolio value (NPV) analysis framework. The NPV analysis ~~attempts~~is intended to estimate the net sensitivity of the fair value of the assets and liabilities to sudden large changes in the levels of interest rates.

Management believes there has been no material change since December 31, 2006, in the type of interest rate risk or market risk that the Company currently assumes.

Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures.A review and evaluation was performed by our principal executive and financial officers regarding the effectiveness of our disclosure controls and procedures as of ~~March 31,~~June 30, 2007 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended. When conducting this evaluation, management also considered the facts and underlying circumstances that resulted in the restatement described in Note 10 of the Unaudited Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” of this report. Based on that review and evaluation, the principal executive and financial officers have concluded that our current disclosure controls and procedures, as designed and implemented, are operating effectively.

(b) Changes in Internal Controls.During the quarter ended ~~March 31,~~June 30, 2007, there has been no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934, as amended, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

2633

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in response to Item 1A to Part I of our 2006 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Sale of Unregistered Securities

The Company made no unregistered sales of its equity securities during the quarter ended ~~March 31,~~June 30, 2007.

Issuer Purchases of Equity Securities

On January 31, 2007, the Company announced that the board of directors adopted a Stock Repurchase Program under which the Company was authorized to repurchase up to $40.0 million worth of the outstanding common stock. On February 27, 2007, the Company announced that the board of directors had increased the authorized repurchase amount to $50.0 million. On April 26, 2007, the Board increased the authorized repurchase amount to $75.0 million. Through June 30, 2007, the Company had used $41.7 million to repurchase 3.4 million shares of its outstanding common stock under this plan. This program expires on January 31, 2008. Subsequent to June 30, 2007, management announced that it does not expect to repurchase additional shares under the plan at this time.

The following summarizes share repurchase activities during the three months ended ~~March 31, 2007:~~June 30, 2007 pursuant to the Stock Repurchase Program:

Total Number of Maximum Approximate
Total Shares Purchased Dollar Value (in thousands)
Number of as Part of Publicly of Shares that May Yet be
Shares Average Price Announced Purchased Under the
Purchased(1) Paid per Share Plans or Programs Plans or Programs (2)

Calendar Month:

January 2007 16,314 $14.77 — $40,000
February 2007 — — — 50,000
March 2007 1,294,831 12.80 1,284,300 33,500

Total
1,311,145 12.83 1,284,300 33,500


					Total Number of		Maximum Approximate
	Total				Shares Purchased		Dollar Value (in thousands)
	Number of				as Part of Publicly		of Shares that May Yet be
	Shares		Average Price		Announced		Purchased Under the
	Purchased		Paid per Share		Plans or Programs		Plans or Programs
Calendar Month:
April 2007		1,834,100	$	11.92		1,834,100	$	36,600
May 2007		270,030		12.23		270,030		33,295
June 2007		—		—		—		33,295

Total		2,104,130		11.98		2,104,130		33,295


~~(1)~~		Some of the shares purchased by the Company during the first quarter of 2006 were in connection with the tax withholding of restricted stock granted under the 2000 Stock Incentive Plan. These purchases are not included against the maximum number of shares that may yet be purchased under the Board of Directors authorization.

~~(2)~~		On January 31, 2007, the Company announced that the board of directors adopted a Stock Repurchase Program under which the Company was authorized to repurchase up to $40.0 million worth of the outstanding common stock. On February 27, 2007, the Company announced that the board of directors had increased the authorized repurchase amount to $50.0 million. On April 26, 2007, the Board increased the authorized repurchase amount to $75.0 million. This program expires on January 31, 2008.

Item 3. Defaults upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

~~None.~~The 2007 Annual Meeting of Stockholders of the Company was held on May 25, 2007. The agenda items for such meeting are shown below together with the vote of the Company’s common stock with respect to such agenda items.

1. The election of six directors to serve until the 2008 Annual Meeting of Stockholders.


	Votes For		Votes Withheld
Mark T. Hammond		49,863,450		2,994,386
Robert O. Rondeau, Jr.		49,436,267		3,421,569
James D. Coleman		49,411,244		3,446,592
Richard S. Elsea		49,118,253		3,739,583
B. Brian Tauber		50,053,680		2,804,156
Jay J. Hansen		50,050,753		2,807,083

The terms of Thomas J. Hammond, Kirstin A. Hammond, Charles Bazzy, Michael Lucci, Sr., Robert W. DeWitt and Frank D’Angelo continued after such meeting.

2. The ratification of the appointment of Virchow, Krause & Company, LLP as the Company’s independent registered public accountant for the year ending December 31, 2007.


Votes For	Votes Against	Abstain	Non-Vote
52,528,234	-0-	164,333	165,269

Item 5. Other Information

None.

2735

Item 6. Exhibits


11		Computation of Net Earnings per Share

31.1		Section 302 Certification of Chief Executive Officer

31.2		Section 302 Certification of Chief Financial Officer

32.1		Section 906 Certification, as furnished by the Chief Executive Officer

32.2		Section 906 Certification, as furnished by the Chief Financial Officer

2836

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	FLAGSTAR BANCORP, INC.
Date: ~~May 8,~~August 9, 2007	/s/ Mark T. Hammond
	Mark T. Hammond
	President and Chief Executive Officer ~~(Duly~~ (Duly Authorized Officer)



Date: August 9, 2007	/s/ Paul D. Borja
	Paul D. Borja
	Executive Vice President and Chief Financial Officer ~~(Principal~~ (Principal Financial Officer)

2937

EXHIBIT INDEX


Ex. No.		Description

11		Statement regarding Computation of Net Earnings per Share

31.1		Section 302 Certification of Chief Executive Officer

31.2		Section 302 Certification of Chief Financial Officer

32.1		Section 906 Certification, as furnished by the Chief Executive Officer

32.2		Section 906 Certification, as furnished by the Chief Financial Officer

3038