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 ~~June~~September 30, 2008


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 ~~(State or other jurisdiction of~~ ~~Incorporation or organization)~~		38-3150651 ~~(I.R.S. Employer~~ ~~Identification No.)~~


(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

5151 Corporate Drive, Troy, Michigan		48098-2639

(Address of principal executive offices)		~~48098-2639~~ (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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 ~~August 4,~~November 6, 2008, ~~72,336,848~~83,626,726 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.

~~FORWARD-LOOKING~~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,” “assumes,” “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, 2007 and Part II, Item 1A of this Quarterly Report on Form 10-Q, including: (1) general business, economic and political conditions may significantly affect our earnings; (2) if we cannot effectively manage the impact of the volatility of interest rates, our earnings could be adversely affected; (3) the value of our mortgage servicing rights could decline with reduction in interest rates; (4) gains on mortgage servicing rights may be difficult to realize due to disruption in the capital markets; (5) we use estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; (6) current and further deterioration in the housing and commercial real estate markets may lead to increased loss severities and further worsening of delinquencies and non-performing assets in our loan portfolios. Consequently, our allowance for loan losses may not be adequate to cover actual losses, and we may be required to materially increase our reserves; (7) our secondary market reserve for losses could be insufficient; (8) our home lending profitability could be significantly reduced if we are not able to resell mortgages; (9) our commercial real estate and commercial business loan portfolios carry heightened credit risk; (10) we have substantial risks in connection with securitizations and loan sales; (11) our ability to borrow funds, maintain or increase deposits or raise capital could be limited, which could adversely affect our liquidity and earnings; (12) we may be required to raise capital at terms that are materially adverse to our stockholders; (13) our holding company is dependent on the Bank for funding of obligations and dividends; (14) we may not be able to replace key members of senior management or attract and retain qualified relationship managers in the future; (15) the network and computer systems on which we depend could fail or experience a security breach; (16) our business is highly regulated; (17) our business has volatile earnings because it operates based on a multi-year cycle; (18) our loans are geographically concentrated in only a few states; (19) a larger percentage or our loans are collateralized by real estate, and an adverse change in the real estate market may result in losses and adversely affect our portfolio; (20) a significant part of our business strategy involves adding new branch locations, and our failure to grow may adversely affect our business, prospects, and results of operations and financial condition; (21) we are subject to heightened regulatory scrutiny with respect to bank secrecy and anti-money laundering statutes and regulations; (22) certain hedging strategies that we use to manage our investment in mortgage servicing rights may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rate; and (23) we depend on our institutional counterparties to provide services that are critical to our business. If one or more of our institutional counterparties defaults on its obligations to us or becomes insolvent, it could materially adversely affect our earnings, liquidity, capital position and financial condition.

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

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


	At June 30,			At December 31,			At September 30,			At December 31,
	2008			2007			2008			2007
	(Unaudited)						(Unaudited)
Assets
Cash and cash items	$	134,852		$	129,992		$	155,889		$	129,992
Interest-bearing deposits		37,835			210,177			192,046			210,177

Cash and cash equivalents		172,687			340,169			347,935			340,169
Securities classified as trading		33,782			13,703			23,074			13,703
Securities classified as available for sale		978,033			1,308,608			1,041,446			1,308,608
Mortgage-backed securities held to maturity (fair value $1.3 billion at December 31, 2007)		—			1,255,431			—			1,255,431
Other investments		29,756			26,813			31,826			26,813
Loans available for sale		2,706,372			3,511,310			1,961,352			3,511,310
Loans held for investment		9,091,262			8,134,397			9,134,884			8,134,397
Less: allowance for loan losses		(154,000	)		(104,000	)		(224,000	)		(104,000	)

Loans held for investment, net		8,937,262			8,030,397			8,910,884			8,030,397

Total interest-earning assets		12,723,040			14,356,439			12,160,628			14,356,439
Accrued interest receivable		51,470			57,888			53,308			57,888
Repossessed assets, net		118,582			95,074			119,205			95,074
Federal Home Loan Bank stock		373,443			348,944			373,443			348,944
Premises and equipment, net		244,627			237,652			246,340			237,652
Mortgage servicing rights at fair value		661,819			—			722,159			—
Mortgage servicing rights, net		10,566			413,986			9,992			413,986
Other assets		287,594			151,120			318,405			151,120

Total assets	$	14,605,993		$	15,791,095		$	14,159,369		$	15,791,095

Liabilities and Stockholders’ Equity Liabilities
Liabilities and Stockholders’ Equity
Liabilities
Deposits	$	7,478,188		$	8,236,744		$	7,420,804		$	8,236,744
Federal Home Loan Bank advances		5,736,000			6,301,000			5,438,000			6,301,000
Security repurchase agreements		108,000			108,000			108,000			108,000
Long term debt		248,685			248,685			248,660			248,685

Total interest-bearing liabilities		13,570,873			14,894,429			13,215,464			14,894,429
Accrued interest payable		42,753			47,070			27,237			47,070
Secondary market reserve		28,000			27,600			28,600			27,600
Other liabilities		162,603			129,018			211,597			129,018

Total liabilities		13,804,229			15,098,117			13,482,898			15,098,117
Commitments and Contingencies
Stockholders’ Equity
Preferred stock $0.01 par value, 25,000,000 shares authorized; 47,982 shares of mandatory convertible non-cumulative perpetual preferred stock, series A with a liquidation preference of $1,000 per share issued at June 30, 2008		1			—
Common stock $.01 par value, 150,000,000 shares authorized; 72,336,848 and 63,656,979 shares issued, and 72,336,848 and 60,270,624 shares outstanding at June 30, 2008 and December 31, 2007, respectively		723			637
Preferred stock $0.01 par value, 25,000,000 shares authorized; no shares outstanding								—			—
Common stock $0.01 par value, 150,000,000 shares authorized; 83,626,726 and 63,656,979 shares issued, and 83,626,726 and 60,270,624 shares outstanding at September 30, 2008 and December 31, 2007, respectively								836			637
Additional paid in capital		118,413			64,350			118,664			64,350
Accumulated other comprehensive loss		(32,102	)		(11,495	)		(95,668	)		(11,495	)
Retained earnings		714,729			681,165			652,639			681,165
Treasury stock, at cost, no shares at June 30, 2008, and 3,386,355 shares at December 31, 2007		—			(41,679	)
Treasury stock, at cost, no shares at September 30, 2008, and 3,386,355 shares at December 31, 2007								—			(41,679	)

Total stockholders’ equity		801,764			692,978			676,471			692,978

Total liabilities and stockholders’ equity	$	14,605,993		$	15,791,095		$	14,159,369		$	15,791,095

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


	For the Three Months Ended						For the Six Months Ended						For the Three Months Ended						For the Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2008			2007			2008			2007			2008			2007			2008			2007
	(Unaudited)															(Unaudited)
Interest Income
Loans	$	177,582		$	189,958		$	353,876		$	377,208		$	172,163		$	201,464		$	526,039		$	578,673
Mortgage-backed securities held to maturity		—			13,768			15,576			28,385			—			15,485			15,576			43,869
Securities available for sale		21,171			13,524			36,761			27,122			14,563			15,212			51,325			42,334
Interest-bearing deposits		1,376			2,674			4,145			6,176			1,416			3,647			5,561			9,823
Other		435			2,540			1,059			4,142			395			1,343			1,453			5,486

Total interest income		200,564			222,464			411,417			443,033			188,537			237,151			599,954			680,185

Interest Expense
Deposits		70,817			86,038			154,867			171,064			60,940			91,117			215,807			262,181
FHLB advances		63,327			64,882			127,885			132,734			62,348			70,534			190,168			203,268
Federal reserve borrowings														419			—			484			—
Security repurchase agreements		1,207			18,041			4,362			30,434			1,179			17,982			5,541			48,416
Other		3,814			2,462			8,106			4,909			3,810			3,582			11,916			10,495

Total interest expense		139,165			171,423			295,220			339,141			128,696			183,215			423,916			524,360

Net interest income		61,399			51,041			116,197			103,892			59,841			53,936			176,038			155,825
Provision for loan losses		43,833			11,452			78,096			19,745			89,612			30,195			167,708			49,941

Net interest income after provision for loan losses		17,566			39,589			38,101			84,147
Net interest income (loss) after provision for loan losses														(29,771	)		23,741			8,330			105,884

Non-Interest Income
Loan fees and charges		617			1,415			1,501			2,644			777			(218	)		2,278			1,257
Deposit fees and charges		6,815			5,710			12,846			10,688			7,183			5,808			20,029			16,496
Loan administration		37,370			1,985			20,324			4,168			25,655			4,333			45,980			10,097
Net gain on loan sales		43,826			28,144			107,252			53,298
Net (loss) gain on sales of mortgage servicing rights		(834	)		5,610			(547	)		5,725
Net gain on sales of securities available for sale		4,869			—			4,869			729
Loss on trading securities		(4,104	)		—			(13,586	)		—
Net gain (loss) on loan sales														22,152			(17,457	)		129,403			35,841
Net gain on sales of mortgage servicing rights														896			456			348			6,181
Net gain (loss) on sales of securities available for sale														149			(2,944	)		5,019			(2,215	)
(Loss) gain on trading securities														(12,899	)		1,914			(26,485	)		1,914
Other fees and charges		11,718			13,456			20,293			18,494			9,475			9,376			29,768			29,039

Total non-interest income		100,277			56,320			152,952			95,746			53,388			1,268			206,340			98,610

Non-Interest Expense
Compensation and benefits		52,084			39,150			106,077			78,642			51,461			40,037			157,538			118,680
Occupancy and equipment		20,437			17,014			40,258			33,782			19,462			17,599			59,721			51,380
Communication		1,801			2,330			3,586			3,404
Other taxes		384			(10	)		1,276			(583	)
Asset resolution														18,019			1,952			29,799			6,912
General and administrative		19,030			13,750			31,708			28,795			30,222			13,672			55,010			39,920

Total non-interest expense		93,736			72,234			182,905			144,040			119,164			73,260			302,068			216,892

Earnings before federal income taxes		24,107			23,675			8,148			35,853
Provision for federal income taxes		8,361			8,544			3,002			12,963
Loss before federal income taxes														(95,547	)		(48,251	)		(87,398	)		(12,398	)
Benefit for federal income taxes														(33,456	)		(16,196	)		(30,454	)		(3,233	)

Net Earnings	$	15,746		$	15,131		$	5,146		$	22,890
Net Loss													$	(62,091	)	$	(32,055	)	$	(56,944	)	$	(9,165	)

Earnings per share
Loss per share
Basic	$	0.24		$	0.25		$	0.08		$	0.37		$	(0.79	)	$	(0.53	)	$	(0.83	)	$	(0.15	)

Diluted	$	0.22		$	0.25		$	0.08		$	0.37		$	(0.79	)	$	(0.53	)	$	(0.83	)	$	(0.15	)

Flagstar Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity and Comprehensive ~~Income (Loss)~~Loss
(In thousands, except per share data)


																												Accumulated
								Accumulated																	Additional			Other									Total
					Additional			Other									Total			Preferred			Common		Paid in			Comprehensive			Retained			Treasury			Stockholders’
	Preferred		Common		Paid in			Comprehensive			Retained			Treasury			Stockholders’			Stock			Stock		Capital			Income (Loss)			Earnings			Stock			Equity
	Stock		Stock		Capital			Income (Loss)			Earnings			Stock			Equity
Balance at January 1, 2007	$	—	$	636	$	63,223		$	5,182		$	743,193		$	—		$	812,234		$	—		$	636	$	63,223		$	5,182		$	743,193		$	—		$	812,234
Net loss		—		—		—			—			(39,225	)		—			(39,225	)		—			—		—			—			(39,225	)		—			(39,225	)
Reclassification of gain on swap extinguishment		—		—		—			(101	)		—			—			(101	)		—			—		—			(101	)		—			—			(101	)
Change in net unrealized loss on swaps used in cash flow hedges		—		—		—			(3,957	)		—			—			(3,957	)		—			—		—			(3,957	)		—			—			(3,957	)
Change in net unrealized loss on securities available for sale		—		—		—			(12,619	)		—			—			(12,619	)		—			—		—			(12,619	)		—			—			(12,619	)

Total comprehensive loss		—		—		—			—			—			—			(55,902	)		—			—		—			—			—			—			(55,902	)
Adjustment to initially apply FIN 48		—		—		—			—			(1,428	)		—			(1,428	)		—			—		—			—			(1,428	)		—			(1,428	)
Stock options exercised		—		1		69			—			—			—			70			—			1		69			—			—			—			70
Stock-based compensation		—		—		1,083			—			—			—			1,083			—			—		1,083			—			—			—			1,083
Tax effect from stock-based compensation		—		—		(25	)		—			—			—			(25	)		—			—		(25	)		—			—			—			(25	)
Purchase of treasury stock		—		—		—			—			—			(41,705	)		(41,705	)		—			—		—			—			—			(41,705	)		(41,705	)
Issuance of treasury stock		—		—		—			—			—			26			26			—			—		—			—			—			26			26
Dividends paid ($0.35 per share)		—		—		—			—			(21,375	)		—			(21,375	)		—			—		—			—			(21,375	)		—			(21,375	)

Balance at December 31, 2007 (Unaudited)		—		637		64,350			(11,495	)		681,165			(41,679	)		692,978
Net earnings		—		—		—			—			5,146			—			5,146
Balance at December 31, 2007																					—			637		64,350			(11,495	)		681,165			(41,679	)		692,978
(Unaudited)
Net loss																					—			—		—			—			(56,944	)		—			(56,944	)
Reclassification of gain on dedesignation of swaps used in cash flow hedges		—		—		—			(236	)		—			—			(236	)		—			—		—			(236	)		—			—			(236	)
Change in net unrealized loss on securities available for sale		—		—		—			(20,371	)		—			—			(20,371	)		—			—		—			(83,937	)		—			—			(83,937	)

Total comprehensive loss		—		—		—			—			—			—			(15,461	)		—			—		—			—			—			—			(141,117	)
Cumulative effect adjustment due to change of accounting for residential mortgage servicing rights		—		—		—			—			28,418			—			28,418			—			—		—			—			28,418			—			28,418
Issuance of preferred stock		1		—		45,796			—			—			—			45,797			1			—		45,796			—			—			—			45,797
Issuance of common stock		—		86		8,480			—			—			—			8,566			—			199		54,162			—			—			—			54,361
Issuance of treasury stock		—		—		—			—			—			41,092			41,092			—			—		—			—			—			41,092			41,092
Conversion of preferred stock																					(1	)		—		(45,796	)		—			—			—			(45,797	)
Restricted stock issued		—		—		(587	)		—			—			587			—		—			—		(587	)		—			—			587			—
Stock options exercised		—		—		77			—			—			—			77			—			—		77			—			—			—			77
Stock-based compensation		—		—		502			—			—			—			502			—			—		867			—			—			—			867
Tax effect from stock-based compensation		—		—		(205	)		—			—			—			(205	)		—			—		(205	)		—			—			—			(205	)

Balance at June 30, 2008	$	1	$	723	$	118,413		$	(32,102	)	$	714,729		$	—		$	801,764
Balance at September 30, 2008																				$	—		$	836	$	118,664		$	(95,668	)	$	652,639		$	—		$	676,471

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


	For the Six Months Ended
	June 30,						For the Nine Months Ended September 30,
	2008			2007			2008			2007
	(Unaudited)						(Unaudited)
Operating Activities
Net earnings	$	5,146		$	22,890
Adjustments to net earnings to net cash used in operating activities
Net loss							$	(56,944	)	$	(9,165	)
Adjustments to net loss to net cash used in operating activities
Provision for loan losses		78,096			19,745			167,708			49,941
Depreciation		11,663			12,730			17,015			19,024
Amortization of MSRs		1,348			33,417			1,949			52,668
Decrease in valuation allowance in mortgage servicing rights		(55	)		(408	)		(82	)		(358	)
Loss on fair value of residential mortgage servicing rights, net of hedging gains (losses)		44,064			—			58,839			—
Stock-based compensation expense		502			725			867			1,119
Loss on interest rate swaps		627			—			149			—
Net loss (gain) on the sale of assets		82			(1,777	)
Net gain on the sale of assets								(429	)		(3,041	)
Net gain on loan sales		(107,252	)		(53,298	)		(129,403	)		(35,841	)
Net loss (gain) on sales of mortgage servicing rights		547			(5,725	)
Net gain on securities classified as available for sale		(4,869	)		(729	)
Unrealized loss on trading securities		13,586			—
Net gain on sales of mortgage servicing rights								(348	)		(6,181	)
Net (gain) loss on securities classified as available for sale								(5,019	)		2,215
Unrealized (gain) loss on trading securities								26,485			(1,914	)
Proceeds from sales and securitization of loans available for sale		12,242,515			10,433,710			18,745,006			16,031,878
Origination and repurchase of mortgage loans available for sale, net of principal repayments		(13,593,576	)		(12,477,316	)		(21,068,787	)		(19,018,391	)
Decrease (increase) in accrued interest receivable		6,418			(3,386	)		4,580			(11,062	)
Increase in other assets		(169,183	)		(25,438	)
(Decrease) increase in accrued interest payable		(4,317	)		1,511
Net tax effect for stock grants issued		205			43
(Increase) decrease in other assets								(88,256	)		387
Decrease in accrued interest payable								(19,833	)		(119	)
Net tax effect of stock grants issued								205			25
Decrease in federal income taxes payable		(34,161	)		(1,412	)		(98,996	)		(21,229	)
Decrease in payable for securities purchased		—			(249,694	)		—			(249,694	)
Increase (decrease) in other liabilities		22,587			(2,813	)
Increase in other liabilities								47,591			8,318

Net cash used in operating activities		(1,486,027	)		(2,297,225	)		(2,397,703	)		(3,191,420	)

Investing Activities
Net change in other investments		(2,942	)		(198	)		(5,013	)		(745	)
Repayment of mortgage-backed securities held to maturity		90,846			178,823			90,846			249,475
Proceeds from sale of investment securities available for sale		899,855			171,441			913,798			254,937
Repayment (purchase) of investment securities available for sale		104,090			(202,794	)		138,988			(132,755	)
Proceeds from sales of portfolio loans		1,265,066			693,283			1,312,084			693,283
Origination of portfolio loans, net of principal repayments		182,688			526,147			1,474,806			708,063
Purchase of Federal Home Loan Bank stock		(24,499	)		(51,457	)		(24,499	)		(53,524	)
Investment in unconsolidated subsidiary		—			774			—			1,238
Proceeds from the disposition of repossessed assets		41,419			47,927			78,447			70,318
Acquisitions of premises and equipment, net of proceeds		(17,305	)		(14,793	)		(24,240	)		(25,891	)
Proceeds from the sale of mortgage servicing rights		—			33,459			—			33,915

Net cash provided by investing activities		2,539,218			1,382,612			3,955,217			1,798,314

Financing Activities
Net (decrease) increase in deposit accounts		(758,556	)		74,322			(815,940	)		862,068
Net increase in security repurchase agreements		—			714,612
Net decrease in security repurchase agreements								—			(522,138	)
Net (decrease) increase in Federal Home Loan Bank advances		(565,000	)		122,055			(863,000	)		985,000
Payment on other long term debt								(25	)		—
Issuance of junior subordinated debt		—			25,000			—			40,000
Net (disbursement) receipt of payments of loans serviced for others		(10,029	)		6,226
Net receipt of payments of loans serviced for others								21,005			17,069
Net receipt of escrow payments		17,585			24,298			12,885			19,931
Proceeds from the exercise of stock options		77			(146	)		77			(241	)
Net tax effect of stock grants issued		(205	)		(43	)		(205	)		(25	)
Issuance of preferred stock		45,797			—			45,797			—
Issuance of common stock		8,566			—			8,566			—
Issuance of treasury stock		41,092			—			41,092			26
Dividends paid to stockholders		—			(12,334	)
Purchase of treasury stock		—			(41,705	)

Net cash (used in) provided by financing activities		(1,220,673	)		912,285

Net decrease in cash and cash equivalents		(167,482	)		(2,328	)
Beginning cash and cash equivalents		340,169			277,236

Ending cash and cash equivalents	$	172,687		$	274,908


	For the Six Months Ended				For the Nine Months Ended September 30,
	June 30,				2008			2007
					(Unaudited)
Dividends paid to stockholders						—			(18,361	)
Purchase of treasury stock						—			(41,705	)

Net cash (used in) provided by financing activities						(1,549,748	)		1,341,599

Net increase (decrease) in cash and cash equivalents						7,766			(51,507	)
Beginning cash and cash equivalents						340,169			277,236

Ending cash and cash equivalents					$	347,935		$	225,729
	2008		2007
	(Unaudited)
Supplemental disclosure of cash flow information:
Loans held for investment transferred to repossessed assets	$	93,106	$	56,315	$	149,855		$	88,576

Total interest payments made on deposits and other borrowings	$	299,537	$	339,634	$	443,748		$	524,479

Federal income taxes paid	$	5,808	$	—	$	5,808		$	—

Reclassification of mortgage loans originated for portfolio to mortgage loans available for sale	$	—	$	167,943	$	280,635		$	693,283

Reclassification of mortgage loans originated available for sale then transferred to portfolio loans	$	1,255,416	$	693,283	$	1,583,069		$	210,639

Mortgage servicing rights resulting from sale or securitization of loans	$	203,838	$	154,000	$	292,004		$	247,570

Reclassification of mortgage backed securities held to maturity to securities available for sale	$	1,163,681	$	—	$	1,163,681		$	—

Retention of residual interests in securitization transactions	$	—	$	29,398	$	—		$	20,487

Recharacterization of mortgage loans available for sale to mortgage-backed securities available for sale					$	—		$	406,094

Recharacterization of loans held for investment to mortgage-backed securities held to maturity					$	—		$	345,794

Conversion of mandatory convertible non-cumulative perpetual preferred stock					$	45,797		$	—

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 ~~$14.6~~$14.2 billion in assets at ~~June~~September 30, 2008, Flagstar is the largest financial institution headquartered in Michigan.

The Company’s principal business is obtaining funds in the form of deposits and wholesale borrowings and investing those funds in single-family mortgages and other types of loans. Its primary lending activity is the acquisition or origination of single-family mortgage loans. The Company also originates consumer loans, commercial real estate loans, and non-real estate commercial loans and it services a significant volume of residential mortgage loans for ~~others.~~others, although the Company has recently suspended originating substantially all loans other than those that are eligible for sale through Fannie Mae or Freddie Mac or insured through the Federal Housing Administration (“FHA”).

The Company sells or securitizes most of the mortgage loans that it originates and generally retains the right to service the mortgage loans that it sells. These ~~mortgage-servicing~~mortgage servicing rights (“MSRs”) have occasionally been sold by the Company in transactions separate from the sale of the underlying mortgages. The Company may also retain a portion of its loan production on its consolidated statement of financial condition as loans held for investment in order to enhance the Company’s leverage ability and receive the interest spread between earning assets and paying ~~liabilities.~~liabilities over the longer term.

The Bank is a member of the Federal Home Loan Bank of Indianapolis (“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 up to applicable limits.

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 (“SEC”). 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~~nine month periods ended ~~June~~September 30, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. 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, 2007. The Form 10-K can be found on the Company’s Investor Relations web page, atwww.flagstar.com, and on the website of the SEC, atwww.sec.gov.

Note 3.Recent Accounting Developments

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,” establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. SFAS 157 clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at the 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. The Company adopted SFAS 157 as of January 1, 2008. See Note 4, “Fair Value Accounting” for further information.

In February 2007, the FASB issued SFAS 159,“The Fair Value Option for Financial Assets and Financial Liabilities.”SFAS 159 permits entities to choose to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The decision to elect the fair value option may be applied instrument by instrument, is irrevocable and must be applied to the entire instrument and not to specified risks, specific cash flows or

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

In November 2007, the SEC issued Staff Accounting Bulletin 109 (“SAB 109”) regarding the written loan commitments that are accounted for at fair value through earnings under ~~generally accepted accounting principles.~~U.S. GAAP. SAB 109 supersedes SAB 105 and expresses the current view of the SEC staff that, consistent with the guidance in SFAS 156, "“Accounting for Servicing of Financial Assets”and SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” the expected net future cash flows related to the associated servicing of the loans should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The adoption of SAB 109 iswas effective on a prospective basis for the Company’s derivative loan commitments issued or modified on or after January 1, 2008. The effect of this change resulted in an increase in the Company’s gain on loan sales by approximately ~~$5.9~~$6.7 million during the three month period ended ~~June~~September 30, 2008.

In December 2007, the SEC issued Staff Accounting Bulletin 110 (“SAB 110”). SAB 110 expresses the views of the SEC regarding the use of a “simplified” method in developing an estimate of the expected term of “plain vanilla” share options as discussed in SAB 107 and issued under SFAS 123 (revised 2004), “Share-Based Payment.” The SEC indicated in SAB 107 that it would accept a company’s decision to use the simplified method, regardless of whether the company had sufficient information to make more refined estimates of expected term. Under SAB 107, the SEC had believed detailed information about employee exercise behavior would be readily available and therefore would not expect companies to use the simplified method for share option grants after December 31, 2007. SAB 110 states that the SEC will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. The Company does not utilize the simplified method, and therefore management does not expect that this pronouncement will have an impact on the Company’s consolidated financial condition, results of operation or liquidity.

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133.”SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves on the transparency of financial reporting. In adopting SFAS 161, entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial positions, financial performance and cash flows. Because this pronouncement affects only disclosures, this pronouncement will not have an impact on the Company’s consolidated financial condition, results of operation or liquidity. The adoption of SFAS 161 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. The Company does not expect to elect early adoption of SFAS 161.

In May 2008, the FASB issued SFAS 162,“The Hierarchy of Generally Accepted Accounting Principles.”SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of non-governmental entities that are presented in conformity with ~~generally accepted accounting principles (GAAP) in the United States~~U.S. GAAP (the GAAP hierarchy). The adoption of SFAS 162 will be effective 60 days following SEC approval of the Public Company Accounting Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Management does not expect that the adoption of this statement will have a material impact of this Company’s consolidated financial condition, results of operation or liquidity.

In May 2008, the FASB issued SFAS 163,“Accounting for Financial Guarantee Insurance Contracts —- - an interpretation of FASB Statement No. 60.”SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. The statement also clarifies how SFAS 60 applies to financial guarantee insurance contracts by insurance enterprises. The statement also requires expanded disclosures about financial guarantee insurance contracts. The adoption of SFAS 163 will be effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods of those years, except for some disclosures about the risk-management activities. Management does not expect that this statement will have an impact on the Company’s consolidated financial condition, results of operation or liquidity.

Note 4.Fair Value Accounting

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

	•		Defines fair value as the price that would be received to sell an asset or paid to transfer a liability, in either case through an orderly transaction between market participants at a measurement date, and establishes a framework for measuring fair value;

	•		Establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date;

	•		Nullifies the guidance in EITF 02-3, which required the deferral of profit at inception of a transaction involving a derivative financial instrument in the absence of observable data supporting the valuation technique;

	•		Eliminates large position discounts for financial instruments quoted in active markets and requires consideration of the company’s creditworthiness when valuing liabilities; and

	•		Expands disclosures about instruments that are measured at fair value.

SFAS 159 provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized Company commitments and written loan commitments not previously recorded at fair value. In accordance with the provisions of SFAS 159, the Company, as of January 1, 2008, elected the fair value option for certain non-investment grade residual securities from private-label securitizations. The Company elected fair value on these residual securities and reclassified these investments as securities — trading to provide consistency in the accounting for the Company’s residual interests. The Company had recognized a permanent impairment on these residual securities as of December 31, 2007, thereby reducing the carrying value to fair value at that time. Thus, the fair value election had no impact on opening retained earnings. The decrease in fair value for the three and ~~six~~nine months ended ~~June~~September 30, 2008 was ~~$3.0~~$10.7 million and ~~$10.5~~$23.9 million, respectively, before taxes, which is included within the total loss on trading securities reported in the Company’s ~~Consolidated Statement~~consolidated statement of ~~Earnings.~~operations.

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

Determination of Fair Value

The following is a description of the Company’s valuation methodologies for assets measured at fair value which have been applied to all assets carried at fair value, whether as a result of the adoption of SFAS 159, SFAS 156 or previously carried at fair value.

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

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

Valuation Hierarchy

SFAS 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy favors the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows.

	•		Level 1 — Fair value is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets in which the Company can participate.

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

	•		Level 3 — Fair value is based upon financial models using primarily unobservable inputs.

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

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

Assets

Securities classified as trading.These securities are non-investment grade residual securities that arose from private-label securitizations of the Company in 2005, 2006 and 2007. These non-investment grade residual securities do not trade in an active, open market with readily observable prices and are therefore classified within the Level 3 valuation hierarchy. Accordingly, the fair value of residual securities is determined by discounting estimated net future cash flows using expected prepayment rates and discount rates that approximate current market rates. Estimated net future cash flows include assumptions related to expected credit losses on these securities. The Company maintains a model that evaluates the default rate and severity of loss on the residual securities’ collateral, considering such factors as loss experience, delinquencies, loan-to-value ratios, borrower credit scores and property type.

Securities classified as available for sale.Where quoted prices for securities are available in an active market, those securities are classified within Level 1 of the valuation hierarchy. If such quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of securities with similar characteristics, which would generally be classified within Level 2 of the valuation hierarchy, include certain ~~AAA-rated~~AAA rated U.S. government sponsored agency securities. Due to illiquidity in the markets, the Company determined the fair value of certain ~~AAA-rated~~ non-agency securities using internal valuation models and therefore classified them within the Level 3 valuation hierarchy as these models utilize significant inputs which are unobservable.

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

Loans held for investment.The Company does not record these loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, “Accounting by Creditors for Impairment of a Loan,”(SFAS 114). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At ~~June~~September 30, 2008, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as a nonrecurring Level 2 valuation.

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

Mortgage Servicing Rights.The Company has obligations to service residential first mortgage loans and consumer loans (i.e. home equity lines of credit (“HELOCs”) and second mortgage loans obtained through private-label securitization

transactions). Effective January 1, 2008, the Company elected the fair value measurement method for residential MSRs under SFAS 156. Upon this election, residential MSRs began to be accounted for at fair value on a recurring basis. Consumer servicing assets are carried at amortized cost and are periodically evaluated for impairment.

Residential Mortgage Servicing Rights.The current market for residential mortgage servicing rights is not sufficiently liquid to provide participants with quoted market prices. Therefore, the Company uses an option-adjusted spread valuation approach to determine the fair value of residential MSRs. This approach consists of projecting servicing cash flows under multiple interest rate scenarios and discounting these cash flows using risk-adjusted discount rates. The key assumptions used in the valuation of residential MSRs include mortgage prepayment speeds and discount rates. Management periodically obtains third-party valuations of the residential MSR portfolio to assess the reasonableness of the fair value calculated by its internal valuation model. Due to the nature of the valuation inputs, residential MSRs are classified within Level 3 of the valuation hierarchy. See Note 9, “Mortgage Servicing Rights” for the key assumptions used in the residential MSR valuation process.

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

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

Assets measured at fair value on a recurring basis

The following table presents the financial instruments carried at fair value as of ~~June~~September 30, 2008, by caption on the Consolidated Statement of Financial Condition and by SFAS 157 valuation hierarchy (as described above) (dollars in thousands):


								Total carrying										Total carrying
								value in the										value in the
								Consolidated										Consolidated
								Statement of										Statement of
								Financial										Financial
	Level 1			Level 2		Level 3		Condition			Level 1			Level 2		Level 3		Condition

Securities classified as trading:
Residual interests	$	—		$	—	$	33,782	$	33,782		$	—		$	—	$	23,074	$	23,074
Securities classified as available for sale		—			225,519		752,514		978,033			—			407,758		633,688		1,041,446
Residential mortgage servicing rights		—			—		661,819		661,819			—			—		722,159		722,159
Other investments		29,756			—		—		29,756			31,826			—		—		31,826
Derivative financial instruments												—			—		—		—
Rate lock commitments		—			—		25,231		25,231			—			—		10,216		10,216
Forward agency and loan sales		—			14,366		—		14,366			—			21,180		—		21,180
Treasury futures		(40,905	)		—		—		(40,905	)		(19,802	)		—		—		(19,802	)
Treasury options		(5,434	)		—		—		(5,434	)		(24,316	)		—		—		(24,316	)
Interest rate swaps		627			—		—		627			(149	)		—		—		(149	)

Total assets at fair value	$	(15,956	)	$	239,885	$	1,473,346	$	1,697,275		$	(12,441	)	$	428,938	$	1,389,137	$	1,805,634

management instruments are not included below, and therefore the gains and losses in the tables do not reflect the effect of the Company’s risk management activities related to such Level 3 instruments.

Fair value measurements using significant unobservable inputs

The table below includes a rollforward of the Consolidated Statement of Financial Condition amounts for the ~~six~~nine months ended ~~June~~September 30, 2008 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy (in thousands).


														Changes in															Changes in
														unrealized															unrealized
														gains and															gains and
														(losses)															(losses) related
														related to								Purchases,							to financial
						Purchases,								financial								issuances							instruments
			Total			issuances			Transfers					instruments			Fair value,		Total realized/			and			Transfers in		Fair value,		held at
	Fair value,		realized/			and			in and/or			Fair value,		held at
Six months ended	January		unrealized			settlements,			out of			June 30,		June 30,
June 30, 2008	1, 2008		gains/(losses)			net			Level 3			2008		2008^(c)
Nine months ended																	January 1,		unrealized			settlements,			and/or out		September		September 30,
September 30, 2008																	2008		gains/(losses)			net			of Level 3		30, 2008		2008^(c)

Securities classified as trading:
Residual interests^(a)	$	13,703	$	(12,008	)	$	—		$	32,087		$	33,782	$	—		$	13,703	$	(22,716	)	$	—		$	32,087	$	23,074	$	—
Securities classified as available for sale^(b)(c)		33,333		(26,604	)		(42,127	)		787,912	^(e)		752,514		(26,604	)
Securities classified as available for sale^{(b) (c) (e)}																		33,333		(127,986	)		(59,571	)		787,912		633,688		(127,986	)
Residential mortgage servicing rights^(d)		445,962		12,135			203,722			—			661,819		—			445,962		(15,691	)		291,888			—		722,159		—
Derivative financial
Instruments:
Rate lock commitments		26,129		—			(898	)		—			25,231		—			26,129		—			(15,913	)		—		10,216		—

Totals	$	519,127	$	(26,477	)	$	160,697		$	819,999		$	1,473,346	$	(26,604	)	$	519,127	$	(166,393	)	$	216,404		$	819,999	$	1,389,137	$	(127,986	)

As of January 1, 2008, non-investment grade residuals amounting to $33.3 million that were classified as available for sale securities were reclassified to trading securities in accordance with SFAS 159. No gain or loss was recorded upon reclassification. See Note 4, “ Fair Value Accounting” for further information. At ~~June~~September 30, 2008, the Company had ~~$33.8~~$23.1 million in securities classified as trading. These securities are non-investment grade residual securities from private-label securitizations. The securities are recorded at fair value with any unrealized gains and losses reported in the consolidated statement of ~~earnings.~~operations. During the quarter ended ~~June~~September 30, 2008, the Company recognized losses related to these trading securities of ~~$4.1~~$12.9 million as a result of the decrease in the fair value of the securities. During the ~~six~~nine month period ending ~~June~~September 30, 2008, the Company recognized losses related to these trading securities of ~~$13.6~~$26.5 million as a result of the decrease in the fair value of the securities. The decline in the fair value of these residual securities was principally due to the increase in the actual and expected losses in the second mortgages and home equity lines of credit that underlie ~~this asset.~~these assets. Additionally, during the third quarter of 2008, the values of certain of these assets were affected by the tightening of the spread between the three month LIBOR rate and the prime rate. The Company had ~~no losses~~gains on trading securities amounting to $1.9 million during the quarter ~~or six~~and nine month period ended ~~June~~September 30, 2007.

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

June 30, December 31,
2008 2007
Amortized cost $ 1,027,421 $ 1,326,656
Gross unrealized holding gains 102 4,647
Gross unrealized holding losses (49,490 ) (22,695 )

Estimated fair value $ 978,033 $ 1,308,608

~~At June 30, 2008, $379.8 million non-agency available for sale securities with unrealized losses of $29.0 million had been in a continuous unrealized loss position for greater than twelve months.~~


	September 30,			December 31,
	2008			2007
Amortized cost	$	1,188,627		$	1,326,656
Gross unrealized holding gains		933			4,647
Gross unrealized holding losses		(148,114	)		(22,695	)

Estimated fair value	$	1,041,446		$	1,308,608

The unrealized losses on securities available for sale include ~~$40.6~~$141.9 million on ~~$752.5 million of AAA-rated~~ investments in non-agency collateralized mortgage obligations (“CMOs”) at ~~June~~September 30, 2008. These CMOs consist of interests in investment vehicles backed by mortgage loans. In all of the CMOs, the Company’s investment is senior to a subordinated tranche(s) which have first loss exposure. At September 30, 2008, $336.1 million of non-agency available for sale securities with unrealized losses of $61.7 million had been in a continuous unrealized loss position for greater than twelve months. Management concluded that these unrealized losses are temporary in nature since they are not related to the underlying credit quality of the issuers and the Company has the intent and ability to hold these investments for a time necessary to recover its cost or will ultimately recover its cost at maturity (i.e., these investments have contractual maturities that, absent credit default, should allow the Company to recover its cost). The Company believes that these losses are primarily related to market conditions rather than underlying credit issues associated with the issuers of the obligations. The CMOs were purchased in the fourth quarter of 2006 and first quarter of 2007 and have not experienced any losses to date. The Company does not believe it should have any loss of principal on these investments given its senior position and the protection that the subordinated classes provide.

As of ~~June~~September 30, 2008, the aggregate amount of available for sale securities from each of the following non-agency issuers were greater than 10% of the Company’s stockholders’ equity.


	Amortized		Fair		Amortized		Fair
Name of Issuer	Cost		Value		Cost		Value
	(in thousands)				(in thousands)
Countrywide Alternative Loan Trust	$	83,311	$	80,300	$	119,869	$	62,931
Countrywide Home Loans		293,408		284,252		250,773		213,267
Flagstar Home Equity Loan Trust 2006-1		244,397		221,408		236,500		207,880
Goldman Sachs Mortgage Company		88,743		86,361		87,030		77,192
JP Morgan Mortgage Trust		83,204		80,193		81,464		72,418

	$	793,063	$	752,514	$	775,636	$	633,688

reclassified at fair value and resulted in losses on loan sales of $34.7 million. The loans were reclassified because management no longer has the intent to sell such loans. The change in ~~managements~~management’s intent ~~with respect to these loans~~ was caused by the continued disruption of the secondary market. The loans reclassified to held for investment were transferred at fair value. Such loans were written down to a fair value of $648.7 million which resulted in a loss of $22.5 million that was included in net gain on loan sales. Of the $22.5 million loss, approximately $16.0 million was attributed to estimated credit losses inherent in the loans transferred. During the quarter ended March 31, 2008, management reclassified approximately $592.9 million of mortgage loans from loans available for sale to loans held for investment. Such loans were reclassified at fair value and resulted in a $0.2 million loss on loan sales.

Loans available for sale are carried at the lower of aggregate cost or estimated fair value. These loans had an aggregate fair value that exceeded their recorded amount for each period presented. The Company generally estimates the fair value of mortgage loans based on quoted market prices for securities backed by similar types of loans. Given the lack of liquidity in the secondary mortgage market at ~~June~~September 30, 2008 and December 31, 2007, significant management judgment was necessary to estimate the fair value of loans available for sale. Where quoted market prices were available, such market prices were utilized as estimates for fair values. Otherwise, the fair values of loans were estimated by discounting estimated cash flows using management’s best estimate of market interest rates, prepayment speeds and loss assumptions for similar collateral.

Note 7.Loans Held for Investment

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


	June 30,			December 31,			September 30,			December 31,
	2008			2007			2008			2007
Mortgage loans	$	6,042,770		$	5,823,952		$	6,134,305		$	5,823,952
Second mortgage loans		294,783			56,516			291,523			56,516
Commercial real estate loans		1,706,191			1,542,104			1,737,152			1,542,104
Construction loans		71,345			90,401			65,814			90,401
Warehouse lending		423,356			316,719			344,731			316,719
Consumer loans		529,034			281,746			536,759			281,746
Commercial loans		23,783			22,959			24,600			22,959

Total		9,091,262			8,134,397			9,134,884			8,134,397
Less allowance for loan losses		(154,000	)		(104,000	)		(224,000	)		(104,000	)

Total	$	8,937,262		$	8,030,397		$	8,910,884		$	8,030,397

Credit Risk on Securitization

With respect to the issuance of private-label securitizations, the Company retains certain limited credit exposure in that it retains non-investment grade residual securities in addition to customary representations and warranties. The Company does not have credit exposure associated with non-performing loans in securitizations beyond its residual interests and the amount of draws on HELOCs that it funds and which are not reimbursed by the respective trust. The value of the Company’s residual interests includes the Company’s credit loss assumptions as to the underlying collateral pool. To the extent that actual credit losses exceed these assumptions, the value of the Company’s residual interests will be diminished.

The following table summarizes the loan balance associated with the Company’s servicing portfolio and the balance of related retained assets with credit exposure, which includes residual interests that are included as trading securities and unreimbursed HELOC draws that are included in loans held for investment at ~~June~~September 30, 2008 (in thousands):


			Balance of Retained				Balance of Retained
	Total Loans		Assets with Credit		Total Loans		Assets with Credit
	Serviced		Exposure		Serviced		Exposure
Private-label securitizations	$	1,284,069	$	62,891	$	1,242,740	$	63,245
Government sponsored agencies		44,545,958		—		50,587,417		—
Other investors		838		—		550		—

Total	$	45,830,865	$	62,891	$	51,830,707	$	63,245

Mortgage loans that have been securitized in private-label securitizations at ~~June~~September 30, 2008 and 2007 that are sixty days or more past due and the credit losses incurred in the securitization trusts are presented below (in thousands):

Credit Losses
Total Principal Principal Amount (Net of Recoveries)
Amount of Loans Of Loans 60 Days For the Six
Outstanding Or More Past Due Months Ended
June 30, June 30, June 30,
2008 2007 2008 2007 2008 2007
Securitized mortgages $ 1,284,069 $ 1,532,422 $ 33,970 $ 6,055 $ 28,657 $ 5,916


									Credit Losses
	Total Principal				Principal Amount				(Net of Recoveries)
	Amount of Loans				Of Loans 60 Days				For the Nine
	Outstanding				Or More Past Due				Months Ended
	September 30,				September 30,				September 30,
	2008		2007		2008		2007		2008		2007

Securitized mortgages	$	1,242,740	$	1,467,933	$	42,050	$	12,869	$	42,966	$	14,781

Note 9.Mortgage Servicing Rights

The Company has obligations to service residential first mortgage loans and consumer loans (HELOC and second mortgage loans resulting from private-label securitization transactions). A description of these classes of servicing assets follows.

Residential Mortgage Servicing Rights.Servicing of residential first mortgage loans is a significant business activity of the Company. The Company recognizes MSR assets on residential first mortgage loans when it retains the obligation to service these loans upon sale and the servicing fee is more than adequate compensation. MSRs are subject to changes in value from, among other things, changes in interest rates, prepayments of the underlying ~~loans.~~loans and changes in credit quality of the underlying portfolio. Historically, the Company has treated this risk as a counterbalance to the increased production and gain on loan sale margins that tend to occur in an environment with increased prepayments. In the quarter ended March 31, 2008, the Company began to specifically hedge the risk by hedging the fair value of MSRs with derivative instruments that are intended to change in value inversely to part or all of the changes in the value of MSRs.

Prior to January 1, 2008, all residential MSRs were accounted for at the lower of their initial carrying value, net of accumulated amortization, or fair value. Residential MSRs were periodically evaluated for impairment and a valuation allowance established through a charge to operations when the carrying value exceeded the fair value and was believed to be temporary. Other-than-temporary impairments were recognized if the recoverability of the carrying value was determined to be remote. There were no other-than-temporary impairments recognized during 2007. Changes in the carrying value of the residential MSRs, accounted for using the amortization method, and the associated valuation allowance for the ~~six~~nine month period ended ~~June~~September 30, 2007 follow:


	For the Six Month			For the Nine Month
	Period Ended			Period Ended
	June 30, 2007			September 30, 2007
	(In Thousands)			(In Thousands)
Balance at beginning of period	$	166,705		$	166,705
Additions from loans sold with servicing retained		146,211			239,482
Amortization		(31,732	)		(50,361	)
Sales		(27,358	)		(27,733	)

Carrying value before valuation allowance at end of period		253,826			328,093

Valuation allowance
Balance at beginning of period		(408	)		(358	)
Impairment recoveries		408			358

Balance at end of period		—			—

Net carrying value of amortization method MSRs at end of period	$	253,826		$	328,093

Unpaid principal balance of loans serviced for others	$	19,976,413
Unpaid principal balance of residential mortgage loans serviced for others				$	25,197,119

Fair value of residential MSRs:
Beginning of period	$	190,875		$	190,875

End of period	$	320,597		$	373,309

valuation allowance, a direct write-down permanently reduces the carrying value of the consumer servicing asset and the valuation allowance, precluding recognition of subsequent recoveries. There were no other-than-temporary impairments on consumer servicing assets recognized during the three or ~~six~~nine month periods ended ~~June~~September 30, 2008 and 2007.

The fair value of consumer servicing assets is estimated by using an internal valuation model. This method is based on calculating the present value of estimated future net servicing cash flows, taking into consideration discount rates, actual and expected loan prepayment rates, ~~and~~ servicing costs and other economic factors. The internal valuation model is validated periodically through a third-party valuation.

Changes in the carrying value of the consumer servicing assets and the associated valuation allowance follow:


	For the Six Month Period Ended						For the Nine Month Period Ended
	June 30,						September 30,
	2008			2007			2008			2007
	(In Thousands)						(In Thousands)
Consumer servicing assets
Balance at beginning of period	$	11,914		$	6,846		$	11,914		$	6,846
Additions:
From loans securitized with servicing retained		116			7,740			116			8,078
Subtractions:
Amortization		(1,348	)		(1,684	)		(1,949	)		(2,462	)

Carrying value before valuation allowance at end of period		10,682			12,902			10,081			12,462

Valuation allowance
Balance at beginning of period		(144	)		(150	)		(144	)		(150	)
Impairment recoveries (charges)		28			(41	)		55			(37	)

Balance at end of period		(116	)		(191	)		(89	)		(187	)

Net carrying value of servicing assets at end of period	$	10,566		$	12,711		$	9,992		$	12,275

Unpaid principal balance of consumer loans serviced for others	$	1,284,069		$	1,532,422		$	1,242,740		$	1,467,933

Fair value of servicing assets:
Beginning of period	$	11,861		$	6,757		$	11,861		$	6,757

End of period	$	10,573		$	12,739		$	10,167		$	12,291

Note 11.Derivative Financial Instruments

The Company follows the provisions of SFAS 133, as amended, for its derivative instruments and hedging activities, which require it to recognize all derivative instruments on the consolidated statements of financial condition at fair value. The following derivative financial instruments were identified and recorded at fair value as of ~~June~~September 30, 2008 and December 31, 2007:

	-		~~Fannie Mae, Freddie Mac and other forward loan sales contracts;~~

	-		~~Rate lock commitments;~~

	-		~~Interest rate swap agreements; and~~

	-		— Fannie Mae, Freddie Mac and other forward loan sales contracts; — Rate lock commitments; — Interest rate swap agreements; and — Treasury futures and options.

The Company hedges the risk of overall changes in fair value of loans held for sale and rate lock commitments generally by selling forward contracts on securities of Fannie Mae, Freddie Mac and Ginnie Mae. Under SFAS 133, certain of these positions may qualify as a fair value hedge of a portion of the funded loan portfolio and result in adjustments to the carrying value of designated loans through gain on sale based on value changes attributable to the hedged risk. The forward contracts used to economically hedge the loan commitments are accounted for as non-designated hedges and naturally offset rate lock commitment mark-to-market gains and losses recognized as a component of gain on loan sale. The Bank recognized pre-tax ~~gains~~losses of ~~$6.2~~$8.2 million and ~~$3.6~~$8.5 million for the three months ended ~~June~~September 30, 2008 and 2007, respectively, on its hedging activity relating to loan commitments and loans held for sale. The Bank recognized pre-tax gains (losses) of ~~$26.9~~$18.8 million and ~~$7.5~~$(1.0) million for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, respectively, on its hedging activity relating to loan commitments and loans held for sale.

The Company uses interest rate swap agreements to reduce its exposure to interest rate risk inherent in a portion of the current borrowings and anticipated deposits. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts and indices. Under SFAS 133, the swap agreements used to hedge the Company’s anticipated borrowings and advances qualify as cash flow hedges. Derivative gains and losses reclassed from accumulated other comprehensive ~~(loss) income~~loss to current period ~~earnings~~operations are included in the line item in which the hedged cash flows are recorded. At December 31, 2007, accumulated other comprehensive ~~(loss) income~~loss included a deferred after-tax net gain of ~~$0.2~~

$0.2 million related to derivatives used to hedge funding cash flows. On January 1, 2008, the Company derecognized all cash flow hedges. As such, the after-tax net gain of $0.2 million in accumulated other comprehensive ~~income (loss)~~loss at December 31, 2007 was recognized through ~~earnings~~operations during 2008.

The Company recognizes ineffective changes in hedge values resulting from designated SFAS 133 hedges discussed above in the same statement of ~~earnings~~operations captions as effective changes when such material ineffectiveness occurs. There were no components of derivative instruments that were excluded from the assessment of hedge effectiveness. For 2007, the Company did not recognize any significant gains or losses due to ineffectiveness of its cash flow hedges. The Company had no designated cash flow hedges during 2008.

Beginning in the first quarter of 2008, the Company began to hedge its residential MSR asset through the use of U.S. Treasury futures and options in order to mitigate the effect of changes in and volatility of the interest rate environment. Changes in the values of these derivative instruments are included in loan administration income in the non-interest income portion of the consolidated statement of ~~earnings.~~operations. Because the residential MSRs are accounted for on the fair value method, gains or losses in hedging activities are expected to be offset by increases or decreases in the fair value of the residential MSR asset, although such changes may not be perfectly correlated.

The Company had the following derivative financial instruments (dollars in thousands):


	June 30, 2008							September 30, 2008
	Notional		Fair			Expiration		Notional		Fair			Expiration
	Amounts		Value			Dates		Amounts		Value			Dates
Mortgage banking derivatives:
Rate lock commitments	$	2,568,736	$	25,231			2008	$	3,235,250	$	10,216			2008
Forward agency and loan sales		3,091,440		14,366			2008		3,051,882		21,180			2008
Mortgage servicing rights derivatives:
Treasury futures		801,000		(40,905	)		2008
Treasury and agency futures									920,000		(19,802	)		2008
Treasury options		1,580,000		(5,434	)		2008		1,700,000		(24,316	)		2008
Borrowings and advances derivatives:
Interest rate swaps (LIBOR)		130,000		627			2008-2010		130,000		(149	)		2008-2010


	December 31, 2007
	Notional		Fair			Expiration
	Amounts		Value			Dates
Mortgage banking derivatives:
Rate lock commitments	$	3,069,134	$	26,129			2008
Forward agency and loan sales		3,845,065		(13,504	)		2008
Borrowings and advances hedges:
Interest rate swaps (LIBOR)		130,000		378			2008-2010

Counterparty Credit Risk

The Bank is exposed to credit loss in the event of non-performance by the counterparties to its various derivative financial instruments. The Company ~~manages~~attempts to manage this risk by selecting large, well-established counterparties, spreading the credit risk among such counterparties, and by placing contractual limits on the amount of unsecured credit risk from any single counterparty.

Note 12.Stock-Based Compensation

For the three months ended June 30, 2008 and 2007, the Company recorded stock-based compensation expense of $0.4 million ($0.2 million net of tax) and $0.4 million ($0.2 million net of tax), respectively. For the six months ended JuneSeptember 30, 2008 and 2007, the Company recorded stock-based compensation expense of $0.5 million ($~~0.3~~0.4 million net of tax) and ~~$0.7~~$0.4 million ($~~0.5~~0.3 million net of tax), respectively. For the nine months ended September 30, 2008 and 2007, the Company recorded stock-based compensation expense of $1.4 million ($0.9 million net of tax) and $1.1 million ($0.7 million net of tax), respectively.

Stock Options

During the three month periods ended ~~June~~September 30, 2008 and 2007, there were no stock options granted.

Cash-Settled Stock Appreciation Rights

The Company issues cash-settled stock appreciation rights (“SAR”) to officers and key employees in connection with year-end compensation. Cash-settled stock appreciation rights generally vest at the rate of 25% of the grant on each of the first four annual anniversaries of the grant date. The standard term of a SAR is seven years beginning on the grant date. Grants of SARs may be settled only in cash and once made, may not be later amended or modified to be settled in common stock or a combination of common stock and cash. There were no SARs issued during the ~~second~~third quarter of 2008 or 2007.

Restricted Stock

The Company issued restricted stock to officers, directors, and key employees in connection with year-end compensation. Restricted stock generally will vest in 50% increments on each annual anniversary following the date of grant. The Company incurred expenses during the three month periods ended ~~June~~September 30, 2008 and 2007 of approximately $0.4 million and $0.3 million, respectively. During the ~~six~~nine month periods ended ~~June~~September 30, 2008 and 2007, the Company incurred expenses of approximately ~~$0.7~~$1.1 million and ~~$0.6~~$0.9 million, respectively.

Note 13.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 lending operation also services mortgage loans for others and sells MSRs into the secondary market. Funding for the 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, 2008
	Bank			Home Lending								For the Three Months Ended September 30, 2008
	Operations			Operations			Elimination			Combined		Bank			Home Lending
2008:												Operations			Operations			Elimination			Combined
Net interest income	$	41,948		$	19,451		$	—		$	61,399	$	45,609		$	14,232		$	—		$	59,841
Gain on sale revenue		4,869			42,992			—			47,861		—			23,048			—			23,048
Other income		10,032			42,384			—			52,416
Other (loss) income													(2,552	)		32,892			—			30,340

Total net interest income and non-interest income		56,849			104,827			—			161,676		43,057			70,172			—			113,229
(Loss) earnings before federal income taxes		(20,502	)		44,609			—			24,107
Loss before federal income taxes													(85,707	)		(9,840	)		—			(95,547	)
Depreciation and amortization		2,400			3,708			—			6,108		2,414			4,911			—			7,325
Capital expenditures		590			6,896			—			7,486		3,566			3,362			—			6,928
Identifiable assets		13,653,177			3,747,816			(2,795,000	)		14,605,993		13,345,151			3,099,218			(2,285,000	)		14,159,369
Inter-segment income (expense)		20,963			(20,963	)		—			—		17,138			(17,138	)		—			—

	For the Six Months Ended June 30, 2008
	Bank			Home Lending
	Operations			Operations			Elimination			Combined
2008:
Net interest income	$	70,819		$	45,378		$	—		$	116,197
Gain on sale revenue		4,869			106,705			—			111,574
Other income		13,887			27,491			—			41,378

Total net interest income and non-interest income		89,575			179,574			—			269,149
(Loss) earnings before federal income taxes		(51,974	)		60,122			—			8,148
Depreciation and amortization		4,480			7,159			—			11,639
Capital expenditures		10,400			6,879			—			17,279
Identifiable assets		13,653,177			3,747,816			(2,795,000	)		14,605,993
Inter-segment income (expense)		42,600			(42,600	)		—			—

	For the Three Months Ended June 30, 2007
	Bank			Home Lending
	Operations			Operations			Elimination			Combined
2007:
Net interest income	$	30,520		$	20,521		$	—		$	51,041
Gain on sale revenue		—			33,754			—			33,754
Other income		18,553			4,013			—			22,566

Total net interest income and non-interest income		49,073			58,288			—			107,361
Earnings before federal income taxes		9,213			14,462			—			23,675
Depreciation and amortization		2,480			22,218			—			24,698
Capital expenditures		6,714			—			—			6,714
Identifiable assets		15,477,401			5,623,077			(4,921,000	)		16,179,478
Inter-segment income (expense)		36,908			(36,908	)		—			—

	For the Six Months Ended June 30, 2007
	Bank			Home Lending
	Operations			Operations			Elimination			Combined
2007:
Net interest income	$	64,013		$	39,879		$	—		$	103,892
Gain on sale revenue		—			59,023			—			59,023
Other income		29,205			7,518			—			36,723

Total net interest income and non-interest income		93,218			106,420			—			199,638
Earnings before federal income taxes		16,849			19,004			—			35,853
Depreciation and amortization		4,984			41,163			—			46,147
Capital expenditures		14,812			—			—			14,812
Identifiable assets		15,477,401			5,623,077			(4,921,000	)		16,179,478
Inter-segment income (expense)		64,058			(64,058	)		—			—


	For the Three Months Ended September 30, 2007
	Bank			Home Lending
2007:	Operations			Operations			Elimination			Combined
Net interest income	$	23,806		$	30,130		$	—		$	53,936
Gain on sale revenue		—			(17,001	)		—			(17,001	)
Other income		10,056			8,213			—			18,269

Total net interest income and non-interest income		33,862			21,342			—			55,204
(Loss) earnings before federal income taxes		(24,469	)		(23,782	)		—			(48,251	)
Depreciation and amortization		2,482			21,815			—			24,297
Capital expenditures		4,437			6,633			—			11,070
Identifiable assets		15,879,011			6,175,988			(5,490,000	)		16,564,999
Inter-segment income (expense)		41,175			(41,175	)		—			—


	For the Nine Months Ended September 30, 2007
	Bank			Home Lending
2007:	Operations			Operations			Elimination			Combined
Net interest income	$	87,819		$	68,006		$	—		$	155,825
Gain on sale revenue		—			42,022			—			42,022
Other income		39,261			17,327			—			56,588

Total net interest income and non-interest income		127,080			127,355			—			254,435
(Loss) earnings before federal income taxes		(8,877	)		(3,521	)		—			(12,398	)
Depreciation and amortization		7,466			64,226			—			71,692
Capital expenditures		20,267			5,616			—			25,883
Identifiable assets		15,879,011			6,175,988			(5,490,000	)		16,564,999
Inter-segment income (expense)		105,233			(105,233	)		—			—

Note 14.Private Placement

The Company entered into purchase agreements with seven institutional investors, Thomas J. Hammond, Chairman of the Company and Mark T. Hammond, Vice Chairman, President and Chief Executive Officer of the Company effective May 16, 2008. Pursuant to the terms of the purchase agreements, the Company raised, in aggregate, approximately $100 million in cash or $94 million net of placement agent and legal fees, through direct sales to investors of the Company.

Under the terms of the purchase agreements, institutional investors agreed to purchase up to 11,365,000 shares of the Company’s common stock at $4.25 per share, and Thomas Hammond and Mark Hammond agreed to purchase 635,000 shares of the Company’s common stock at $5.88 per share. Additionally, the Company issued 47,982 shares of mandatory convertible non-cumulative perpetual preferred stock to the institutional investors at a purchase price and liquidation preference of $1,000 per share. Upon approval by the Company’s stockholders, the preferred shares ~~will~~ automatically convert to 11,289,878 shares of the Company’s common stock at an initial conversion price of $4.25 per share.

~~The Special Meeting of Stockholders to vote on the approval of the conversion is to be held at the national headquarters of the Company in Troy, Michigan, on August 12, 2008.~~

The offering was finalized on May 19, 2008, whereby a total of approximately $100 million of gross proceeds, or $94 million in net proceeds, were received. The Company invested $72 million into the Bank for working capital purposes and the remaining $22 million remained at the Company to be used to service long term debt payments.

A Special Meeting of Stockholders to vote on the approval of the conversion of the preferred shares to common shares was held on August 12, 2008. On that date, the shareholders approved the conversion of the Company’s mandatory convertible non-cumulative perpetual preferred stock into the Company’s common stock. The preferred stock automatically converted into shares of common stock as a result.

2726

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

Where we say “we,” “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 13 of the Notes to Consolidated Financial Statements, in Item 1, Financial Statements, herein.

Banking Operation.We provide a broad range of banking services to consumers, ~~and~~ small businesses and municipalities in Michigan, Indiana and ~~Georgia.~~Georgia as well as to across the country through our internet banking operations. 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 ~~June~~September 30, 2008, we operated a network of ~~170~~173 banking centers and provided banking services to approximately ~~127,700~~129,100 households. During the ~~second~~third quarter of 2008, we opened 3three banking centers ~~including 2 in Michigan and 1~~ in Georgia. During the first ~~six~~nine months of 2008, we consolidated an in-store Indiana branch into an existing traditional branch. During ~~the remainder of~~October 2008, we ~~expect to open 5~~opened one additional ~~branches~~branch in the Atlanta, Georgia area and 1one additional branch in Michigan. We do not expect to open any additional branches during the fourth quarter 2008.

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~~ December��31, 2007, which is available on our website,www.flagstar.com, under the Investor Relations section, or on the website of the SEC, atwww.sec.gov.

2827

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

For the Three Months Ended For the Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Return on average assets 0.41 % 0.38 % 0.07 % 0.29 %
Return on average equity 8.39 % 7.69 % 1.43 % 5.79 %
Efficiency ratio 58.0 % 67.3 % 68.0 % 72.1 %
Equity/assets ratio (average for the period) 4.91 % 4.99 % 4.66 % 4.93 %
Mortgage loans originated or purchased $ 8,059,886 $ 7,162,855 $ 15,919,874 $ 12,652,185
Other loans originated or purchased $ 116,771 $ 258,936 $ 266,754 $ 522,754
Mortgage loans sold $ 8,106,544 $ 5,730,633 $ 15,266,871 $ 11,020,249
Interest rate spread — Bank only¹
1.82 % 1.30 % 1.67 % 1.26 %
Net interest margin — Bank only²
1.89 % 1.43 % 1.77 % 1.42 %
Interest rate spread — Consolidated¹
1.77 % 1.27 % 1.62 % 1.21 %
Net interest margin — Consolidated²
1.80 % 1.35 % 1.66 % 1.39 %
Dividend payout ratio N/A 39.7 % N/A 53.9 %
Average common shares outstanding 66,005 60,691 63,159 62,051
Average fully diluted shares outstanding 71,746 61,110 66,260 62,552
Charge-offs to average investment loans (annualized) 0.50 % 0.36 % 0.64 % 0.33 %

June 30, March 31, December 31, June 30,
2008 2008 2007 2007
Equity-to-assets ratio 5.49 % 4.42 % 4.39 % 4.76 %
Core capital ratio³
6.70 % 5.64 % 5.78 % 6.04 %
Total risk-based capital ratio³
11.65 % 10.47 % 10.66 % 10.96 %
Book value per common share $ 10.45 ⁽⁴⁾ $ 11.66 $ 11.50 $ 12.78
Number of common shares outstanding 72,337 60,325 60,271 60,260
Mortgage loans serviced for others $ 45,830,865 $ 38,378,056 $ 32,487,337 $ 21,508,835
Capitalized value of mortgage servicing rights 1.47 % 1.30 % 1.27 % 1.24 %
Ratio of allowance to non-performing loans 46.3 % 47.9 % 52.8 % 53.8 %
Ratio of allowance to loans held for investment 1.69 % 1.42 % 1.28 % 0.70 %
Ratio of non-performing assets to total assets 3.17 % 2.34 % 1.90 % 1.18 %
Number of banking centers 170 167 164 156
Number of home lending centers 121 138 143 73
Number of salaried employees 3,389 3,170 3,083 2,689
Number of commissioned employees 791 839 877 462

For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Return on average assets (1.72 )% (0.77 )% (0.50 )% (0.08 )%
Return on average equity (32.15 )% (17.08 )% (10.29 )% (1.57 )%
Efficiency ratio 105.2 % 132.7 % 79.0 % 85.2 %
Equity/assets ratio (average for the period) 5.34 % 4.51 % 4.88 % 4.79 %
Mortgage loans originated or purchased $ 6,680,450 $ 6,566,185 $ 22,600,324 $ 19,218,370
Other loans originated or purchased $ 34,666 $ 262,415 $ 301,420 $ 785,169
Mortgage loans sold $ 6,809,608 $ 5,955,396 $ 22,076,479 $ 16,975,645
Interest rate spread — Bank only¹
1.78 % 1.35 % 1.69 % 1.29 %
Net interest margin — Bank only²
1.93 % 1.52 % 1.84 % 1.45 %
Interest rate spread — Consolidated¹
1.74 % 1.27 % 1.64 % 1.29 %
Net interest margin — Consolidated²
1.82 % 1.36 % 1.73 % 1.38 %
Dividend payout ratio N/A (18.8 )% N/A (197.3 )%
Average common shares outstanding 78,473 60,265 68,301 61,450
Average fully diluted shares outstanding 78,473 60,636 68,301 61,874
Charge-offs to average investment loans 0.83 % 0.33 % 0.71 % 0.34 %

September 30, June 30, December 31, September 30,
2008 2008 2007 2007
Equity-to-assets ratio 4.78 % 5.49 % 4.39 % 4.40 %
Core capital ratio³
6.29 % 6.70 % 5.78 % 5.78 %
Total risk-based capital ratio³
11.10 % 11.65 % 10.66 % 10.65 %
Book value per common share $ 8.09 $ 10.45 ⁽⁴⁾ $ 11.50 $ 12.09
Number of common shares outstanding 83,627 72,337 60,271 60,271
Mortgage loans serviced for others $ 51,830,707 $ 45,830,865 $ 32,487,337 $ 26,665,052
Capitalized value of mortgage servicing rights 1.41 % 1.47 % 1.27 % 1.28 %
Ratio of allowance to non-performing loans 54.1 % 46.3 % 52.8 % 61.0 %
Ratio of allowance to loans held for investment 2.45 % 1.69 % 1.28 % 1.11 %
Ratio of non-performing assets to total assets 3.87 % 3.17 % 1.90 % 1.34 %
Number of banking centers 173 170 164 158
Number of home lending centers 111 121 143 151
Number of salaried employees 3,291 3,389 3,083 2,939
Number of commissioned employees 736 791 877 852


⁽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.

⁽⁴⁾		The book value per common share assuming the conversion of the Company’s mandatory convertible non-cumulative perpetual preferred stock, series A at June 30, 2008 iswas $9.54.

2928

Results of Operations

Net ~~Earnings~~Loss

Three Months. Net ~~earnings~~loss for the three months ended ~~June~~September 30, 2008 was ~~$15.7~~$(62.1) million, ~~$0.22~~$(0.79) per share-diluted, a $0.6 million increase from the earnings of $15.1 million, $0.25 per share-diluted, reported in the comparable 2007 period. The overall increase resulted primarily from a $44.0 million increase in non-interest income offset by a $32.3 million increase in the provision for loan losses and a $21.5 million increase in non-interest expense.

~~Six Months.~~~~Net earnings for the six months ended June 30, 2008 was $5.1 million, $0.08 per share-diluted, a $17.8~~$30.0 million decrease from the ~~earnings~~loss of ~~$22.9~~$(32.1) million, ~~$0.37~~$(0.53) per share-diluted, reported in the comparable 2007 period. The overall decrease on a pretax basis resulted primarily from a ~~$38.9~~$52.1 million increase in non-interest ~~expense~~income and a ~~$58.4~~$5.9 million increase in net interest income before provision offset by a $59.4 million increase in the provision for loan losses ~~offset by~~and a ~~$57.2~~$45.9 million increase in non-interest expense.

Nine Months.Net loss for the nine months ended September 30, 2008 was $(56.9) million, $(0.83) per share-diluted, a $47.7 million decrease from the loss of $(9.2) million, $(0.15) per share-diluted, reported in the comparable 2007 period. The overall decrease on a pretax basis resulted from a $107.7 million increase in non-interest income and a ~~$9.9~~$20.2 million ~~decrease~~increase in ~~federal~~net interest income ~~tax~~before provision offset by a $117.8 million increase in the provision for loan losses and an $85.2 million increase in non-interest expense.

Net Interest Income

Three Months. We recorded ~~$61.4~~$59.8 million in net interest income before provision for loan losses for the three months ended ~~June~~September 30, 2008, a ~~20.4%~~10.9% increase from ~~$51.0~~$53.9 million recorded for the comparable 2007 period. The increase reflects a ~~$21.9~~$48.6 million decrease in interest income offset by ~~an $32.2~~a $54.5 million decrease in interest expense, primarily as a result of rates paid on deposits, FHLB advances and security repurchase agreements that decreased more than the decrease in yields earned on loans and securities. The increase in net interest income before provision for loan losses in the three months ended ~~June~~September 30, 2008, as compared to the same period in 2007, resulted despite a decrease of our average interest-earning assets by ~~$1.1~~$2.8 billion and our average interest-paying liabilities by ~~$1.0~~$2.4 billion.

Average interest-earning assets as a whole repriced down 1528 basis points during the three months ended ~~June~~September 30, 2008 and average interest-bearing liabilities repriced down 6575 basis points during the same period, resulting in the increase in our interest rate spread of 5047 basis points to ~~1.77%~~1.74% for the three months ended ~~June~~September 30, 2008, from 1.27% for the comparable 2007 period. The Company recorded a net interest margin of ~~1.80%~~1.82% at ~~June~~September 30, 2008 as compared to ~~1.35%~~1.36% at ~~June~~September 30, 2007. At the Bank level, the net interest margin was ~~1.89%~~1.93% at ~~June~~September 30, 2008, as compared to ~~1.43%~~1.52% at ~~June~~September 30, 2007.

~~Six~~Nine Months. We recorded ~~$116.2~~$176.0 million in net interest income before provision for loan losses for the ~~six~~nine months ended ~~June~~September 30, 2008, ~~an 11.8%~~a 13.0% increase from ~~$103.9~~$155.8 million recorded for the comparable 2007 period. The increase reflects ~~a $31.6~~an $80.2 million decrease in interest income offset by a ~~$43.9~~$100.5 million decrease in interest ~~expense, primarily as a result of rates paid on deposits, FHLB advances and security repurchase agreements that decreased more than the decrease in yields earned on loans and securities.~~expense. The increase in net interest income before provision for loan losses in the ~~six~~nine months ended ~~June~~September 30, 2008, as compared to the same period in 2007, resulted despite a decrease of our average interest-earning assets by ~~$0.8~~$1.5 billion and our average interest-paying liabilities by ~~$0.8~~$1.3 billion.

3029

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. Interest income from earning assets includes the amortization of net premiums and net deferred loan origination costs of ~~$3.5~~$1.9 million and ~~$7.8~~$5.2 million for the three months ended ~~June~~September 30, 2008 and 2007 and ~~$6.7~~$8.5 million and ~~$14.0~~$19.3 million for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, respectively. Non-accruing loans were included in the average loan amounts outstanding.


	Three Months Ended June 30,														Three Months Ended September 30,
	2008							2007							2008							2007
	Average				Annualized			Average				Annualized			Average				Annualized			Average				Annualized
	Balance		Interest		Yield/Rate			Balance		Interest		Yield/Rate			Balance		Interest		Yield/Rate			Balance		Interest		Yield/Rate
					(Dollars in thousands)										(Dollars in thousands)
Interest-earning assets:
Loans available for sale	$	3,009,450	$	51,702		6.87	%	$	4,691,970	$	66,559		5.67	%	$	2,196,230	$	40,063		7.14	%	$	5,680,959	$	88,510		6.23	%
Loans held for investment		8,948,480		125,880		5.63	%		7,781,126		123,399		6.34	%		9,403,920		132,100		5.52	%		7,131,286		112,954		6.34	%
Mortgage-backed securities held to maturity		—		—		—			1,124,507		13,768		4.91	%		—		—		—			1,207,941		15,485		5.09	%
Securities classified as available for sale		1,479,799		21,171		5.75	%		936,165		13,524		5.79	%
Securities classified as available for sale or trading																981,804		14,563		5.90	%		1,021,178		15,212		4.94	%
Interest-bearing deposits		210,346		1,376		2.63	%		206,345		2,674		5.20	%		258,122		1,416		2.18	%		528,857		3,647		2.74	%
Other		28,941		435		6.01	%		59,323		2,540		8.63	%		30,427		395		5.16	%		124,713		1,343		4.27	%

Total interest-earning assets		13,677,016		200,564		5.87	%		14,799,436		222,464		6.02	%		12,870,503		188,537		5.76	%		15,694,934		237,151		6.04	%
Other assets		1,614,949							963,243							1,598,395							954,882

Total assets	$	15,291,965						$	15,762,679						$	14,468,898						$	16,649,816

Interest-bearing liabilities
Deposits	$	7,207,022		70,817		3.95	%	$	7,529,648		86,038		4.58	%	$	6,640,749		60,940		3.65	%	$	7,715,971		91,117		4.69	%
FHLB advances		6,035,978		63,327		4.22	%		5,513,739		64,882		4.72	%		5,723,217		62,348		4.33	%		5,978,691		70,534		4.68	%
Federal Reserve borrowings																73,837		419		2.26	%		—		—		—
Security repurchase agreements		114,527		1,207		4.24	%		1,331,090		18,041		5.44	%		108,000		1,179		4.34	%		1,299,963		17,982		5.49	%
Other		248,685		3,814		6.13	%		207,873		2,462		4.75	%		248,661		3,810		6.00	%		238,399		3,582		6.01	%

Total interest-bearing liabilities		13,606,212		139,165		4.10	%		14,582,350		171,423		4.75	%		12,794,464		128,696		4.02	%		15,233,024		183,215		4.77	%
Other liabilities		934,775							393,561							901,824							666,222
Stockholders’ equity		750,978							786,768							772,610							750,570

Total liabilities and stockholders’ equity	$	15,291,965						$	15,762,679						$	14,468,898						$	16,649,816

Net interest-earning assets	$	70,804						$	217,086						$	76,039						$	461,910

Net interest income			$	61,399						$	51,041						$	59,841						$	53,936

Interest rate spread¹						1.77	%						1.27	%						1.74	%						1.27	%

Net interest margin²						1.80	%						1.35	%						1.82	%						1.36	%

Ratio of average interest-earning assets to average interest-bearing liabilities						101	%						101	%						101	%						103	%


	Six Months Ended June 30,														Nine Months Ended September 30,
	2008							2007							2008							2007
	Average				Annualized			Average				Annualized			Average				Annualized			Average				Annualized
	Balance		Interest		Yield/Rate			Balance		Interest		Yield/Rate			Balance		Interest		Yield/Rate			Balance		Interest		Yield/Rate
					(Dollars in thousands)										(Dollars in thousands)
Interest-earning assets:
Loans available for sale	$	3,047,017	$	101,488		6.66	%	$	3,991,623	$	123,336		6.18	%	$	2,761,351	$	141,551		6.74	%	$	4,578,248	$	211,846		6.17	%
Loans held for investment		8,764,193		252,388		5.76	%		8,395,136		253,872		6.05	%		8,978,992		384,488		5.65	%		7,973,853		366,827		6.13	%
Mortgage-backed securities held to maturity		602,452		15,576		5.20	%		1,231,184		28,385		4.61	%		400,169		15,576		5.20	%		1,214,867		43,869		4.83	%
Securities classified as available for sale		1,289,102		36,761		5.73	%		855,245		27,122		6.40	%		1,185,921		51,325		5.78	%		910,556		42,334		6.22	%
Interest-bearing deposits		252,258		4,145		3.30	%		245,553		6,176		5.07	%		254,227		5,561		2.92	%		292,631		9,823		4.49	%
Other		28,138		1,059		7.57	%		77,126		4,142		10.83	%		28,907		1,453		6.71	%		92,988		5,486		7.89	%

Total interest-earning assets		13,983,160		411,417		5.88	%		14,795,867		443,033		5.99	%		13,609,567		599,954		5.82	%		15,063,143		680,185		6.02	%
Other assets		1,493,753							1,221,206							1,528,888							1,168,393

Total assets	$	15,476,913						$	16,017,073						$	15,138,455						$	16,231,536

Interest-bearing liabilities
Deposits	$	7,346,428		154,867		4.24	%	$	7,555,840		171,064		4.57	%	$	7,153,942		215,807		4.03	%	$	7,592,261		262,181		4.62	%
FHLB advances		6,022,220		127,885		4.27	%		5,679,606		132,734		4.71	%		5,917,985		190,168		4.29	%		5,800,591		203,268		4.69	%
Federal Reserve borrowings																28,631		484		2.26	%		—		—		—
Security repurchase agreements		223,732		4,362		3.92	%		1,176,451		30,434		5.22	%		184,873		5,541		4.00	%		1,191,851		48,416		5.43	%
Other		248,685		8,106		6.52	%		230,416		4,909		4.30	%		248,677		11,916		6.30	%		218,175		10,495		6.41	%

Total interest-bearing liabilities		13,841,065		295,220		4.26	%		14,642,313		339,141		4.78	%		13,534,108		423,916		4.18	%		14,802,878		524,360		4.73	%
Other liabilities		915,134							584,350							866,208							651,669
Stockholders’ equity		720,714							790,410							738,139							776,989

Total liabilities and stockholders’ equity	$	15,476,913						$	16,017,073						$	15,138,455						$	16,231,536

Net interest-earning assets	$	142,095						$	153,554						$	75,459						$	260,265

Net interest income			$	116,197						$	103,892						$	176,038						$	155,825

Interest rate spread¹						1.62	%						1.21	%						1.64	%						1.29	%

Net interest margin²						1.66	%						1.39	%						1.73	%						1.38	%

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

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 June 30,									Three Months Ended September 30,
	2008 Versus 2007									2008 Versus 2007
	Increase (Decrease) due to:									Increase (Decrease) due to:
	Rate			Volume			Total			Rate			Volume			Total
	(In thousands)											(In thousands)
Interest-earning assets:
Loans available for sale	$	8,993		$	(23,850	)	$	(14,857	)	$	5,828		$	(54,275	)	$	(48,447	)
Loans held for investment		(16,021	)		18,502			2,481			(16,876	)		36,022			19,146
Mortgage-backed securities-held to maturity		35			(13,803	)		(13,768	)		(114	)		(15,371	)		(15,485	)
Securities classified as available for sale		(222	)		7,869			7,647			(163	)		(486	)		(649	)
Interest-earning deposits		(1,351	)		53			(1,298	)		(376	)		(1,855	)		(2,231	)
Other		(1,450	)		(655	)		(2,105	)		60			(1,008	)		(948	)

Total		(10,016	)		(11,884	)		(21,900	)		(11,641	)		(36,973	)		(48,614	)

Interest-bearing liabilities:
Deposits		(11,547	)		(3,674	)		(15,221	)		(17,639	)		(12,538	)		(30,177	)
FHLB advances		(7,684	)		6,129			(1,555	)		(5,213	)		(2,973	)		(8,186	)
Federal Reserve borrowings											419			—			419
Security repurchase agreements		(379	)		(16,455	)		(16,834	)		(533	)		(16,270	)		(16,803	)
Other		870			482			1,352			75			153			228

Total		(18,740	)		(13,518	)		(32,258	)		(22,891	)		(31,628	)		(54,519	)

Change in net interest income	$	8,724		$	1,634		$	10,358		$	11,250		$	(5,345	)	$	5,905

the portfolio and had the effect of increasing our allowance for loan losses by $32.6 million. Net charge-offs increased in the 2008 period to $11.2 million, compared to $6.6 million for the same period in 2007, and as a percentage of investment loans, increased to an annualized 0.50% from 0.36%. The increase in charge-offs as a percentage of investment loans reflects the Bank’s decline in credit quality as demonstrated by increases in net charge-offs and non-performing loans. See “Analysis of Items on Statement of Financial Condition — Assets — Allowance for Loan Losses,” below, for further information.

~~Six Months~~. During the six months ended June 30, 2008, we recorded a provision for loan losses of $78.1 million as compared to $19.7 million recorded during the same period in 2007. 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 the effect of increasing our allowance for loan losses by ~~$50.0 million.~~$70.0 million for the three month period ended September 30, 2008. Net charge-offs increased in the 2008 period to ~~$28.1~~$19.6 million, compared to ~~$12.1~~$5.8 million for the same period in 2007, and as a percentage of investment loans, increased to an annualized ~~0.64%~~0.83% from 0.33%. The increase in charge-offs as a percentage of investment loans reflects the Bank’s decline in credit quality reflected in increases in net charge-offs and non-performing loans. See “Analysis of Items on Statement of Financial Condition — Assets — Allowance for Loan Losses,” below, for further information.

Nine Months. During the nine months ended September 30, 2008, we recorded a provision for loan losses of $167.7 million as ~~demonstrated~~compared to $49.9 million recorded during the same period in 2007. The provision reflects our estimate to maintain the allowance for loan losses at a level management believes is appropriate to cover probable and inherent losses in the portfolio. It had the effect of increasing our allowance for loan losses by $120.0 million. Net charge-offs increased in the 2008 period to $47.7 million, compared to $17.9 million for the same period in 2007, and as a percentage of investment loans, increased to an annualized 0.71% from 0.34%. The increase in charge-offs as a percentage of investment loans reflects the Bank’s decline in credit quality as reflected in increases in net charge-offs and non-performing loans. See “Analysis of Items on Statement of Financial Condition — Assets — 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, (iv) net gain (loss) on loan sales, (v) net gain on sales of MSRs, (vi) net gain (loss) on sales of securities available for sale, (vii) loss (gain) on trading securities and (viii) other fees and charges. During the three months ended ~~June~~September 30, 2008, non-interest income increased to ~~$100.3~~$53.4 million from ~~$56.3~~$1.3 million in the comparable 2007 period. During the ~~six~~nine months ended ~~June~~September 30, 2008, non-interest income increased to ~~$152.9~~$206.3 million from ~~$95.7~~$98.6 million in the comparable 2007 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 recorded during the three months ended ~~June~~September 30, 2008 totaled ~~$0.6~~$0.8 million compared to ~~$1.4~~a loss of $0.2 million recorded during the comparable 2007 period. This ~~decrease~~increase is the result of the ~~completion of our enhancements to our SFAS 91 processes~~increase in non-capitalizable fees during the ~~latter half of 2007. As~~period as a result ~~we capitalized~~of an increase in our mortgage loan ~~fees on an expanded group of loan products during the 2008 period versus the same period in 2007.~~production.

~~Six~~Nine months. Loan fees recorded during the ~~six~~nine months ended ~~June~~September 30, 2008 totaled ~~$1.5~~$2.3 million compared to ~~$2.6~~$1.3 million recorded during the comparable 2007 period. This ~~decrease~~increase is the result of the ~~completion of our enhancements to our SFAS 91 processes~~increase in non-capitalizable fees during the ~~latter half of 2007. As~~year as a result ~~we capitalized~~of an increase in our mortgage loan ~~fees on an expanded group of loan products during the 2008 period versus the same period in 2007.~~production.

Deposit Fees and Charges. Our banking operation records 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.

Three months. During the three months ended ~~June~~September 30, 2008, we recorded ~~$6.8~~$7.2 million in deposit fees versus ~~$5.7~~$5.8 million in the comparable 2007 period. This increase is attributable to the increase in our non-sufficient funds fees and other depository fees as our banking franchise continues to expand.

~~Six~~Nine months.During the ~~six~~nine months ended ~~June~~September 30, 2008, we recorded ~~$12.8~~$20.0 million in deposit fees versus ~~$10.7~~$16.5 million recorded in the comparable 2007 period. This increase is attributable to the increase in our non-sufficient funds fees and other depository fees as our banking franchise continues to 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. Until January 1, 2008, our MSRs were accounted for on the amortization method; thereafter, the majority of our MSRs have been accounted for on the fair value method. See Note 9 — Mortgage Servicing Rights, in Item 1. Financial Statements, herein.

Three Months. The loan administration income during the three month period ended ~~June~~September 30, 2008 increased to ~~$37.4~~$25.7 million up from ~~$1.9~~$4.3 million during the comparable 2007 period. During 2008, we recorded revenues from servicing fees and ancillary income of ~~$35.2~~$41.0 million ~~and~~offset by a mark to market adjustment of ~~$2.9~~$14.8 million on the fair value of the residential MSRs and ~~was offset by~~ amortization on consumer mortgage servicing of ~~$0.7~~$0.6 million. The mark to market adjustment was net of hedging losses of ~~$69.2~~$14.4 million.

Included in our results of loan administration for both the three month and nine month periods ended September 30, 2008 is the effect of the failure of Lehman Brothers in September 2008 to honor its commitment to buy $65.0 million of excess servicing. The asset was sold in late August for late September settlement and was removed from the hedged position. In mid-September, we received confirmation of Lehman's.

2008, we did not begin hedging the portfolio until the latter portion of the first quarter. During the 2007 period, we recorded revenues from servicing fees and ancillary income of ~~$37.2~~$59.8 million which was offset by amortization of ~~$33.4~~$52.7 million. The increase in the servicing fees and ancillary income in the 2008 period is due to the significant increase in the loans serviced during the 2008 period over the corresponding period in 2007. The total unpaid principal balance of loans serviced for others was ~~$45.8~~$51.8 billion at ~~June~~September 30, 2008, versus $32.5 billion serviced at December 31, 2007, and ~~$21.5~~$26.7 billion serviced at ~~June~~September 30, 2007.

Net Gain (Loss) 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 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~~be required to pay more in the acquisition phase, thus decreasing our net gain achievable. ~~Our~~During 2008, our net gain was also affected by increasing spreads available from securities we sell that are guaranteed by Fannie Mae and Freddie Mac and by a combination of a significant decline in residential mortgage lenders and a significant shift in loan demand to Fannie Mae and Freddie Mac conforming residential mortgage loans and Ginnie Mae-insured loans, which has provided us with loan pricing opportunities for conventional residential mortgage products.

The following table indicates the net gain on loan sales reported in our consolidated financial statements to our loans sold or securitized within the period (dollars in thousands):


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended						For the Nine Months Ended
	2008			2007			2008			2007			September 30,						September 30,
Net gain on loan sales	$	43,826		$	28,144		$	107,252		$	53,298
													2008			2007			2008			2007

Net (loss) gain on loan sales													$	22,152		$	(17,457	)	$	129,403		$	35,841

Loans sold or securitized	$	8,106,544		$	5,730,633		$	15,266,871		$	11,020,249		$	6,809,608		$	5,955,396		$	22,076,479		$	16,975,645

Spread achieved		0.54	%		0.49	%		0.70	%		0.48	%		0.33	%		(0.29	)%		0.59	%		0.21	%

September 30, 2008 and 2007, respectively. Lower of cost or market adjustments amounted to ~~$22.7~~$34.7 million and ~~$0.1~~$0.2 million for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, respectively. Provisions to our secondary market reserve amounted to ~~$5.8~~$8.2 million and ~~$4.5~~$7.2 million, for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, respectively. Also included in our net gain on loan sales is the capitalized value of our MSRs, which totaled ~~$205.3~~$292.0 million and ~~$154.0~~$247.5 million for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, respectively.

Net Gain on Sales 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. AtPrior to 2008, 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 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. Effective January 1, 2008, with the adoption of fair value accounting for MSRs, we would not expect to realize significant gains or losses at the time of sale. Instead, our income from MSRs would be recorded through loan administration income.

Three months.During the three month period ending ~~June~~September 30, 2008 and 2007, we did not sell any servicing rights on a bulk ~~basis; however, we sold $2.0 billion of servicing rights on a bulk basis during the comparable 2007 period.~~basis. For the three months ended ~~June~~September 30, 2008, we recognized a ~~loss~~gain of ~~$0.8~~$0.9 million on our change in the estimate of amounts receivable from past MSR sales. The ~~$5.6~~$0.5 million gain on MSR sales for the three months ended ~~June~~September 30, 2007 resulted from the ~~$2.0 billion~~$95.5 million of servicing rights sold on a servicing released basis during that period.

~~Six~~Nine months.During the ~~six~~nine month period ending ~~June~~September 30, 2008, we did not sell any servicing rights on a bulk basis; however, for the same period in 2007 we sold servicing rights related to $2.0 billion of ~~servicing rights~~loans serviced for others on a bulk basis. For the ~~six~~nine months ended ~~June~~September 30, 2008, we recognized a ~~loss~~gain of ~~$0.5~~$0.3 million on our change in estimate of amounts receivable from past MSR sales. ~~The $5.7 million gain on MSR sales for the six months ended June 30, 2007 was the result of the sale of $2.0 billion of servicing rights during that period.~~

Net (Loss) Gain on Sales of Securities Available for Sale.Securities classified as available for sale are comprised of U.S. government sponsored agency securities as well as non-agency securities. During 2007, securities classified as available for sale also included certain residual interests from private securitizations.

Three Months. Gains (losses) on the sale of agency securities available for sale that are recently created with underlying mortgage products originated by Flagstar are reported within net gain on loan sale. Securities in this category have typically remained in the portfolio less than 30 days before sale. During the three months ended ~~June~~September 30, 2008, sales of these agency securities with underlying mortgage products originated by Flagstar were ~~$1.2 billion~~$36.4 million resulting in ~~$4.4 million~~$172,000 of net gain on loan sale.

During the three months ended ~~June~~September 30, 2008, we sold ~~$895.0~~$13.8 million in available for sales securities consisting of agency securities. Gain (loss) on sales for these available for sale securities types are reported in net gain on sale of available for sales securities. These sales generated a ~~$4.9 million~~$149,000 net gain on sale of available for sale securities.

During the three months ended September 30, 2007, we sold $84.2 million of securities available for sale which resulted in gains of $668,000. Also, during the three months ended September 30, 2007, we had a $3.6 million other-than-temporary impairment of our residual interests that arose from securitizations completed in 2005 and 2006. The other-than-temporary impairment arose during the third quarter of 2007 primarily from the increase in our credit loss assumptions for these securitizations.

The increase was caused by our recognition of the increasing losses in the underlying mortgages. The credit loss assumptions have increased by as much as 80% for certain securitizations.

~~Six~~Nine Months. During the ~~six~~nine months ended ~~June~~September 30, 2008, sales of agency securities with underlying mortgage products originated by Flagstar were ~~$2.7~~$2.8 billion resulting in ~~$1.6~~$1.7 million of net gain on loan sale. There were no such sales in the ~~six~~nine months ended ~~June~~September 30, 2007.

During the ~~six~~nine months ended ~~June~~September 30, 2008, we sold ~~$895.0~~$908.8 million in available for sales securities consisting of agency securities. These sales generated a ~~$4.9~~$5.0 million net gain on sale of available for sale securities. In the ~~six~~nine months ended ~~June~~

September 30, 2007, we sold ~~$141.9~~$255.2 million in purchased agency and non-agency securities available for sale. ~~This sale~~These sales generated a net ~~gain~~gains on sale of available for sale securities of ~~$0.7~~$1.4 million. During the nine months ended September 30, 2007, we recognized a $3.6 million other-than-temporary impairment as described above. In 2008, such losses are recognized as “(loss) gain on trading securities.”

~~Loss~~(Loss) Gain on Trading Securities.Securities classified as trading are comprised of residual interests from private-label securitizations. ~~Loss~~(Loss) gain on securities classified as trading is the result of a ~~reduction~~change in the estimated fair value of the securities.

Three Months. During the three months ended ~~June~~September 30, 2008, we recorded a ~~$4.1~~$12.9 million loss on trading securities. The loss was primarily due to the increase in the estimated cumulative loss expectations which were only partially offset by the changes to prepayment speeds related to the loans underlying the residual interests. Additionally, during the third quarter certain of these assets were affected by the tightening of the spread between LIBOR and prime interest rates. These changes caused a reduction in the fair value of the residual interests from our private-label securitizations.

During the three and nine months ended September 30, 2007, we recognized an unrealized gain on trading securities of $1.9 million. Although certain assumptions relating to these residual interests were negatively adjusted during the third quarter of 2007, the value of these residual interests increased based on the reduction in interest rate paid to the senior investors. A significant portion of the bonds issued in the securitization are variable rate and as such the reduction of the interest rate on such bonds results in additional expected cash flow available to residual interests.

~~Six~~Nine Months.During the ~~six~~nine months ended ~~June~~September 30, 2008, we recorded a ~~$13.6~~$26.5 million loss on trading securities. The loss was primarily due to the increase in the estimated cumulative loss expectations which were only partially offset by the changes to prepayment speeds related to the loans underlying the residual interests. These changes caused a reduction in the fair value of the residual interests from our private-label securitizations.

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

Three months. During the three months ended ~~June~~September 30, 2008, we recorded ~~$5.3~~$4.8 million in cash dividends received on FHLB stock, compared to ~~$3.3~~$3.7 million received during the three months ended ~~June~~September 30, 2007. At ~~June~~September 30, 2008 and 2007, we owned $373.4 million and ~~$329.0~~$331.1 million of FHLB stock, respectively. We also recorded ~~$1.9~~$2.1 million and ~~$0.8~~$0.9 million in subsidiary income for the three months ended ~~June~~September 30, 2008 and 2007, respectively. We recorded $0.9 million and $0.6 million of penalty fees during the three months ended September 30, 2008 and 2007, respectively. In addition, we recorded ~~income~~expense of ~~$0.2~~$1.1 million and an ~~expense~~income of ~~$1.4~~$1.0 million related to adjustments to our estimates in calculating our secondary market reserve, for the three months ended ~~June~~September 30, 2008 and 2007, respectively.

~~Six~~Nine months.During the ~~six~~nine months ended ~~June~~September 30, 2008, we recorded ~~$9.7~~$14.5 million in cash dividends received on FHLB stock, compared to the ~~$7.4~~$11.1 million received during the ~~six~~nine months ended ~~June~~September 30, 2007. We also recorded ~~$3.4~~$5.4 million and ~~$1.6~~$2.5 million in subsidiary income for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, respectively. We recorded $7.7 million and $6.4 million in various fee and miscellaneous income during the nine months ended September 31, 2008 and 2007, respectively. In addition, we recorded income of ~~$1.6~~$0.5 million and an expense of ~~$5.4~~$4.4 million relating to adjustments to our estimates in calculating our secondary market reserve for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, respectively.

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, loan fees and 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. Other expenses associated with loan production, however, are not required or allowed to be capitalized and are, therefore, expensed when incurred.


	For the Three Months Ended						For the Six Months Ended							For the Three Months Ended							For the Nine Months Ended
	June 30,						June 30,							September 30,							September 30,
	2008			2007			2008			2007				2008				2007			2008			2007
	(Dollars in thousands)												(Dollars in thousands)
Compensation and benefits	$	54,411		$	42,847		$	111,037		$	85,496			$	54,487			$	44,653		$	165,524		$	129,924
Commissions		30,788			19,517			60,103			34,822				26,298				18,136			86,401			52,959
Occupancy and equipment		20,471			17,038			40,324			33,824				19,492				17,622			59,816			51,446
Advertising		2,332			2,804			4,657			4,654				3,574				3,065			8,231			7,719
Federal insurance premium		1,818			1,039			3,345			1,821				1,566		��		1,257			4,911			3,078
Communications		2,136			1,533			4,243			2,980				1,974				1,579			6,218			4,559
Other taxes		384			(10	)		1,275			(583	)			(1,359	)			(470	)		(83	)		(1,053	)
Asset resolution															18,019				1,952			29,798			6,912
Other		14,879			11,178			23,707			23,366				24,764				8,706			36,690			26,929

Subtotal		127,219			95,946			248,691			186,380				148,815				96,500			397,506			282,473
Less: capitalized direct costs of loan closings, under SFAS 91		(33,483	)		(23,712	)		(65,786	)		(42,340	)			(29,651	)			(23,240	)		(95,438	)		(65,581	)

Non-interest expense	$	93,736		$	72,234		$	182,905		$	144,040			$	119,164			$	73,260		$	302,068		$	216,892

Efficiency ratio⁽¹⁾		58.0	%		67.3	%		68.0	%		72.1	%			105.2	%			132.7	%		79.0	%		85.2	%

the third quarter of 2008 as compared to the same period in 2007. Commission percentages are typically higher for the retail loan originators ~~during~~than the wholesale account executives.

Asset resolution expense consists of foreclosure costs, loss provisions and gains and losses on the sale of real estate owned (REO) properties that we have obtained through foreclosure proceedings. Asset resolution expense for the comparable period increased ~~loan originations~~$16.1 million to $18.0 million. Because of the climate of the housing market, provision for REO loss was increased from $0.9 million to $13.2 million, an increase of $12.3 million net of any gain on REO and ~~a change in the compensation structure.~~recovery of related debt.

The ~~33.1%~~184.5% increase in other expense during the 2008 period from the comparable 2007 period is principally reflective of ~~the increased mortgage loan originations~~an increase in expected losses on commercial letters of credit of $9.9 million and ~~the increased number~~an increase in incurred losses under reinsurance contracts of ~~banking centers and home lending centers in operation during the period offset in part by an administrative cost savings measure.~~$4.7 million.

During the three months ended ~~June~~September 30, 2008, we capitalized direct loan origination costs of ~~$33.5~~$29.7 million, an increase of ~~$9.8~~$6.5 million from ~~$23.7~~$23.2 million for the comparable 2007 period. This ~~41.4%~~28.0% increase is a result of an ~~$11.3~~$8.2 million, or ~~57.7%~~45.3%, increase in commission expense and an increase in the direct loan origination costs during the 2008 period versus the 2007 period.

~~Six~~Nine months.Non-interest expense, before capitalization of direct loan origination costs, increased ~~$62.3~~$115.0 million to ~~$248.7~~$397.5 million during the ~~six~~nine months ended ~~June~~September 30, 2008, from ~~$186.4~~$282.5 million for the comparable 2007 period.

Compensation and benefits expense increased ~~$25.5~~$35.6 million during the 2008 period from the comparable 2007 period to ~~$111.0~~$165.5 million and was primarily attributable to regular salary increases for employees and additional staff and support personnel for the newly-opened banking centers, additional staff for collections and loss mitigation and additional underwriters and other support staff to manage the sizeable increase in FHA business.

Commissions earned by to the commissioned sales staff for the comparable period increased ~~$25.3~~$33.4 million. This increase reflects in part the 65.0% increase in the home lending portion of loan production, for which commissions are higher.

Asset resolution expense for the comparable period increased $22.9 million to $29.8 million. Because of the climate of the housing market, provision for REO loss was increased to $19.4 million from $3.4 million, an increase of $16.0 million, offset in part by gain on REO and recovery of related debt. Legal services related to foreclosure costs increased to $15.5 million from $9.9 million.

The ~~1.5%~~36.2% increase in other expense during the 2008 period from the comparable 2007 period is principally reflective of ~~the increased mortgage loan originations~~an increase in expected losses on commercial letters of credit of $11.0 million and ~~the increased number~~an increase in incurred losses under reinsurance contracts of ~~home lending centers and the increased number of banking centers in operation during the period.~~$4.7 million.

During the ~~six~~nine months ended ~~June~~September 30, 2008, we capitalized direct loan origination costs of ~~$65.8~~$95.4 million, an increase of ~~$23.5~~$29.8 million from ~~$42.3~~$65.6 million for the comparable 2007 period. This ~~55.4%~~45.5% increase is a result of the increase in commission expense and other direct loan origination costs resulting from the increase in loan originations.

~~Provision~~Benefit for Federal Income Taxes

For the three months ended ~~June~~September 30, 2008, our ~~provision~~benefit for federal income taxes as a percentage of pretax ~~earnings~~loss was ~~34.7%~~(35.0)% compared to ~~36.1%~~(33.6)% in 2007. For the ~~six~~nine months ended ~~June~~September 30, 2008, our ~~provision~~benefit for federal income taxes as a percentage of pretax ~~earnings~~loss was ~~36.8%~~(34.8)% compared to ~~36.2%~~(26.1)% in 2007. For each period, the ~~provision~~benefit for federal income taxes varies from statutory rates primarily because of certain non-deductible corporate expenses.

Analysis of Items on the Consolidated Statement of Financial Condition

Assets

Securities Classified as Trading.Securities classified as trading are comprised of residual interests from our private-label securitizations. The residual interests in these securitizations ~~was $33.8~~were $23.1 million at ~~June~~September 30, 2008 versus $13.7 million at December 31, 2007. The increase in securities classified as trading was a result of our ~~decision,~~election, in conjunction with the fair value option under SFAS 159, to reclassify (to this account) the residual interests that were previously classified as securities available for ~~sale to the trading category.~~sale. Changes to fair value are recorded in the consolidated statement of ~~earnings.~~operations.

Securities Classified as Available for Sale.Securities classified as available for sale, which are comprised of mortgage-backed securities, collateralized mortgage obligations and, prior to January 1, 2008, residual interests from securitizations of mortgage loan products decreased from $1.3 billion at December 31, 2007, to ~~$978.0 million~~$1.0 billion at ~~June~~September 30, 2008. See Note 5 of the 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 $1.3 billion at December 31, 2007 to zero at ~~June~~September 30, 2008. The decrease was attributable to management’s decision to reclassify these securities to the available for sale category as of March 31, 2008. The reclassification was required because management no longer intends to hold these securities to maturity. A significant portion of these securities were sold ~~during~~subsequent to the ~~three month period ended June 30, 2008.~~reclassification. At December 31, 2007, ~~$107.3~~$107.6 million of the mortgage-backed securities were pledged as collateral under security repurchase agreements.

Other Investments.Our investment portfolio increased from $26.8 million at December 31, 2007, to ~~$29.8~~$31.8 million at ~~June~~September 30, 2008. Investment securities consist of mutual funds held as 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. At ~~June~~September 30, 2008, we held loans available for sale of ~~$2.7~~$2.0 billion, which was a decrease of ~~$0.8~~$1.5 billion from $3.5 billion held at December 31, 2007. ~~During the quarter ended June 30, 2008, certain~~The decrease was attributed to management’s decision to reclassify approximately $1.6 billion of mortgage loans, ~~and all~~ consumer loans and second mortgage loans ~~classified as available for sale were reclassified as~~to loans held for investment during the second and third quarter of 2008, net of mark downs taken upon transfers, because management no longer ~~has~~had the intent to sell ~~such~~these loans. The change in managements intent with respect to these loans was caused by the continued disruption of the secondary market. The loans reclassified to held for investment were transferred at fair value. The loans reclassified were written down to a fair value of $648.7 million which resulted in a loss on loan sales of $22.5 million. During the quarter ended March 31, 2008, management reclassified approximately $592.9 million of mortgage loans from loans available for sale to loans held for investment. Such loans were reclassified at fair value and resulted in a $0.2 million loss on loan sales.

Loans Held for Investment. Loans held for investment at ~~June~~September 30, 2008 increased ~~$906.9~~$880.5 million from December 31, 2007. The increase was principally attributable to reclassifications of approximately ~~$1.3~~$1.6 billion of mortgage loans, second mortgage loans and consumer loans from loans available for sale. ~~See Note 7 of the Notes to Consolidated Financial Statements, in Item 1. Financial Statements, herein.~~This increase was partially offset by principal reductions on loans held for investment from normal payments.

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 ~~$154.0~~$224.0 million at ~~June~~September 30, 2008 from $104.0 million at December 31, 2007, respectively. Our non-performing loans (i.e., loans that are past due 90 days or more) increased to ~~$332.5~~$413.7 million from $197.1 million at ~~June~~September 30, 2008 and December 31, 2007, respectively. The allowance for loan losses as a percentage of investment loans increased to ~~1.69%~~2.45% at ~~June~~September 30, 2008 from 1.28% at December 31, 2007. The increase in the allowance for loan losses at ~~June~~September 30, 2008 reflects management’s assessment of the effect of increased levels of charge-offs as well as increases in classified and non-performing loans. ~~However, the~~The allowance for loan losses as a percentage of non-performing loans ~~decreased~~increased to ~~46.3%~~54.1% from 52.8% at ~~June~~September 30, 2008 and December 31, 2007, ~~respectively, as the increase in classified and non-performing loans has risen at a higher rate than the anticipated losses on those loans.~~respectively. The delinquency rate increased in the first ~~six~~nine months of the year to ~~5.48%~~6.92% as of ~~June~~September 30, 2008, up from ~~4.03%~~3.49% as of December 31, 2007.

The allowance for loan losses is considered adequate based upon management’s assessment of relevant factors, including the types and amounts of delinquent and 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. At ~~June~~September 30, 2008, ~~75.7%~~76.3% of all delinquent loans are loans in which we ~~had~~have a first lien position on residential real estate.

Delinquent Loans


																September 30,		% of			December 31,		% of			September 30,		% of
	June 30,		% of			December 31,		% of			June 30,		% of			2008		Loans			2007		Loans			2007		Loans
Days Delinquent	2008		Loans			2007		Loans			2007		Loans			(Dollars in thousands)
	(Dollars in thousands)
30	$	95,311		1.05	%	$	59,811		0.74	%	$	50,202		0.66	%	$	107,313		1.18	%	$	59,811		0.74	%	$	73,382		1.05	%
60		69,930		0.77			70,450		0.87			30,451		0.40			110,943		1.21			70,450		0.87			44,481		0.63
90		332,539		3.66			197,149		2.42			99,298		1.29			413,717		4.53			197,149		2.42			127,506		1.81

Total	$	497,780		5.48	%	$	327,410		4.03	%	$	179,951		2.35	%	$	631,973		6.92	%	$	327,410		4.03	%	$	245,369		3.49	%

Investment loans	$	9,091,262				$	8,134,397				$	7,655,473				$	9,134,884				$	8,134,397				$	7,034,732

30 day delinquencies equaled ~~$159.9~~$215.9 million, 60 day delinquencies equaled ~~$86.5~~$117.5 million and 90 day delinquencies equaled ~~$401.7~~$503.4 million at ~~June~~September 30, 2008. Total delinquent loans under the MBA Method total ~~$648.1~~$836.9 million or ~~7.13%~~9.16% of loans held for investment at ~~June~~September 30, 2008, as compared to, ~~delinquent loans at December 31, 2007 of~~ $478.3 million, or 5.88% of total loans held for ~~investment.~~investment at December 31, 2007.

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			Nine Months Ended						Year Ended
	June 30,			June 30,			December 31,			September 30,			September 30,			December 31,
	2008			2007			2007			2008			2007			2007
Beginning balance	$	104,000		$	45,779		$	45,779		$	104,000		$	45,779		$	45,779
Provision for loan losses		78,096			19,745			88,297			167,708			49,941			88,297
Charge-offs
Mortgage loans		(16,097	)		(8,424	)		(17,468	)		(29,384	)		(12,453	)		(17,468	)
Consumer loans		(3,136	)		(4,711	)		(9,827	)		(5,127	)		(6,792	)		(9,827	)
Commercial loans		(8,952	)		—			(4,765	)		(13,124	)		(379	)		(4,765	)
Construction loans		(86	)		—			—			(169	)		—			—
Other		(909	)		(716	)		(1,599	)		(1,442	)		(1,122	)		(1,599	)

Total charge-offs		(29,180	)		(13,851	)		(33,659	)		(49,246	)		(20,746	)		(33,659	)

Recoveries
Mortgage loans		227			408			687			330			536			687
Consumer loans		585			1,145			2,258			806			1,959			2,258
Commercial loans		7			—			174			7			1			174
Construction loans		—			—			—			—			—			—
Other		265			174			464			395			330			464

Total recoveries		1,084			1,727			3,583			1,538			2,826			3,583

Charge-offs, net of recoveries		(28,096	)		(12,124	)		(30,076	)		(47,708	)		(17,920	)		(30,076	)

Ending balance	$	154,000		$	53,400		$	104,000		$	224,000		$	77,800		$	104,000

Net charge-off ratio		0.64	%		0.33	%		0.38	%		0.71	%		0.34	%		0.38	%

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 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 on the loan. Loans that are repurchased and that are performing according to their terms are included within our loans held for investment portfolio. Repurchased assets are loans that we have reacquired because of representation and warranties issues related to loan sales or securitizations and that are non-performing at the time of repurchase. To the extent we later foreclose on the loan, the underlying property is transferred to repossessed assets for disposal. During the three months ended ~~June~~September 30, 2008 and 2007, we repurchased ~~$22.1~~$16.0 million and ~~$16.5~~$13.7 million in unpaid principal balance of non-performing loans, respectively. The estimated fair value of the remaining repurchased assets totaled ~~$11.3~~$15.4 million at ~~June~~September 30, 2008 and $8.1 million at December 31, 2007, and is included within other assets in our consolidated statements of financial condition.

Mortgage Servicing Rights.At ~~June~~September 30, 2008, MSRs included residential MSRs at fair value amounting to ~~$661.8~~$722.2 million and consumer MSRs at amortized cost amounting to ~~$10.6~~$10.0 million. At December 31, 2007, all MSRs were accounted for on an amortized cost basis and amounted to $414.0 million of which $402.2 million were residential. As of January 1, 2008, we elected the fair value method for residential MSRs and recorded a cumulative effect adjustment to retained earnings of $43.7 million, which increased the balance of our residential MSRs. During the ~~six~~nine month period ended ~~June~~September 30, 2008, we recorded additions to our residential MSRs of ~~$103.0~~$291.9 million due to loan sales or securitizations. Additionally, we recorded a fair value adjustment to ~~increase~~decrease the fair value of the residential MSRs by ~~$72.2~~$15.7 million. The adjustment included approximately ~~$32.5~~$42.8 million in the reduction of fair value ofdue to payoffs ~~and $44.7~~offset by $27.1 million of market driven charges, primarily ~~a decrease~~an increase in mortgage loan rates that led to an expected ~~increase~~decrease in prepayment speeds. The increase in the capitalized value of the MSRs from December 31, 2007 to ~~June~~September 30, 2008 includes the effect of the change in accounting from amortized cost to fair value. ~~In addition, the increase in value is due to the increase in mortgage rates which have led to a decrease in expected prepayment rates.~~ See Note — 9 in Part I, Item 1 Financial Statements, herein.

The principal balance of the loans underlying our total MSRs was ~~$45.8~~$51.8 billion at ~~June~~September 30, 2008 versus $32.5 billion at December 31, 2007, ~~with the increase primarily attributable to having no~~reflecting our 2008 loan origination activity without any bulk MSR sales during the 2008 period.

Other Assets.Other assets increased ~~$136.5~~$167.3 million, or ~~90.3%~~110.7%, to ~~$287.6~~$318.4 million at ~~June~~September 30, 2008, from $151.1 million at December 31, 2007. The majority of this change was attributable to ana net increase of ~~$52.0~~$11.5 million in ~~margin~~ accounts relating to derivative activities utilized to hedge our MSR ~~derivatives,~~portfolio, a ~~$50.8~~$18.8 million increase in mortgage banking derivatives, an increase of $64.1 million relating to the estimated fair value of repurchased assets and an increase in deferred federal and state income tax benefit of ~~$41.5~~$60.8 million ~~of amounts receivable from GNMA related to insured loans repurchased. These increases were offset in part by the $55.8~~and $14.7 million, ~~fair value adjustment of the mortgage banking derivatives.~~respectively.

Liabilities

Deposit Accounts.Deposit accounts decreased ~~$0.7~~$0.8 billion to ~~$7.5~~$7.4 billion at ~~June~~September 30, 2008, from $8.2 billion at December 31, 2007. Although our total deposits decreased, the majority of the decrease came from a reduction in more expensive certificates of deposit, municipal deposits and national accounts. This reduction was executed as part of our strategy to shrink the size of our balance sheet and increase our net interest margin. The composition of our deposits was as follows:

Deposit Portfolio
(Dollars in thousands)


	June 30, 2008								December 31, 2007								September 30, 2008								December 31, 2007
			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	$	455,523		0.65	%		6.09	%	$	436,239		1.60	%		5.30	%	$	419,109		0.63	%		5.65	%	$	436,239		1.60	%		5.30	%
Savings accounts		441,017		2.39	%		5.90			237,762		2.90	%		2.89			410,069		2.50	%		5.53			237,762		2.90	%		2.89
MMDA		544,390		2.47	%		7.28			531,587		3.86	%		6.45			520,664		2.68	%		7.02			531,587		3.86	%		6.45
Certificates of deposit⁽¹⁾		3,597,842		4.27	%		48.11			3,870,828		4.99	%		46.99			3,418,840		4.05	%		46.06			3,870,828		4.99	%		46.99

Total Retail Deposits		5,038,772		3.58	%		67.38			5,076,416		4.48	%		61.63			4,768,682		3.47	%		64.26			5,076,416		4.48	%		61.63

Municipal deposits⁽²⁾		893,901		3.01	%		11.95			1,545,395		5.04	%		18.76			1,213,150		3.01	%		16.35			1,545,395		5.04	%		18.76
National accounts		957,860		4.78	%		12.81			1,141,549		4.64	%		13.86			970,257		4.78	%		13.07			1,141,549		4.64	%		13.86
Company controlled deposits⁽³⁾		587,655		0.00	%		7.86			473,384		0.00	%		5.75			468,715		0.00	%		6.32			473,384		0.00	%		5.75

Total Deposits	$	7,478,188		3.39	%		100.0	%	$	8,236,744		4.35	%		100.0	%	$	7,420,804		3.35	%		100.0	%	$	8,236,744		4.35	%		100.0	%

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. Typically these representations and warranties are in place for the life of the loan. 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, and actual credit losses on repurchased loans, among other factors. Increases to the secondary market reserve for current loan sales reduce our net gain on loan sales. Adjustments to our previous estimates are recorded as an increase or decrease in our other fees and charges.

At ~~June~~September 30, 2008, the lendable value of the collateral we pledged to the FRB totaled ~~$0.9~~$1.1 billion of which no borrowings were outstanding.

At ~~June~~September 30, 2008, we had outstanding rate-lock commitments to lend ~~$2.6~~$3.2 billion in mortgage loans, along with outstanding commitments to make other types of loans totaling ~~$139.7~~$2.2 million. As such commitments may expire without being drawn upon, they do not necessarily represent future cash commitments. Also, at ~~June~~September 30, 2008, we had outstanding commitments to sell $3.1 billion of mortgage loans. We expect that our lending commitment will be funded within 90 days. Total commercial and consumer unused lines of credit totaled ~~$1.7~~$1.5 billion at ~~June~~September 30, 2008, including ~~$962.9~~$853.7 million of unused warehouse lines of credit to various mortgage companies, of which we had advanced ~~$432.3~~$344.7 million at ~~June~~September 30, 2008. There was an additional ~~$12.0~~$11.5 million in undrawn lines of credit contained within consumer loans.

Regulatory Capital Adequacy.At ~~June~~September 30, 2008, the Bank exceeded all applicable bank regulatory minimum capital requirements and was considered “well ~~capitalized.”~~capitalized” for both Tier 1 capital and total risk-based capital purposes. The Company is not subject to regulatory capital requirements.

The Bank’s regulatory capital includes proceeds from trust preferred securities that were issued in nine separate private offerings to the capital markets and as to which $247.4 million of such securities were outstanding at ~~June~~September 30, 2008.

On May 19, 2008, the Company completed a private placement transaction which resulted in net proceeds to the Company of $94 million, of which $72 million was contributed to the Bank for working capital purposes. The amount remaining at the Company is expected to be utilized for payments on long-term debt and other corporate expenses. See Note 14 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements herein.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our exposure to interest rate risk arises from three distinctly managed mechanisms –— home lending, mortgage servicing, and structural balance sheet maturity or repricing mismatches.

In our home lending operations, we are exposed to market risk in the form of interest rate risk from the time we commit to an interest rate on a mortgage loan application through the time we sell, or commit to sell, the mortgage loan. On a daily basis, we analyze various economic and market factors to 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. A mismatch of our commitments to fund mortgage loans and our 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 may cause a higher percentage of pipeline loans to close than we projected, and thereby exceed our commitments to sell that pipeline of loans. As a result, we could incur losses upon sale of these additional loans to the extent the market rate of interest is higher than the mortgage interest rate committed to by us on pipeline loans we had initially anticipated to close. To the extent that the hedging strategies utilized by us are not successful, our profitability may be adversely affected.

We also service residential mortgages for various external parties. We receive a service fee based on the unpaid balances of servicing rights as well as ancillary income (late fees, float on payments, etc.) as compensation for performing the servicing function. An increase in mortgage prepayments, as is often associated with declining interest rates, can lead to reduced values on capitalized mortgage servicing rights and ultimately reduced loan servicing revenues. In the first quarter of 2008, we began to specifically hedge the market risk associated with mortgage servicing rights using a portfolio of Treasury note futures and options. To the extent that the hedging strategies are not effective, our profitability associated with the mortgage servicing activity may be adversely affected.

In addition to the home lending and mortgage servicing operations, our banking operations may 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 is intended to estimate the net sensitivity of the fair value of the assets and liabilities to sudden and significant changes in the levels of interest rates.

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 ~~June~~September 30, 2008 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended. 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 ~~June~~September 30, 2008, 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.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Other than as set forth below, there have been no material changes to the risk factors previously disclosed in response to Item 1A to Part I of our 2007 Annual Report on Form 10-K (the “2007 Form 10-K”). The first two risk factors below, previously included in the Form 10-Q for the quarter ended March 31, 2008, are in addition to the risk factors included in the 2007 Form 10-K, and the last risk factor below replaces the risk factor in the 2007 Form 10-K labeled “Our ability to borrow funds and raise capital could be limited, which could adversely affect our earnings.”

Certain hedging strategies that we use to manage our investment in mortgage servicing rights may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates.

We invest in MSRs to support our mortgage banking strategies and to deploy capital at acceptable returns. The value of these assets and the income they provide tend to be counter-cyclical to the changes in production volumes and gain on sale of loans that result from changes in interest rates. We also enter into derivatives to hedge our MSRs to offset losses in fair value resulting from the actual or anticipated increase in prepayments in declining interest rate environments. The primary risk associated with MSRs is that they will lose a substantial portion of their value as a result of higher than anticipated prepayments occasioned by declining interest rates. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than anticipated. Our hedging strategies are highly susceptible to prepayment risk, basis risk, market volatility and changes in the shape of the yield curve, among other factors. In addition, our hedging strategies rely on assumptions and projections regarding our assets and general market factors. If these assumptions and projections prove to be incorrect or our hedging strategies do not adequately mitigate the impact of changes in interest rates or prepayment speeds, we may incur losses that would adversely impact our earnings.

We depend on our institutional counterparties to provide services that are critical to our business. If one or more of our institutional counterparties defaults on its obligations to us or becomes insolvent, it could materially adversely affect our earnings, liquidity, capital position and financial condition.

We face the risk that one or more of our institutional counterparties may fail to fulfill their contractual obligations to us. Our primary exposures to institutional counterparty risk are with third-party providers of credit enhancement on the mortgage assets that we hold in our investment portfolio, including mortgage insurers and financial guarantors, issuers of securities held on our balance sheet, and derivatives counterparties.

The challenging mortgage and credit market conditions have adversely affected, and will likely continue to adversely affect, the liquidity and financial condition of a number of our institutional counterparties, particularly those whose businesses are concentrated in the mortgage industry. One or more of these institutions may default in its obligations to us for a number of reasons, such as changes in financial condition that affect their credit ratings, a reduction in liquidity, operational failures or insolvency. Several of our institutional counterparties have experienced ratings downgrades and liquidity constraints. These and other key institutional counterparties may become subject to serious liquidity problems that, either temporarily or permanently, negatively affect the viability of their business plans or reduce their access to funding sources. The financial difficulties that a number of our institutional counterparties are currently experiencing may negatively affect the ability of these counterparties to meet their obligations to us and the amount or quality of the products or services they provide to us. A default by a counterparty with significant obligations to us could result in significant financial losses to us and could materially adversely affect our ability to conduct our operations, which would adversely affect our earnings, liquidity, capital position and financial condition.

Our ability to borrow funds, maintain or increase deposits or raise capital could be limited, which could adversely affect our liquidity and earnings.

Our access to external sources of financing, including deposits, as well as the cost of that financing, is dependent on various factors. Many of these factors depend upon market perceptions of events that are beyond our control, such as the failure of other banks or financial institutions. Other factors are dependent upon our results of operations including, but not limited to material changes in operating margins; earnings trends and volatility; funding and liquidity management practices; financial leverage on an absolute basis or relative to peers; the composition of the statement of financial condition and/or capital structure; geographic and business diversification; and our market share and competitive position in the business segments in which we operate. The material deterioration in any one or a combination of these factors could result in a downgrade of our credit or servicer ratings or a decline in our perception within the marketplace and could result in a limited ability to borrow funds, maintain or increase deposits (including custodial deposits for our agency servicing portfolio) or to raise capital.

Our ability to make mortgage loans depends largely on our ability to secure funds on terms acceptable to us. Our primary sources of funds to meet our financing needs include loan sales and securitizations, deposits, which include custodial amounts from our agency servicing portfolio, borrowings from the FHLB, borrowings from investment and commercial banks through repurchase agreements, and capital-raising activities. If we are unable to maintain any of these financing arrangements or arrange for new financing on terms acceptable to us, or if we default on any of the covenants imposed upon us by our borrowing facilities, then we may have to reduce the number of loans we are able to originate for sale in the secondary market or for our own investment. A sudden and significant reduction in loan originations that occurs as a result could adversely impact our earnings. There is no guarantee that we will able to renew or maintain our financing ~~arrangement~~arrangements or that we will be able to adequately access capital markets when or if a need for additional capital arises.

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

~~Sale of Unregistered Securities~~

On May 19, 2008, we sold 12,000,000 shares of the Company’s common stock and 47,982 shares of the Company’s Mandatory Convertible Non-Cumulative Perpetual Preferred Stock to institutional and individual investors in a private placement transaction exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. Disclosure required by Item 2 of Part II to Form 10-Q was provided in our Current Report on Form 8-K and the Exhibits attached thereto dated May 16, 2008.None.

Issuer Purchases of Equity Securities

The Company made no purchases of its equity securities during the quarter ended ~~June~~September 30, 2008.

Item 3. Defaults upon Senior Securities

None.

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

~~The 2008 Annual~~At the Company’s Special Meeting of Stockholders on August 12, 2008, the Company’s stockholders approved the automatic conversion of ~~the Company was held on May 23, 2008. The agenda items for such meeting are shown below together with the vote~~47,982 shares of the Company’s mandatory convertible non-cumulative perpetual preferred stock, series A, into approximately 11,289,878 shares of common ~~stockholders with respect to such agenda items.~~stock. The votes for, votes against and abstentions (there were no broker non-votes) were as follows:

~~1. The election of seven directors to serve until the 2010 Annual Meeting of Stockholders.~~

Votes For Votes Withheld
Thomas J. Hammond 50,589,072 4,664,034
Kirstin A. Hammond 50,596,925 4,656,181
Charles Bazzy 48,679,492 6,573,614
Michael Lucci, Sr. 49,982,629 5,270,477
Robert W. DeWitt 48,687,521 6,565,585
Frank D’Angelo 49,975,780 5,277,326
William F. Pickard 50,685,493 4,567,613

~~The terms of the other directors, Mark T. Hammond, Robert O. Rondeau, Jr., James D. Coleman, Richard S. Elsea, B. Brian Tauber and Jay J. Hansen, 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, 2008.~~

Votes For Votes Against Abstain Non-Vote
54,766,949 386,491 99,666 —
Votes for 39,167,855
Votes against 424,591
Abstentions 100,290

Item 5. Other Information

None.


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

				The unaudited condensed consolidated financial statements of the Company are as follows: Consolidated Statements of Financial Condition — September 30, 2008 (unaudited) and December 31, 2007. Unaudited Consolidated Statements of Operations — For the three and nine months ended September 30, 2008 and 2007. Consolidated Statements of Stockholders’ Equity and Comprehensive Loss — For the nine months ended September 30, 2008 (unaudited) and for the year ended December 31, 2007. Unaudited Consolidated Statements of Cash Flows — For the nine months ended September 30, 2008 and 2007. ~~Consolidated Statements of Financial Condition — June 30, 2008 (unaudited) and December 31, 2007.~~

				~~Unaudited Consolidated Statements of Earnings — For the three and six months ended June 30, 2008 and 2007.~~

				~~Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) — For the six months ended June 30, 2008 (unaudited) and for the year ended December 31, 2007.~~

				~~Unaudited Consolidated Statements of Cash Flows — For the six months ended June 30, 2008 and 2007.~~

				Unaudited Notes to Consolidated Financial Statements.


	June 30,		December 31,		September 30,		December 31,
	2008		2007		2008		2007

Impaired loans with no allowance for loan losses allocated	$	46,347	$	22,307	$	51,140	$	22,307
Impaired loans with allowance for loan losses allocated		190,094		112,044		266,536		112,044

Total impaired loans	$	236,441	$	134,351	$	317,676	$	134,351

Amount of the allowance allocated to impaired loans	$	47,883	$	34,937	$	77,233	$	34,937
Average investment in impaired loans	$	186,269	$	70,582	$	186,269	$	70,582
Cash-basis interest income recognized during impairment	$	4,282	$	2,324	$	7,248	$	2,324


													For the Three Months				For the Nine Months
	For the Three Months						For the Six Months						Ended September 30,				Ended September 30,
	Ended June 30,						Ended June 30,						2008		2007		2008			2007
	2008			2007			2008			2007
Proceeds from new securitizations	$	—		$	98,231		$	—		$	719,097		$	—	$	—	$	—		$	719,097
Proceeds from collections reinvested in securitizations		—			48,719			6,960			90,949			—		93,869		6,960			184,817
Servicing fees received		1,677			1,907			3,433			3,122			1,604		1,928		5,037			5,050
Loan repurchases for representations and warranties		(1,501	)		(642	)		(1,501	)		(642	)		—		—		(1,501	)		(642	)


	For the Six Month			For the Nine Month
	Period Ended			Period Ended
	June 30, 2008			September 30, 2008
	(In Thousands)			(In Thousands)
Balance at beginning of period	$	402,243		$	402,243
Cumulative effect of change in accounting		43,719			43,719
Additions from loans sold with servicing retained		203,722			291,888
Changes in fair value due to:
Payoffs^(a)		(32,526	)		(42,765	)
All other changes in valuation inputs or assumptions^(b)		44,661			27,074

Fair value of MSRs at end of period	$	661,819		$	$722,159

Unpaid principal balance of loans serviced for others	$	44,546,796
Unpaid principal balance of residential mortgage loans serviced for others				$	50,587,967


	For the Three Months				For the Six Months				For the Three Months				For the Nine Months
	Ended June 30,				Ended June 30,				Ended September 30,				Ended September 30,
	2008		2007		2008		2007		2008		2007		2008		2007
Residential real estate	$	33,616	$	17,478	$	62,269	$	33,857	$	39,423	$	20,642	$	101,691	$	54,499
Consumer		1,625		2,105		3,381		3,320		2,299		2,676		4,963		5,256

Total	$	35,241	$	19,583	$	65,650	$	37,177	$	41,722	$	23,318	$	106,654	$	59,755


PART I. FINANCIAL INFORMATION			4

Item 1.		Financial Statements			4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			2827
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			45
Item 4.		Controls and Procedures			45

PART II — OTHER INFORMATION			46

Item 1.		Legal Proceedings			46
	Item 1A.			Risk Factors		46
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 3.		Defaults upon Senior Securities			47
Item 4.		Submission of Matters to a Vote of Security Holders			47
Item 5.		Other Information		��	47
Item 6.		Exhibits			48

SIGNATURES			49
~~Statement regarding Computation of Net Earnings per Share~~EX-11
~~Section 302 Certification of Chief Executive Officer~~EX-31.1
~~Section 302 Certification of Chief Financial Officer~~EX-31.2
~~Section 906 Certification of Chief Executive Officer~~EX-32.1
~~Section 906 Certification of Chief Financial Officer~~EX-32.2


(a)		Residual interests are valued using internal inputs supplemented by independent third party inputs.

(b)		~~Securities~~U.S. government agency securities classified as available for sale are valued predominantly using quoted broker/dealer prices with adjustments to reflect for any assumptions a willing market participant would include in its valuation. Non-agency securities classified as available for sale are valued using internal valuation models and pricing information from third parties.

(c)		Realized gains (losses) are reported in non-interest income. Unrealized gains (losses) are reported in accumulated other comprehensive income (loss).

(d)		Effective January 1, 2008, the Company elected the fair value measurement method for residential MSRs under SFAS 156 (See Note 9 — “Mortgage Servicing Rights”).

(e)		Management had anticipated that the ~~AAA-rated~~ non-agency securities would be classified under Level 2 of the valuation hierarchy. However, due to illiquidity in the markets, the fair value of these securities will be determined using internal models and therefore is classified within Level 3 of the valuation ~~hierarchy.~~hierarchy and pricing information from third parties.


	Balance at								Balance at
	June 30, 2008		Level 1		Level 2		Level 3		September 30, 2008		Level 1		Level 2		Level 3

Loans held for investment	$	182,926	$	—	$	182,926	$	—	$	257,995	$	—	$	257,995	$	—
Repossessed assets		118,582		—		118,582		—		119,205		—		119,205		—
Consumer servicing assets		10,566		—		—		10,566		9,992		—		—		9,992

Totals	$	312,074	$	—	$	301,508	$	10,566	$	387,192	$	—	$	377,200	$	9,992


							Annual			Weighted -								Annual			Weighted
	Prepayment			Projected			Discount			Average Life		Prepayment			Projected			Discount			Average Life
	Speed			Credit Losses			Rate			(in years)		Speed			Credit Losses			Rate			(in years)

2005 HELOC Securitization		20	%		3.84	%		20	%		2.7		16	%		4.10	%		20	%		3.2
2006 HELOC Securitization		19	%		9.12	%		20	%		3.5		11	%		12.22	%		20	%		5.7
2006 Second Mortgage Securitization		16	%		3.46	%		20	%		4.4		9	%		3.53	%		20	%		6.2
2007 Second Mortgage Securitization		16	%		4.31	%		20	%		4.8		11	%		5.52	%		20	%		6.4


(a)		Represents decrease in MSR value associated with loans that paid off during the period.

(b)		Represents estimated MSR value change resulting primarily from market-driven changes in interest rates.


	June 30						September 30
	2008			2007			2008			2007
Weighted-average life (in years)		3.9			2.7			3.9			2.7
Weighted-average discount rate		13.1	%		13.4	%		13.7	%		12.7	%


							For the Nine			For the Year
	For the Six			For the Year			Months Ended			Ended
	Months Ended			Ended			September 30,			December 31,
	June 30, 2008			December 31, 2007			2008			2007
Gain (reclassified to earnings) on interest rate swap extinguishment	$	—		$	(155	)	$	—		$	(155	)
Related tax benefit		—			54			—			54
Unrealized loss on derivatives used in cash flow hedging relationships		—			(11,377	)		—			(11,377	)
Related tax benefit		—			3,981
Reclassification adjustment for gains included in earnings relating to cash flow hedging relationships		—			5,290
Related tax (expense) benefit								—			3,981
Reclassification adjustment for gains (losses) included in earnings relating to cash flow hedging relationships								—			5,290
Related tax expense		—			(1,851	)		—			(1,851	)
Gain (reclassified to earnings) on interest rate swap derecognition		(363	)		—			(363	)		—
Related tax benefit		127			—			127			—
Unrealized loss on securities available for sale		(31,340	)		(19,414	)		(129,134	)		(19,414	)
Related tax benefit		10,969			6,795			45,197			6,795

Change	$	(20,607	)	$	(16,677	)	$	(84,173	)	$	(16,677	)


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

	•		The banking operation conducted business from 1415 more facilities at ~~June~~September 30, 2008 than at ~~June~~September 30, 2007.

	•		We conducted business from ~~48 more~~40 fewer home lending centers at ~~June~~September 30, 2008 than at ~~June~~September 30, 2007.

	•		The home lending operation originated ~~$8.1~~$6.7 billion in residential mortgage loans during the 2008 quarter versus ~~$7.2~~$6.6 billion in the comparable 2007 quarter.

	•		We employed ~~3,389~~3,291 salaried employees at ~~June~~September 30, 2008 versus ~~2,689~~2,939 salaried employees at ~~June~~September 30, 2007.

	•		We employed ~~229~~224 full-time national account executives at ~~June~~September 30, 2008 versus ~~168~~198 at ~~June~~September 30, 2007.

	•		We employed ~~562~~512 full-time retail loan originators at ~~June~~September 30, 2008 versus ~~294~~654 at ~~June~~September 30, 2007.


(1)		The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately ~~$2.0~~$2.1 billion and $2.8 billion at ~~June~~September 30, 2008 and December 31, 2007, respectively.

(2)		Municipal deposits includes funds from municipalities and public schools.

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


	Votes For		Votes Withheld
Thomas J. Hammond		50,589,072		4,664,034
Kirstin A. Hammond		50,596,925		4,656,181
Charles Bazzy		48,679,492		6,573,614
Michael Lucci, Sr.		49,982,629		5,270,477
Robert W. DeWitt		48,687,521		6,565,585
Frank D’Angelo		49,975,780		5,277,326
William F. Pickard		50,685,493		4,567,613


Votes For	Votes Against	Abstain	Non-Vote
54,766,949	386,491	99,666	—

	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


	FLAGSTAR BANCORP, INC.
Date: ~~August 5,~~November 10, 2008	/s/ Mark T. Hammond
	Mark T. Hammond
	President and Chief Executive Officer (Duly Authorized Officer)


	/s/ Paul D. Borja
	Paul D. Borja
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)


	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

Large accelerated filero

Accelerated filerþ

Non-accelerated filero

Smaller reporting companyo

(Do not check if a smaller reporting company)

~~Smaller reporting company~~ o