FLAGSTAR BANCORP INC (Form: 10-K, Received: 03/13/2017 15:11:24)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)



ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016



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

Commission file number: 001-16577

(Exact name of registrant as specified in its charter)



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

5151 Corporate Drive, Troy, Michigan		48098-2639
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (248) 312-2000

Securities registered pursuant to Section 12(b) of the Act:



Title of each class		Name of each exchange on which registered
Common Stock, par value $0.01 per share		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No ý

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 90 days. Yes ý No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):



Large Accelerated Filer	o	Accelerated Filer	x	Non-Accelerated Filer	o	Smaller Reporting Company	o
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No ý

The estimated aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the closing sale price ( $24.41 per share) as reported on the New York Stock Exchange on June 30, 2016 , was approximately $512 million . The registrant does not have any non-voting common equity shares.

As of March 9, 2017 , 57,043,565 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement relating to the 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report on Form 10-K.




	PART I
ITEM 1.	BUSINESS	5
ITEM 1A.	RISK FACTORS	10
ITEM 1B.	UNRESOLVED STAFF COMMENTS	19
ITEM 2.	PROPERTIES	20
ITEM 3.	LEGAL PROCEEDINGS	20
ITEM 4.	MINE SAFETY DISCLOSURES	20

	PART II
ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	21
ITEM 6.	SELECTED FINANCIAL DATA	23
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	66
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	67
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES	128
ITEM 9A.	CONTROLS AND PROCEDURES	128
ITEM 9B.	OTHER INFORMATION	129

	PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE	130
ITEM 11.	EXECUTIVE COMPENSATION	130
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	130
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	130
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	130

	PART IV
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	131
ITEM 16.	FORM 10-K SUMMARY	131

GLOSSARY OF ABBREVIATIONS AND ACRONYMS

The following list of abbreviations and acronyms are provided as a tool for the reader and may be used throughout this Report, including the Consolidated Financial Statements and Notes:



Term	Definition	Term	Definition
AFS	Available for Sale	Ginnie Mae	Government National Mortgage Association
Agencies	Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association, Collectively	GLBA	Gramm-Leach Bliley Act
ALCO	Asset Liability Committee	HELOC	Home Equity Lines of Credit
ALLL	Allowance for Loan & Lease Losses	HFI	Held-for-Investment
AOCI	Accumulated Other Comprehensive Income (Loss)	HOLA	Home Owners Loan Act
ARM	Adjustable Rate Mortgage	HPI	Housing Price Index
ASU	Accounting Standards Update	HTM	Held-to-Maturity
Basel I	Basel Committee’s 1988 Capital Accord	LIBOR	London Interbank Offered Rate
Basel III	Basel Committee on Banking Supervision Third Basel Accord	LHFI	Loans Held-for-Investment
BSA	Bank Secrecy Act	LHFS	Loans Held-for-Sale
C&I	Commercial and Industrial	LTV	Loan-to-Value
CAMELS	Capital, Asset Quality, Management, Earnings, Liquidity and Sensitivity	Management	Flagstar Bancorp’s Management
CD	Certificate of Deposit	MBIA	MBIA Insurance Corporation
CDARS	Certificates of Deposit Account Registry Service	MBS	Mortgage-Backed Securities
CET1	Common Equity Tier 1	MD&A	Management's Discussion and Analysis
CFPB	Consumer Financial Protection Bureau	MP Thrift	MP Thrift Investments, L.P.
CLTV	Combined Loan to Value	MSR	Mortgage Servicing Rights
Common Stock	Common Shares	N/A	Not Applicable
CPR	Common Prepayment Rate	NASDAQ	National Association of Securities Dealers Automated Quotations
CRE	Commercial Real Estate	NYSE	New York Stock Exchange
DFAST	Dodd-Frank Stress Test	OCC	Office of the Comptroller of the Currency
DIF	Depositors Insurance Fund	OCI	Other Comprehensive Income (Loss)
DOJ	United States Department of Justice	OFHEO	Office of Federal Housing Enterprise Oversight
DTA	Deferred Tax Asset	OTS	Office of Thrift Supervision
EVE	Economic Value of Equity	OTTI	Other-Than-Temporary-Impairment
ExLTIP	Executive Long-Term Incentive Program	QTL	Qualified Thrift Lending
Fannie Mae/FNMA	Federal National Mortgage Association	Regulatory Agencies	Board of Governors of the Federal Reserve, Office of the Comptroller of the Currency, U.S. Department of the Treasury, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, Securities and Exchange Commission
FASB	Financial Accounting Standards Board	RESPA	Real Estate Settlement Procedures Act
FBC	Flagstar Bancorp	RWA	Risk Weighted Assets
FDIC	Federal Deposit Insurance Corporation	SEC	Securities and Exchange Commission
FHA	Federal Housing Administration	TARP	Troubled Asset Relief Program
FHLB	Federal Home Loan Bank	TDR	Trouble Debt Restructuring
FICO	Fair Isaac Corporation	UPB	Unpaid Principal Balance
FRB	Federal Reserve Bank	U.S. Treasury	United States Department of Treasury
Freddie Mac	Federal Home Loan Mortgage Corporation	VIE	Variable Interest Entities
FTE	Full Time Employees	XBRL	eXtensible Business Reporting Language
GAAP	United States Generally Accepted Accounting Principles

FORWARD-LOOKING STATEMENTS

Certain statements in this Form 10-K, including but not limited to statements included within the Management’s Discussion and Analysis of Financial Condition and Results of Operations, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. In addition, Flagstar Bancorp, Inc. may make forward-looking statements in our other documents filed with or furnished to the SEC, and our management may make forward-looking statements orally to analysts, investors, representatives of the media, and others.

Generally, forward-looking statements are not based on historical facts but instead represent management’s beliefs regarding future events. Such statements may be identified by words such as believe, expect, anticipate, intend, plan, estimate, may increase, may fluctuate, and similar expressions or future or conditional verbs such as will, should, would, and could. Such statements are based on management’s current expectations and are subject to risks, uncertainties, and changes in circumstances. Actual results and capital and other financial conditions may differ materially from those included in these statements due to a variety of factors, including and without limitation the precautionary statements included within each individual business’ discussion and analysis of its results of operations and the factors listed and described under "Risk Factors" below.

Any forward-looking statements made by or on behalf of Flagstar Bancorp, Inc. speak only as to the date they are made and do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements were made.

PART I



ITEM 1.	BUSINESS

Where we say "we," "us," "our," the "Company" or "Flagstar," we usually mean Flagstar Bancorp, Inc. However, in some cases, a reference to "we," "us," "our," the "Company" or "Flagstar" will include our wholly-owned subsidiary Flagstar Bank, FSB (the "Bank").

General

We are a Michigan-based savings and loan holding company founded in 1993. Our business is primarily conducted through our principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. Based on our assets at December 31, 2016 , we are one of the largest banks headquartered in Michigan, providing commercial, small business, and consumer banking services. At December 31, 2016 , we had 2,886 full-time equivalent employees inclusive of account executives and loan officers. Our common stock is listed on the NYSE under the symbol "FBC." We are considered a controlled company for NYSE purposes, because MP Thrift Investments, L.P. held approximately 62.6 percent of our common stock as of December 31, 2016 .

Our banking network emphasizes the delivery of a complete set of banking and mortgage products and services and we distinguish ourselves by crafting specialized solutions for our customers, local delivery, customer service and product pricing. At December 31, 2016 , we operated 99 full services banking branches throughout Michigan's major markets where we offer full set of banking products to consumer, commercial, and government customers within those markets.

We have a unique, relationship-based business model of a leading Michigan-based bank leveraging a national mortgage business which, itself, leverages the bank. We believe our strong position and focus on service creates a significant competitive advantage in the markets in which we compete. The disciplined management team we have assembled is focused on developing substantial and attractive growth opportunities that generate profitable operations with significant operating leverage. We believe our lower risk profile and strong capital level positions us to better exploit the opportunities that our business model yields and deliver attractive shareholder returns over the long term.

We are a national mortgage originator and utilize multiple origination channels including correspondent, broker, distributed retail, and direct to consumer. We also service and subservice mortgage loans for others on a fee for service basis and may also collect ancillary fees, such as late fees and earn income through the use of noninterest bearing escrow deposits. These escrow deposit accounts and amounts received from servicing loans generate company controlled deposits which offer a stable, low cost, long-term source of funding.

Operating Segments

Our operations are conducted through four operating segments: Community Banking, Mortgage Originations, Mortgage Servicing, and Other. For financial information and additional details regarding each of these operating segments, please see MD&A – Operating Segments and Note 23 - Segment Information, which are incorporated herein by reference.

Community Banking

Our Community Banking segment, services consumer, governmental and commercial customers in the major Michigan markets we serve. We also serve home builders, correspondents, and commercial customers on a national level. We are focused on using capital and liquidity generated from the mortgage business to expand our community banking relationships and build enduring net interest margin revenue and fee income.

Our commercial customers are from a broad range of industries including financial, insurance, service, manufacturing, and distribution. We offer financial products to these customers for use in their normal business operations and financing of working capital needs, equipment purchases and other capital investments. Additionally, our commercial real estate division supports income producing real estate properties. These loans are made to finance properties such as owner-occupied, retail, office, multi-family apartment buildings, industrial buildings, and residential developments which are repaid through cash flows related to the operation, sale, or refinance of the property.

In 2016, we launched a national home builder finance program to grow our balance sheet, increase commercial deposits and develop incremental revenue through our retail purchase mortgage channel and we expanded our product offerings by entering the equipment finance and leasing market.

Mortgage Origination

We utilize multiple production channels to originate or acquire mortgage loans on a national scale to generate high returns on equity capital. This helps grow the servicing business and provides stable, low cost funding for the community bank. We continue to leverage technology to streamline the mortgage origination process, thereby bringing service and convenience to borrowers and correspondents. We also continue to make available to our customers various web-based tools that facilitate the mortgage loan process through each of our production channels. We will continue to seek new ways to expand our relationships with borrowers and correspondents to provide the necessary capital and liquidity to grow mortgage servicing and the community bank.

Correspondent. In the correspondent channels, an unaffiliated bank or mortgage company completes the loan paperwork and also funds the loan at closing. After the bank or mortgage company has funded the transaction, we purchase the loan at an agreed upon price. We perform a full review of each loan, whether purchased in bulk or not, purchasing only those loans that were originated in accordance with our underwriting guidelines. Correspondents apply to the Bank and may be approved for delegated underwriting authority. Delegate correspondents assume the risks associated with the underwriting of the loan and earn more on loans sold compared to non-delegated correspondents. Non-delegated correspondents earn commissions and administrative fees for closing and funding loans which are then underwritten by the Bank. We have active correspondent relationships with 739 companies located in all 50 states.

Broker. In a broker transaction, an unaffiliated mortgage broker completes several steps of the loan origination process including the loan paperwork, but the loans are underwritten by us on a loan-level basis to our underwriting standards and we fund and close the loan in the Bank's name, thereby becoming the lender of record. Currently, we have active broker relationships with 615 mortgage brokers located in all 50 states.

Retail. In our retail channel, loans are originated through our nationwide network of stand-alone home loan centers. At December 31, 2016, we maintained 41 retail locations in 21 states. In a direct-to-consumer lending transaction, loans are originated through our Community Banking segment banking centers and from a national direct-to-consumer call center, both of which, may leverage our existing customer relationships. When loans are originated on a retail basis, most aspects of the lending process are completed internally, including the origination documentation (inclusive of customer disclosures), as well as the funding of the transactions. Our centralized loan processing provides efficiencies and allows lending sales staff to focus on business development.

The majority of our total loan originations during the year ended December 31, 2016 represented mortgage loans that were collateralized by residential first mortgages on single-family residences and were eligible for sale to the Agencies. In addition, we originate or purchase residential first mortgage loans, other consumer loans, and commercial loans for our HFI loan portfolios. Our revenues include noninterest income from sales of residential first mortgages to the Agencies, net interest income, and revenue from servicing of loans for others.

Our mortgage origination segment provides us with a large number of customer relationships through our servicing of loans sold to the Agencies and those loans we retain. These relationships, along with our banking customer relationships, provide us an opportunity to cross-sell a full line of consumer financial products which include mortgage refinancing, HELOC, and other consumer loans.

We primarily utilize borrowings from the FHLB to fund our mortgage loans held for sale and our warehouse lending portfolio. The FHLB provides funding on a fully collateralized basis to us. Our borrowing capacity with the FHLB is a function of the amount of eligible collateral pledged, which includes residential first mortgage loans, home equity lines of credit, commercial real estate loans.

Competition

We face substantial competition in attracting deposits and making loans. Our most direct competition for deposits has historically come from other savings banks, commercial banks and credit unions in our local market areas. Money market funds and full-service securities brokerage firms also compete with us for these funds and, in recent years, many financial institutions have competed for deposits through the Internet. We compete for deposits by offering a broad range of high quality customized

banking services at a large number of convenient locations where our customers are served at a desk rather than in a teller line. We also compete by offering competitive interest rates on our deposit products.

From a lending perspective, there are a large number of institutions offering mortgage loans, consumer loans and commercial loans, including many mortgage lenders that operate on a national scale, as well as local savings banks, commercial banks, and other lenders. With respect to those products that we offer, we compete by offering competitive interest rates, fees, and other loan terms, banking products and services and by offering efficient and rapid service.

Subsidiaries

At December 31, 2016 , our corporate legal structure consisted of the Bank and its wholly-owned subsidiaries along with our wholly-owned non-bank subsidiaries and captive insurance company through which we conduct other non-material business or which are inactive. The Bank and its wholly owned subsidiaries comprised 99.5 percent of our total assets at December 31, 2016 . Currently, we also own nine statutory trusts that are not consolidated with our operations. For additional information, see Notes 1, 7 and 24 to the Consolidated Financial Statements.

Regulation and Supervision

We, the Bank and the products and services we offer, are subject to regulation under state and federal laws. Regulatory reform and enhanced supervisory requirements have had and could continue to have an impact on how we conduct business. As a result, we continually assess the impact of regulatory changes and implement policies, processes and controls required to comply with new regulations.

Changes in applicable laws or regulations, and in their interpretation and application by regulatory agencies, cannot be predicted and may have a material effect on our business and results. For more information, refer to Item 1A. Risk Factors, herein.

Consent Orders and Supervisory Agreements

Consent Order with OCC. On December 19, 2016, the OCC terminated its Consent Order with the Bank which had been in effect since October 23, 2012. Since entering into the Consent Order, the Bank implemented and adopted, what we believe are, industry best practices related to, among other things, regulatory compliance, enterprise risk management, capital and liquidity.

Supervisory Agreement. We are also subject to a Supervisory Agreement with the Board of Governors of the Federal Reserve (the "Supervisory Agreement"), dated January 27, 2010. A failure to comply with the Supervisory Agreement could result in the initiation of further enforcement action by the Federal Reserve, including the imposition of further operating restrictions, and could result in additional enforcement actions against the Company. The Company has taken actions which it believes are appropriate to comply with and intends to maintain compliance with all of the requirements of the Supervisory Agreement. For further information and a complete description of all of the terms of the Supervisory Agreement, please refer to the copy of the Supervisory Agreement filed with the SEC as an exhibit to the Company's Current Report on Form 8-K filed on January 28, 2010 and included as an exhibit to this filing.

Consent Order with CFPB. On September 29, 2014, the Bank entered into a Consent Order with the CFPB. The Consent Order relates to alleged violations of federal consumer financial laws arising from the Bank’s residential first mortgage loan loss mitigation practices and default servicing operations dating back to 2011. Under the terms of the Consent Order, the Bank has paid $28 million for borrower remediation and $10 million in civil money penalties. The settlement does not involve any admission of wrongdoing on the part of the Bank or its employees, directors, officers, or agents.

Holding Company Regulation

The Company is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve (the "Federal Reserve") and the SEC.

Acquisition, Activities and Change in Control. We are a unitary savings and loan holding company, as defined by federal banking law, as is our controlling stockholder, MP Thrift. We may only conduct, or acquire control of companies engaged in, activities permissible for a savings and loan holding company pursuant to the relevant provisions of the Savings and Loan Holding Company Act and relevant regulations. Without prior written approval of the Federal Reserve, neither we, nor MP Thrift may: (i) acquire control of another savings association or holding company thereof, or acquire all or substantially

all of the assets thereof; or (ii) acquire or retain, with certain exceptions, more than 5 percent of the voting shares of a non-subsidiary savings association or a non-subsidiary savings and loan holding company. We are prohibited from acquiring control of a depository institution that is not federally insured or retaining control of a savings association subsidiary for more than one year after the date that such subsidiary becomes uninsured. Similarly, we may not be acquired by a bank holding company, or any company, unless the Federal Reserve approves such transaction. In addition, the GLBA generally restricts a company from acquiring us if that company is engaged directly or indirectly in activities that are not permissible for a savings and loan holding company or financial holding company.

Limitation on Capital Distributions. Under the Supervisory Agreement, we may not declare or pay any cash dividends or other capital distributions or purchase, repurchase, or redeem, or commit to purchase, repurchase, or redeem any equity stock without the prior written non-objection of the Federal Reserve. The Company does not currently pay dividends on capital stock.

Volcker Rule. The Dodd-Frank Act requires the federal financial regulatory agencies to adopt rules that prohibit banks and affiliates from engaging in proprietary trading and investing in and/or sponsoring certain "covered funds," including hedge funds and private equity funds. The statutory provision is commonly called the "Volcker Rule." Pursuant to the requirements of the Volcker Rule, we have established a standard compliance program based on the size and complexity of our operations.

Basel III Capital Requirements. The Bank and the holding company are currently subject to the regulatory capital framework and guidelines reached by Basel III as adopted by the OCC and Federal Reserve. The OCC and Federal Reserve have risk-based capital adequacy guidelines intended to measure capital adequacy with regard to a banking organization’s balance sheet, including off-balance sheet exposures such as unused portions of loan commitments, letters of credit, and recourse arrangements.

The Bank and Bank Holding Company have been subject to the capital requirements of the Basel III rules since January 1, 2015. Basel III replaces the framework established by the 1988 capital accord ("Basel I") of the Basel Committee on Banking Supervision. For additional information, see Note 20 - Regulatory Matters.

Stress Testing Requirements . The U.S. federal banking agencies, including the OCC and the Federal Reserve, issued final rules implementing provisions of the Dodd-Frank Act that require banking organizations, including savings associations and savings and loan holding companies, with total consolidated assets of more than $10 billion but less than $50 billion to conduct annual company-run stress tests, report the results to their primary federal regulator and the Federal Reserve and publish a summary of the results. Each Dodd-Frank Act Stress Test ("DFAST") must be conducted using certain scenarios (baseline, adverse and severely adverse), which the OCC and Federal Reserve will publish by February 15 of each year. Banking organizations are required to use the scenarios to calculate, for each quarter-end within a nine-quarter planning horizon, the impact of such scenarios on revenues, losses, loan loss reserves and regulatory capital levels and ratios, taking into account all relevant exposures and activities. The rules also require each banking organization to establish and maintain a system of controls, oversight and documentation, including policies and procedures, designed to ensure that the DFAST procedures used by the banking organization are effective in meeting the requirements of the rules.

Durbin Amendment. The Durbin Amendment to the Dodd-Frank Act alters the competitive structure of the debit card payment processing industry and caps debit card interchange fees for banks with over $10 billion in assets. The final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers are reasonable and proportional to the costs incurred by issuers for electronic debit transactions. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction will be the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. The impact of this amendment was approximately $2 million in for year ended December 31, 2016 and is estimated to be $4 million on an annual basis.

Source of Strength. The Dodd-Frank Act codified the Federal Reserve’s "source of strength" doctrine and extended it to savings and loan holding companies. Under the Dodd-Frank Act, the prudential regulatory agencies are required to promulgate joint rules requiring bank holding companies and savings and loan holding companies to serve as a source of financial strength for any depository institution subsidiary by maintaining the ability to provide financial assistance to such insured depository institution in the event that it suffers financial distress.

Banking Regulation

We must comply with a wide variety of banking, consumer protection and securities laws, regulations and supervisory expectations and are regulated by multiple regulators, including the Office of the Comptroller of the Currency of the U.S. Department of the Treasury, Consumer Financial Protection Bureau, and the Federal Deposit Insurance Corporation.

FDIC Insurance and Assessment. The FDIC insures the deposits of the Bank and such insurance is backed by the full faith and credit of the U.S. government through the DIF. The FDIC maintains the DIF by assessing each financial institution an insurance premium. The FDIC defined deposit insurance assessment base for an insured depository institution is equal to the average consolidated total assets during the assessment period, minus average tangible equity.

Effective July 1, 2016, the FDIC implemented a new surcharge on large bank participants with more than $10 billion in assets and simultaneously reduced the base assessment rates. The new surcharge and lower assessment are not expected to have a material impact on our earnings.

All FDIC-insured financial institutions must pay an annual assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation ("FICO bonds"), a federal corporation chartered under the authority of the Federal Housing Finance Board.

Affiliate Transaction Restrictions. The Bank is subject to the affiliate and insider transaction rules applicable to member banks of the Federal Reserve as well as additional limitations imposed by the OCC. These provisions prohibit or limit the Bank from extending credit to, or entering into certain transactions with principal stockholders, directors and executive officers of the banking institution and certain of its affiliates. The Dodd-Frank Act imposed further restrictions on transactions with certain affiliates and extension of credit to executive officers, directors and principal stockholders.

Limitation on Capital Distributions. The OCC regulates all capital distributions made by the Bank, directly or indirectly, to the holding company, including dividend payments. As a subsidiary of a savings and loan holding company, the Bank must file a notice and receive approval from the OCC at least 30 days prior to each proposed capital distribution before declaring any dividends. Additionally, the Bank may not pay dividends to the Bancorp if, after paying those dividends, the Bank would fail to meet the required minimum levels under risk-based capital guidelines and the minimum leverage and tangible capital ratio requirements. Payment of dividends by the Bank also may be restricted at any time at the discretion of the OCC if it deems the payment to constitute an unsafe and unsound banking practice.

Loans to One Borrower. Under the Home Owners Loan Act ("HOLA"), savings associations are generally subject to the national bank limits on loans to one borrower. Generally, savings associations may not make a loan or extend credit to a single or related group of borrowers in excess of 15 percent of the institution’s unimpaired capital and surplus (as defined by HOLA). Additional amounts may be loaned if such loans or extensions of credit are secured by readily-marketable collateral, but in no case may they be in excess of an additional 10 percent of unimpaired capital and surplus. The Bank has established an internal lending threshold that is more conservative than the limits required by HOLA and has a defined tracking and reporting process to monitor lending levels of concentration.

CFPB and Consumer Protection Laws and Regulations

The Bank is subject to a number of federal consumer protection laws and regulations. These include, among others, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, electronic funds transfer laws, redlining laws, predatory lending laws, laws prohibiting unfair, deceptive or abusive acts or practices in connection with the offer, or sale of consumer financial products or services, and the Gramm Leach Bliley Act regarding customer privacy and data security.

In addition to supervision by the OCC, the Bank is also subject to supervision by the CFPB, which has responsibility for enforcing the principal federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, and Real Estate Settlement Procedures Act, and the Truth in Savings Act, among others, for institutions that have assets in excess of $10 billion. Much of the CFPB’s regulatory efforts have addressed mortgage standards, mortgage servicing standards, and appraisal and escrow standards. These laws include the Homeowners Protection Act, the Home Mortgage Disclosure Act, the Home Ownership and Equity Protection Act, the Secure and Fair Enforcement for Mortgage Licensing Act, and the Real Estate Settlement Procedures Act.

Incentive Compensation

The U.S. bank regulatory agencies issued comprehensive guidance on incentive compensation policies intended to ensure that the incentive compensation policies of U.S. banks do not undermine the safety and soundness of such banks by encouraging excessive risk-taking. The U.S. bank regulatory agencies review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of U.S. banks that are not "large, complex banking organizations." These

reviews are tailored to each bank based on the scope and complexity of the bank’s activities and the prevalence of incentive compensation arrangements.

Bank Secrecy Act and Anti-Money Laundering

The Bank is subject to the BSA and other anti-money laundering laws and regulations, including the USA PATRIOT Act. The BSA requires all financial institutions to, among other things, establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. The BSA includes various record keeping and reporting requirements such as cash transaction and suspicious activity reporting as well as due diligence requirements. The Bank is also required to comply with U.S. Treasury’s Office of Foreign Assets Control imposed economic sanctions that affect transactions with designated foreign countries, nationals, individuals, entities and others.

Additional Information

Our executive offices are located at 5151 Corporate Drive, Troy, Michigan 48098, and our telephone number is (248) 312-2000. Our stock is traded on the NYSE under the symbol "FBC."

We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge on our website at www.flagstar.com , under "Investor Relations," as soon as reasonably practicable after we electronically file such material with the SEC. These reports are also available without charge on the SEC website at www.sec.gov.

ITEM 1A. RISK FACTORS

Our financial condition and results of operations may be adversely affected by various factors, many of which are beyond our control. In addition to the factors identified elsewhere in this Report, the most significant risk factors affecting our business include those set forth below. The below description of risk factors is not exhaustive, and readers should not consider the description of such risk factors to be a complete set of all potential risks that could affect us.

Market, Interest Rate, Credit and Liquidity Risk

Economic and general market conditions may adversely affect our business.

Our business and results of operations are affected by the financial markets and general economic market, political uncertainty and social conditions, including factors such as the level and volatility of short-term and long-term interest rates, inflation, home prices, unemployment and under-employment levels, bankruptcies, household income, consumer spending, fluctuations in both debt and equity capital markets and currencies, liquidity of the financial markets, the availability and cost of capital and credit, investor sentiment and confidence in the financial markets, political risks and the sustainability of economic growth. Deterioration of any of these conditions could adversely affect our business segments, the level of credit risk we have assumed, our capital levels and liquidity, and our results of operations.

Our business and results of operations are also affected by domestic and international fiscal and monetary policy. Central bank actions can affect the value of financial instruments and other assets, such as investment securities and MSRs, and their policies can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. Changes in fiscal and monetary policies are beyond our control and difficult to predict but could have an adverse impact on our capital requirements and the costs of running our business.

Further, any deterioration in the mortgage market may also reduce the number of new mortgages that we originate, increase the costs of servicing mortgages without a corresponding increase in servicing fees or adversely affect our ability to sell mortgage loans originated by us. Any such event could adversely affect our business, financial condition and results of operations.

Our mortgage origination business is subject to the cyclical and seasonal trends of the real estate market. Cyclicality in our industry could lead to periods of strong growth in the mortgage and real estate markets followed by periods of sharp declines and losses in such markets. One of the primary influences on our mortgage business is the aggregate demand for mortgage loans in our market areas, which is affected by prevailing interest rates. If we are unable to respond to the cyclicality of our industry by appropriately adjusting our operations, headcount and overhead, our business, financial condition and results of operations could be adversely affected.

In addition, seasonal trends have historically reflected the general patterns of residential and commercial real estate sales, which typically peak in the spring and summer seasons. Furthermore, Basel III provides for a countercyclical capital buffer to induce banking organizations to hold capital in excess of regulatory minimums.

Increases in interest rates could lead to lower mortgage origination volume, which could adversely affect our business, financial condition and results of operations.

In 2016, approximately 55 percent of our revenue was derived from the origination of residential mortgages. The residential real estate mortgage lending business is sensitive to interest rates. Lower interest rates generally increase the volume of mortgage originations, while higher interest rates generally cause that volume to decrease. Therefore, our mortgage performance is typically correlated to fluctuations in interest rates. Historically, mortgage origination volumes and sales for the Bank and for other financial institutions have risen and fallen in response to these and other factors. An increase in interest rates would change these conditions and could have a material adverse effect on our operating results. From January through October 2016, average 10 year treasury rates, on which we base our pricing of our 30 year mortgages, remained low at 1.74 percent, 40 basis points lower than average rates experienced throughout 2015 which drove favorable mortgage loan originations, particularly refinancing activity. From November through December 2016, average 10 year treasury rates increased 58 basis points to 2.32 percent which had a negative impact on our fallout adjusted mortgage origination rate lock volume in the fourth quarter.

Changes in interest rates could adversely affect our financial condition and results of operations including our net interest margin, mortgage related assets, and investment portfolio.

Our results of operations and financial condition could be significantly affected by changes in interest rates. Our financial results depend substantially on net interest income, which is the difference between the interest income that we earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. While we have modeled rising interest rate scenarios and such scenarios result in an increase in our net interest income, our deposits and interest-bearing liabilities may reprice more quickly than modeled, thus resulting in a decrease in our net interest income.

Changes in interest rates may affect the average life of our mortgage loans and mortgage related securities. Decreases in interest rates can trigger an increase in unscheduled prepayments of our mortgage loans and mortgage-related securities, as borrowers refinance to reduce their own borrowing costs. As prepayment speeds on mortgage-related securities increase, any premium amortization would increase on a prospective basis. Any immediate adjustments required under the application of the interest method of income recognition may also result in lower net interest income. On the other hand, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate mortgage loans.

Changes in interest rates also affect the fair value of our LHFS, LHFI and investment securities. Generally, the value of our investment securities, which are predominantly fixed-rate, fluctuates inversely with changes in interest rates. Decreases in the fair value of our investment securities, therefore, could have an adverse effect on our stockholders’ equity or our earnings if the decrease in fair value is deemed to be other than temporary.

The fair value of our MSRs is highly sensitive to changes in interest rates and changes in market implied interest rate volatility. Decreases in interest rates can trigger an increase in actual repayments and the probability of repayments which have a negative impact on MSR fair value. An increase in market implied interest rate volatility has a negative impact on our MSR assets and also lowers their fair value.

We manage MSRs using certain derivative strategies which may be ineffective.

We invest in MSRs to support mortgage strategies and to deploy capital at acceptable returns. Our MSRs are sensitive to market implied interest rate volatility and are highly susceptible to prepayment risk, basis risk, and changes in the shape of the yield curve, among other factors. We utilize derivatives and other fair value assets as part of our overall hedging strategy to manage the impact of changes in the fair value of the MSRs, but these risk management strategies do not completely eliminate risk. In addition, our hedging strategies rely on assumptions and projections regarding assets and general market factors, many of which are outside of our control. One or more of these assumptions or projections may prove to be incorrect or our hedging strategies may not adequately mitigate the impact of changes in interest rates or prepayment speeds, and as a result we may incur losses that would adversely impact earnings.

At December 31, 2016 , our MSR was $335 million of Common Equity Tier 1 Capital. We may be unable to effectively manage our MSR concentration risk which could impact our Common Equity Tier 1(CET1) under Basel III, which when fully phased-in will require any MSR balance exceeding 10 percent of our CET1 to be deducted from capital.

As of January 1, 2015, we are subject to new rules relating to capital standards requirements, including requirements contemplated by Section 171 of the Dodd-Frank Act as well as certain standards initially adopted by the Basel Committee on Banking Supervision, which standards are commonly referred to as Basel III. Basel III established a new qualifying criteria for regulatory capital, including new limitations on the amount of deferred tax assets and MSRs that may be held without significantly higher capital requirements. Basel III limits that amount of MSRs and deferred tax assets to 10 percent of CET1, individually, and 15 percent of CET1, in the aggregate. While we have established a plan to reduce these assets before the Basel III full implementation date of March 31, 2018 and are taking other actions to reduce our book balance by that date, no assurances can be given that we will be able to do so, or that we will be successful in selling these assets at their current fair value. If implemented today, we would experience another 201 basis points reduction in Tier 1 Capital (to risk weighted assets) and 105 basis points reduction in the leverage ratio (Tier 1 Capital to adjusted average assets) from those levels at December 31, 2016 . For further information, see Note 20 - Regulatory Matters.

At December 31, 2016 our ALLL was $142 million , covering 2.4 percent of total loans held-for-investment. Our estimate of the inherent losses is imperfect, the portfolio is relatively new and we are using underwriting standards which have not been in place for a long period of time.

Our estimate of the allowance for loan and lease losses may not be adequate to cover actual credit losses inherent in the loan portfolio at December 31, 2016 . If this level were insufficient, future provisions for credit losses could adversely affect our business, financial condition, results of operations, cash flows and prospects. Our ALLL is based on prior experience as well as an evaluation of the risks incurred in the current portfolio. The determination of an appropriate level of loan loss allowance is an inherently subjective process that requires significant management judgment, including estimates of loss and the loss emergence period. We make various assumptions, estimates and judgments about the collectability of our loan portfolio including but not limited to the creditworthiness of our borrowers and the value of real estate or other collateral backing the repayment of loans. New information regarding existing loans, identification of additional problem loans, failure of borrowers and guarantors to perform in accordance with the terms of their loans, and other factors, both within and outside of our control, may require an increase in the ALLL. Moreover, our regulators, as part of their supervisory function, periodically review our ALLL. Our regulators, who have access to broader industry data that we do not have, may recommend or require us to change our ALLL, based on their judgment, which may be different from that of our management or other regulators. Any increase in our loan losses would have an adverse effect on our earnings and financial condition.

Concentration of loans held-for-investment in certain geographic locations and portfolios may increase risk.

Our mortgage loan portfolio is geographically concentrated in certain states, including California, Michigan, Florida, Washington and Texas, which is approximately 65 percent of the portfolio. In addition, approximately 75 percent of our commercial real estate loans are in Michigan or are repayable by borrowers who have significant operations in Michigan. This concentration has made, and will continue to make, our loan portfolio particularly susceptible to downturns in the general economy and the real estate and mortgage markets. Adverse conditions beyond our control, including unemployment, inflation, recession, natural disasters, declining property values, municipal bankruptcies and other factors in these markets could increase default rates in our loan portfolio and could reduce our ability to generate new loans and otherwise negatively affect our financial results.

In 2016, we continued to grow our portfolio of commercial real estate and commercial and industrial loans, which generally expose us to a greater risk of nonpayment and loss than residential real estate loans due to the more complex nature of underwriting associated with commercial loans. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans and collateral may not offset the principal balance at default. Also, many of our borrowers have more than one commercial loan outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a residential real estate loan.

Liquidity is essential to our business and liquidity risk is inherent in our operations, which could adversely affect our financial results and condition.

We require substantial liquidity to repay our customers' deposits, fulfill loan demands, meet debt obligations as they come due, and fund our operations under both normal operating environments and unforeseen circumstances causing liquidity

stress. Our access to liquidity could be impaired by our inability to access the capital markets or unforeseen outflows of deposits. Our access to external sources of financing, including deposits, as well as the cost of that financing, is dependent on various factors including regulatory restrictions. A number of factors could make funding more difficult, more expensive or unavailable on any terms, including, but not limited to, declining financial results and losses, material changes to operating margins, financial leverage on an absolute basis or relative to peers, changes within the organization, specific events that impact our financial condition or reputation, disruptions in the capital markets, specific events that adversely impact the financial services industry, counterparty availability, changes affecting assets, the corporate and regulatory structure, balance sheet and capital structure, geographic and business diversification, interest rate fluctuations, market share and competitive position, general economic conditions and the legal, regulatory, accounting and tax environments governing funding transactions. Many of these factors are beyond our control. The material deterioration in any one or a combination of these factors could result in a downgrade of our credit or servicer standing with counterparties or a decline in our reputation within the marketplace, and could result in higher cash outflows requiring additional access to liquidity, having a limited ability to borrow funds, maintain or increase deposits (including custodial deposits for our agency servicing portfolio) or to raise capital on commercially reasonable terms or at all.

Our ability to make mortgage loans and fund our investments and operations 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, deposits, which include custodial accounts from our servicing portfolio, public funds, and capital-raising activities. Our company controlled deposits are considered stable sources of funding in our stress testing model. If we are unable to maintain any of these financing arrangements, are restricted from accessing certain funding sources by our regulators, are unable to arrange for new financing on terms acceptable to us or at all, 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 mortgage loans we are able to originate for sale in the secondary market or for our own investment or take other actions that could have other negative effects on our operations. A prolonged significant reduction in loan originations that occurs as a result could adversely impact our earnings, financial condition, results of operations and future prospects. There is no guarantee that we will be able to renew or maintain our financing arrangements or deposits or that we will be able to adequately access capital markets when or if a need for additional capital arises.

We use assumptions and estimates in determining the fair value of certain of our financial assets and financial liabilities. Different assumptions and estimates could result in significant declines or increases in valuation.

A total of $5.2 billion of assets and $118 million of liabilities are carried on our Consolidated Statements of Financial Condition at fair value, including our LHFS, AFS investment securities, MSRs, derivatives, certain LHFI, and the DOJ settlement liability. Generally, for assets that are reported at fair value, we use quoted market prices when available. In certain cases, observable market prices and data may not be readily available or their availability may be diminished due to market conditions. In such cases, we use internally developed financial models that utilize observable market data inputs as well as asset specific collateral data included in market observable data to estimate the fair value of certain of these assets and liabilities. These valuation models rely to some degree on management's assumptions, estimates and judgment, which are inherently uncertain. We cannot be certain that the models or the underlying assumptions will prove to be predictive and remain so over time, and therefore, actual results may differ from our models and assumptions. Different assumptions could result in significant differences in valuation, which in turn could result in significant changes in the dollar amount of assets or liabilities we report on our Consolidated Statements of Financial Condition. In addition, sudden illiquidity in markets or declines in prices of certain loans or securities may make it more difficult to value certain balance sheet items, which may lead to the possibility that such valuations will be subject to further change or adjustment. If assumptions or estimates underlying our Consolidated Statements of Financial Condition are inaccurate, we may experience material losses.

We are a holding company and are, therefore, dependent on the Bank for funding of obligations.

As a holding company with no significant assets other than the capital stock of the Bank and a limited amount of cash, our ability to make payments for certain services we purchase from the Bank and to service our debt, including interest payments on our senior notes and junior subordinated debentures depends upon available cash on hand and the receipt of dividends from the Bank on such capital stock. The holding company had cash and cash equivalents of $70 million at December 31, 2016 . The declaration and payment of dividends by the Bank on all classes of its capital stock is subject to the discretion of the Bank's board of directors and to applicable regulatory and legal limitations. If the Bank does not make dividend payments to us, we may not be able to service our debt which could have a material adverse effect on our financial condition and results of operations.

Regulatory Risk

The Holding Company and the Bank remain subject to the restrictions and conditions of the Supervisory Agreement with the Federal Reserve and the Consent Order with the CFPB, respectively. Failure to comply with the Supervisory Agreement could result in further enforcement action against us.

There is no guarantee that the Bank will be able to fully comply with the Consent Order. In the event that we are in material non-compliance with the terms of the Consent Order, the CFPB has the authority to subject the Bank to additional corrective actions. Moreover, they could initiate further enforcement actions against the Bank, seek an injunction requiring the Bank and its officers and directors to comply with the Consent Order and seek civil money penalties against us and our officers and directors. Any failure by the Bank to comply with the terms of the Consent Order or additional actions could adversely affect our business, financial condition and results of operations. In addition, the Bank’s competitors may not be subject to similar actions, which could limit our ability to compete effectively. These corrective actions could negatively impact the Bank's operations and financial performance. For further information on Consent Order see Item 1. Business - Regulation and Supervision.

The Supervisory Agreement, requires that we take certain actions to address issues identified by the OTS. The Supervisory Agreement is enforced by the Federal Reserve as the successor regulator to the OTS with respect to savings and loan holding companies. Under the terms of the agreement, we are required to submit a capital plan; receive written non-objection before declaring or paying any dividend or other capital distribution from the Holding Company, incurring or renewing any debt at the Holding Company and engaging in affiliate transactions (with limited exceptions); comply with applicable regulatory requirements before making certain severance and indemnification payments; and provide notice prior to changes in directors and certain executive officers or entering into, renewing, extending or revising compensation or benefits agreements of such directors or executive officers, with such changes being subject to Federal Reserve approval. While we believe that we have taken all action necessary to comply with the requirements of the Supervisory Agreement, failure to comply with the Supervisory Agreement in the time frames provided, or at all, could result in additional enforcement orders or penalties, which could include further restrictions on us, assessment of civil money penalties on us, as well as our directors, officers and other affiliated parties and removal of one or more officers and/or directors. Any failure by us to comply with the terms of the Supervisory Agreement or additional actions by the Federal Reserve could adversely affect our business, financial condition and results of operations. Moreover, our competitors may not be subject to similar actions, which could limit our ability to compete effectively. For further information on Supervisory Agreement see Item 1. Business - Regulation and Supervision.

Expanded regulatory oversight over our business could significantly increase our risks and costs associated with complying with current and future regulations, which could adversely affect our financial condition and results of operations.

As noted in Item 1 - Business - Regulation and Supervision, we are subject to a wide variety of banking, consumer protection and securities laws, regulations and supervisory expectations and numerous regulatory and enforcement authorities. As a result of and in addition to new legislation aimed at regulatory reform, such as the Dodd-Frank Act, and the increased capital requirements introduced by the Basel III final rules, the regulatory agencies generally are taking a more stringent approach to supervising and regulating financial institutions and financial products and services over which they exercise their respective supervisory authorities. We, the Bank, and our products and services all remain subject to greater supervisory scrutiny and enhanced supervisory requirements and expectations. We may face greater supervisory scrutiny and enhanced supervisory requirements in the foreseeable future.

The Collins Amendment to Dodd-Frank Act establishes minimum Tier 1 leverage and risk-based capital requirements for insured depository institutions, depository institution holding companies, and non-bank financial companies that are supervised by the Federal Reserve. The minimum Tier 1 leverage and risk-based capital requirements are determined by the minimum ratios established by the federal banking agencies that apply to insured depository institutions under the prompt corrective action regulations. The amendment states that certain hybrid securities, such as trust preferred securities, may be included in Tier 1 capital for bank holding companies with total assets below $15 billion as of December 31, 2009. As we were below $15 billion in assets as of December 31, 2009, the trust preferred securities will be included as Tier 1 capital while they are outstanding, subject to certain future limitations. If a depository institution holding company under $15 billion acquires a depository institution holding company and the resulting organization has total consolidated assets of $15 billion or more at the end of the quarter in which the transaction occurred, the resulting organization may no longer include such certain hybrid securities in Tier 1 capital.

As a result of increasing scrutiny and regulation of the banking industry and consumer practices, we may face a greater number or wider scope of examinations, investigations, enforcement actions and litigation, thereby increasing our costs associated with responding to or defending such actions, as well as potentially resulting in costs associated with fines, penalties, settlements or judgments. In addition, increased regulatory inquiries and investigations, as well as any additional legislative or regulatory developments affecting our businesses, and any required changes resulting from these developments, could reduce our revenue, limit the products or services that we offer or increase the costs thereof, impose additional compliance costs, harm our reputation or otherwise adversely affect our businesses. Some of these laws may provide a private right of action that a consumer or class of consumers may seek to pursue to enforce these laws and regulations.

Both the OCC and the FDIC may take regulatory enforcement actions against any of their regulated institutions that do not operate in accordance with applicable regulations, policies and directives. Proceedings may be instituted against any banking institution, or any "institution-affiliated party," such as a director, officer, employee, agent or controlling person, who engages in unsafe and unsound practices, including violations of applicable laws and regulations. The OCC has authority under various circumstances to appoint a receiver or conservator for an insured institution that it regulates, to issue cease and desist orders, to obtain injunctions restraining or prohibiting unsafe or unsound practices, to revalue assets and to require the establishment of reserves. The FDIC has additional authority to terminate insurance of accounts, after notice and hearing, upon a finding that the insured institution is or has engaged in any unsafe or unsound practice that has not been corrected, is operating in an unsafe or unsound condition or has violated any applicable law, regulation, rule, or order of, or condition imposed by, the FDIC. In addition, the Federal Reserve may take regulatory enforcement actions against us, and the CFPB may also have the authority to take regulatory enforcement actions against us or the Bank.

Financial services reform legislation has resulted in, among other things, numerous restrictions and requirements which could negatively impact our business and increase our costs of operations.

The Dodd-Frank Act has significantly changed the bank regulatory structure and affected the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act and its' implemented regulations have increased and may continue to increase our operating and compliance costs and our interest expense.

The CFPB has broad and unique rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers, including prohibitions against unfair, deceptive or abusive practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service including regulations related to the origination and servicing of residential mortgages. The CFPB has finalized significant rules and guidance that impact nearly every aspect of the life cycle of a residential mortgage and continues to revise these rules and propose new rules. The Bank is subject to the CFPB’s supervisory, examination and enforcement authority with respect to consumer protection laws and regulations. As a result, we could incur increased costs, potential litigation or be materially limited or restricted in our business, product offerings or services in the future.

The Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending practices on financial institutions. The Department of Justice, CFPB, and other agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution's performance under fair lending laws in class action litigation. A successful challenge to the Bank's performance under the fair lending laws and regulations could adversely impact the Bank's rating under the Community Reinvestment Act and result in a wide variety of sanctions or penalties, which could negatively impact the Bank's reputation, financial condition and results of operations.

Bank regulators have increased their focus on consumer compliance and, as a result, those portions of our lending operations which most directly deal with consumers, in particular our mortgage operations and consumer lending, pose particular challenges. While we are not aware of any material issues with our compliance, mortgage and consumer lending practices raise compliance risks. Despite the supervision and oversight we exercise in these areas, failure to comply with these regulations could result in the Bank being liable for damages to individual borrowers or other imposed penalties.

Compliance obligations have exposed us and will continue to expose us to additional noncompliance risk and could divert management’s focus from our business operations. Furthermore, the combined effect of numerous rulemakings by multiple governmental agencies and regulators, and the potential conflicts or inconsistencies among such rules, present challenges and risks to our business and operations.

We are highly dependent on the Agencies to sell mortgage loans and any changes in these entities or their current roles could adversely affect our business, financial condition and results of operations.

We sell approximately 70 percent of our mortgage loans to Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac remain in conservatorship and a path forward to emerge from conservatorship is unclear. These roles could be reduced, modified or eliminated and the nature of their guarantees could be limited or eliminated relative to historical measurements.

The elimination or modification of the traditional roles of Fannie Mae or Freddie Mac could significantly and adversely affect our business, financial condition and results of operations. Furthermore, any discontinuation of, or significant reduction in, the operation of these agencies, any significant adverse change in the level of activity of these agencies in the primary or secondary mortgage markets or in the underwriting criteria of these agencies could materially and adversely affect our business, financial condition and results of operations.

Changes in the servicing or origination guidelines required by the Agencies could adversely affect our business, financial condition and results of operations.

We are required to follow specific guidelines that impact the way that we service and originate Agency loans, including guidelines with respect to credit standards for mortgage loans, our staffing levels and other servicing practices, the servicing and ancillary fees that we may charge, our modification standards and procedures and the amount of non-reimbursable advances.

We cannot negotiate these terms with the Agencies and they are subject to change at any time. A significant change in these guidelines that has the effect of decreasing the fees we charge or requires us to expend additional resources in providing mortgage services could decrease our revenues or increase our costs, which would adversely affect our business, financial condition and results of operations.

In addition, changes in the nature or extent of the guarantees provided by Fannie Mae and Freddie Mac or the insurance provided by the FHA could also have broad adverse market implications. The fees that we are required to pay to the Agencies for these guarantees have changed significantly over time and any future increases in these fees would adversely affect our business, financial condition and results of operations.

We depend upon having FDIC insurance to raise deposit funding at reasonable rates. Increases in deposit insurance premiums and special FDIC assessments will adversely affect our earnings.

The Dodd-Frank Act required the FDIC to substantially revise its regulations for determining the amount of an institution's deposit insurance premiums. The FDIC has defined the deposit insurance assessment base for an insured depository institution as average consolidated total assets during the assessment period, minus average tangible equity. Our assessment rate is determined by use of a scorecard that combines a financial institution's CAMELS ratings with certain other financial information. The FDIC may determine that we present a higher risk to the DIF than other banks due to certain factors. These factors include significant risks relating to interest rates, loan portfolio and geographic concentration, concentration of high credit risk loans, increased loan losses, regulatory compliance (including under existing Supervisory Agreement), existing and future litigation and other factors. As a result, we could be subject to higher deposit insurance premiums and special assessments in the future that could adversely affect our earnings. The Bank’s deposit insurance premiums and special assessments in the future also may be higher than competing banks may be required to pay. Our total exposure related to uninsured deposits over $250,000 was approximately $2 billion as of December 31, 2016 . These balances could experience a higher propensity to reprice should rates rise or the Bank's financial condition deteriorate.

Operational Risk

A failure of our information technology systems, or those of our key third party vendors or service providers, could cause operational losses and damage our reputation.

Our businesses are increasingly dependent on our ability to process, record and monitor a large number of complex transactions and data. If our internal financial, accounting, or other information technology systems fail, we may be unable to conduct business for a period of time, which may impact our financial results if that interruption is sustained. In addition, our reputation with our customers or counterparties may suffer, which could have a further, long-term impact on our financial results.

Also, because we conduct part of our business over the Internet and outsource a significant number of our critical functions to third parties, our operations depend on our third-party service providers to maintain and operate their own technology systems. To the extent these third parties’ systems fail, we may be unable to conduct business or provide certain services, and we may face financial and reputational losses as a result.

We collect, store and transfer our customers’ personally identifiable information, and any compromise to the security of that information may have meaningful consequences for us.

Data breaches are of a particular concern relative to the processing of consumer transactions, such as the servicing or subservicing of loans. Our businesses receive, transmit and store a large volume of personally identifiable information and other user data. There are myriad federal, state and international laws regarding privacy and the storing, sharing, use, disclosure and protection of personally identifiable information and user data.

We have policies and processes in place that are intended to meet the requirements of those laws, including security systems in place to prevent unauthorized access to that information. Nevertheless, those processes and systems may be inadequate. Also, to the extent we rely upon third parties to handle personally identifiable data on our behalf, we may be responsible if such data is compromised while in the custody and control of those third parties.

Privacy laws are still evolving and many state and local jurisdictions have laws that differ from federal law. At times, we may also be governed by privacy laws outside of the U.S., with which we are less familiar. If we fail to comply with applicable privacy policies or federal, state, local or international laws and regulations or any compromise of security that results in the unauthorized release of personally identifiable information or other user data, those events could damage the reputation of our business, and discourage potential users from utilizing our products and services. In addition, we may have to bear the cost of mitigating identity theft concerns, and may be subject to fines or legal proceedings by governmental agencies or consumers. Any of these events could adversely affect our business, financial condition and results of operations.

We may be terminated as a servicer or subservicer or incur costs, liabilities, fines and other sanctions if we fail to satisfy our servicing obligations, including our obligations with respect to mortgage loan foreclosure actions.

We act as servicer and subservicer for mortgage loans owned by third parties, which is approximately 10 percent of our revenue and results in approximately $1.6 billion of our average company controlled deposits. In such capacities for those loans, we have certain contractual obligations, including foreclosing on defaulted mortgage loans or, to the extent applicable, considering alternatives to foreclosure. If we commit a material breach of our obligations as servicer, we may be subject to termination if the breach is not cured within a specified period of time following notice, causing us to lose servicing income.

For certain investors and/or certain transactions, we may be contractually obligated to repurchase a mortgage loan or reimburse the investor for credit or other losses incurred on the loan as a remedy for servicing errors with respect to the loan. If we have increased repurchase obligations because of claims for which we did not satisfy our obligations, or increased loss severity on such repurchases, we may have a significant reduction to noninterest income or increase to noninterest expense. We may incur significant costs if we are required to, or if we elect to, re-execute or re-file documents or take other action in our capacity as a servicer in connection with pending or completed foreclosures. We may incur litigation costs if the validity of a foreclosure action is challenged by a borrower. If a court were to overturn a foreclosure because of errors or deficiencies in the foreclosure process, we may have liability to the borrower and/or to any title insurer of the property sold in foreclosure if the required process was not followed. These costs and liabilities may not be legally or otherwise reimbursable to us.

We may be required to repurchase mortgage loans, pay fees or indemnify buyers against losses in some circumstances, which could harm liquidity, results of operations and financial condition.

When mortgage loans are sold by us, we make customary representations and warranties to purchasers, guarantors and insurers, including the Agencies, about the mortgage loans, and the manner in which they were originated. We have made, and will continue to make, such representations and warranties in connection with the sale of loans. Whole loan sale agreements require us to repurchase or substitute mortgage loans, or indemnify buyers against losses, in the event we breach these representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of early payment default of the borrower or we may be required to pay fees. We also are subject to litigation relating to these representations and warranties and the costs of such litigation may be significant. With respect to loans that are originated through our broker or correspondent channels, the remedies we have available against the originating broker or correspondent, if any, may not be as broad as the remedies available to purchasers, guarantors and insurers of mortgage loans against us. In addition, we also face further risk that the originating broker or correspondent, if any, may not have the financial capacity to perform remedies that

otherwise may be available. Therefore, if a purchaser, guarantor or insurer enforces its remedies against us, we may not be able to recover losses from the originating broker or correspondent. If repurchase and indemnity demands increase and such demands are valid claims, the liquidity, results of operations and financial condition may also be adversely affected.

Our representation and warranty reserve for losses at December 31, 2016 is $27 million . This may not be adequate to cover losses for loans that we have sold or securitized into the secondary market which we may be subsequently required to repurchase, pay fines or fees, or indemnify purchasers and insurers because of violations of customary representations and warranties. The repurchase demand pipeline was $6 million at December 31, 2016 . The original unpaid principal balance of 2009 and later vintage loans sold to the Agencies through December 31, 2016 was $183 million .

In addition, our regulators, as part of their supervisory function, periodically review our representation and warranty reserve for losses. Our regulators, based on their judgment, may recommend or require us to increase our reserve. Any increase in our loan losses could have an adverse effect on our earnings and financial condition.

We utilize third party mortgage originators which subjects us to strategic, reputation, compliance and operational risk.

Approximately 94 percent of our residential first mortgage volume depends upon the use of third party mortgage originators, i.e. mortgage brokers and correspondent lenders, who are not our employees. These third parties originate mortgages and provide services to many different banks and other entities. Accordingly, they may have relationships with or loyalties to such banks and other parties that are different from those they have with or to us. Failure to maintain good relations with such third party mortgage originators could have a negative impact on our market share which would negatively impact our net income.

We rely on third party mortgage originators to originate and document the mortgage loans we purchase. While we perform due diligence on the mortgage companies with whom we do business and review the loan files and loan documents we purchase to attempt to detect any irregularities or legal noncompliance, we have less control over these originators than employees of the Bank.

Due to increasing regulatory scrutiny, our third party mortgage originators could choose or be required to either reduce the scope of their business or exit the mortgage origination business altogether. The TILA-RESPA Integrated Disclosure Rule issued by the CFPB establishes comprehensive mortgage disclosure requirements for lenders and settlement agents in connection with most closed-end consumer credit transactions secured by real property. The rule requires certain disclosures are provided to consumers in connection with applying for and closing on a mortgage loan. The rule also mandates the use of specific disclosure forms, timing of communicating information to borrowers and certain record keeping requirements. The increased administrative burden and the system requirements associated with complying with these rules could lead to a decrease in our mortgage volume.

The Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending practices on financial institutions. This regulation applies to lending operations which deal directly with consumer lending. Mortgage and consumer lending practices raise compliance risks resulting from the detailed and complex nature of mortgage and consumer lending regulations imposed by federal regulatory agencies, and the relatively independent and diverse operating channels in which loans are originated. We, and our brokers, are required to apply fair lending and ensure lending practices do not result in a disparate impact to borrowers across various locations. Failure to comply with these regulations, by us or our brokers, could result in the Bank being liable for damages to individual borrowers or other imposed penalties.

Our ability to control the third party mortgage originators could have an adverse impact on our business. In addition, these arrangements with third party mortgage originators and the fees payable by us to such third parties could be subject to additional regulatory scrutiny and restrictions in the future.

We may be subject to corporate tax reform which could impact our net income and effective tax rate.

Congress is evaluating Tax Reform and certain proposals, such as a reduction in the corporate tax rate, which could have a material impact on the Company. If a reduction in rate is enacted we would expect to record a significant charge to expense through our tax provision for the revaluation of our net deferred tax asset. Going forward the reduction in rate may have a favorable impact on our effective tax rate.

General Risk Factors

MP Thrift, an entity managed and controlled by MatlinPatterson, owns 62.6 percent of our common stock and has significant influence over us, including control over decisions that require the approval of stockholders, whether or not such decisions are in the best interests of other stockholders.

MP Thrift owns a substantial majority of our outstanding common stock and as a result, has control over our decisions to enter into any corporate transaction and also the ability to prevent any transaction that requires the approval of our board of directors or the stockholders regardless of whether or not other members of our board of directors or stockholders believe that any such transactions are in their own best interests. So long as MP Thrift continues to hold a majority of our outstanding common stock, it will have the ability to control the vote in any election of directors and other matters being voted on, and continue to exert significant influence over us. Furthermore, MP Thrift may have interests that could diverge from the interests of other stockholders, and may use its control to make decisions that adversely affect the interest of other common stockholders and other holders of our debt or other equity instruments.

Additionally, our ability to use our deferred tax assets to offset future taxable income may be significantly limited if we experience an "ownership change" as defined for U.S. federal income tax purposes. An ownership change occurs if, immediately after any owner shift involving a 5 percent shareholder or any equity structure shift (1) the percentage of the stock of the loss corporation, owned by one or more 5 percent shareholders has increased by more than 50 percentage points, over (2) the lowest percentage of stock of the loss corporation owned by such shareholders. Section 382 of the Internal Revenue Code imposes restrictions on the use of a corporation’s net operating losses, certain recognized built-in losses, and other carryovers after an ownership change occurs. As we have a controlling stockholder, any stock offering in isolation or when combined with other ownership changes, could cause us to experience an ownership change and trigger these restrictions.

We are subject to various legal or regulatory investigations and proceedings.

At any given time, we are defending ourselves against a number of legal and regulatory investigations and proceedings. Proceedings or actions brought against us may result in judgments, settlements, fines, penalties, injunctions, business improvement orders, consent orders, supervisory agreements, restrictions on our business activities or other results adverse to us, which could materially and negatively affect our businesses. If such claims and other matters are not resolved in a manner favorable to us, they may result in significant financial liability and/or adversely affect the market perception of us and our products and services, as well as impact customer demand for those products and services. Some of the laws and regulations to which we are subject may provide a private right of action that a consumer or class of consumers may pursue to enforce these laws and regulations. We have been, and may continue to be in the future, subject to stockholder derivative actions, which could seek significant damages or other relief. Any financial liability or reputational damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. Claims asserted against us can be highly complicated and slow to develop, making the outcome of such proceedings difficult to predict or estimate early in the process. As a participant in the financial services industry, it is likely that we will be exposed to a high level of litigation and regulatory scrutiny and investigations relating to our business and operations.

Although we establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, we do not have accruals for all legal proceedings where we face a risk of loss. Due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal and regulatory proceedings, amounts accrued may not represent the ultimate loss to us from the legal and regulatory proceedings in question. As a result, our ultimate losses may be significantly higher than the amounts accrued for legal loss contingencies.

For further information regarding the unpredictability of legal proceedings and description regarding our pending legal proceedings see, Note 21 - Legal Proceedings, Contingencies and Commitments.

Other Risk Factors

The above description of risk factors is not exhaustive. Other risk factors are described elsewhere herein as well as in other reports and documents that we file with or furnish to the SEC. Other factors that could also cause results to differ from our expectations may not be described herein or in any such report or document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Flagstar's headquarters is located in Troy, Michigan at 5151 Corporate Drive. We operate a regional office in Jackson, Michigan. We own both the headquarters and regional office buildings. At December 31, 2016 , we operated 99 branches in Michigan, of which 73 were owned and 26 were leased. Our Michigan branches consist of 76 free-standing office buildings, two in-store banking centers and 21 branches in buildings in which there are other tenants. In addition, we lease 31 retail offices located in 19 states. We also lease four wholesale lending offices and three commercial lending offices.

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company is party to legal proceedings incident to its business. For further information, see Note 21 - Legal Proceedings, Contingencies and Commitments .

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II



ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock trades on the NYSE under the trading symbol FBC. At December 31, 2016 , there were 56,824,802 shares of our common stock outstanding held by approximately 14,761 stockholders of record. The following table shows the high and low sale prices for our common stock during each calendar quarter during 2016 and 2015:



Quarter Ending	Highest Sale Price		Lowest Sale Price
December 31, 2016	$	29.08	$	26.35
September 30, 2016	28.09		24.40
June 30, 2016	24.47		20.68
March 31, 2016	23.13		17.49
December 31, 2015	$	24.95	$	20.60
September 30, 2015	21.01		17.83
June 30, 2015	19.44		14.61
March 31, 2015	16.50		14.10

Dividends

We have not paid dividends on our common stock since the fourth quarter 2007. The amount and nature of any dividends declared on our common stock in the future will be determined by our board of directors. We are generally prohibited from making any dividend payments on stock except pursuant to the prior non-objection of the Federal Reserve as set forth in the Supervisory Agreement.

Beginning with the February 2012 payment of dividends on preferred stock, we exercised our right to defer regularly scheduled quarterly payments of dividends on preferred stock issued and outstanding. On July 14, 2016, we ended the deferral and made a payment to bring current all outstanding dividends as of that date and subsequently repurchased the outstanding preferred stock.

In addition, our principal sources of funds are cash dividends paid by the Bank to us and other subsidiaries, investment income and borrowings. Federal laws and regulations limit the amount of dividends or other capital distributions that the Bank may pay us. The Bank has an internal practice to remain "well-capitalized" under OCC capital adequacy regulations as discussed above. The Bank must seek prior approval from the OCC at least 30 days before it may make a dividend payment or other capital distribution to us.

Equity Compensation Plan Information

The following table sets forth certain information with respect to securities to be issued under our equity compensation plans as of December 31, 2016 :



Plan Category	Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights	Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (1)		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by security holders (2)	1,507,701	$	17.68	2,634,462
Equity compensation plans not approved by security holders	—	—		—
Total	1,507,701	$	17.68	2,634,462


(1)	Weighted average exercise price is calculated including RSUs, which for this purpose are treated as having an exercise price of zero.


(2)	For further information regarding the 2006 Equity Incentive Plan (the "2006 Plan") and 2016 Equity Incentive Plan (the "2016 Plan"), see Note 18 - Stock-Based Compensation.

Sale of Unregistered Securities

We made no unregistered sales of our equity securities during the fiscal year ended December 31, 2016 .

Issuer Purchases of Equity Securities

We made no purchases of equity securities during the fiscal year ended December 31, 2016 .

Performance Graph

CUMULATIVE TOTAL STOCKHOLDER RETURN

COMPARED WITH PERFORMANCE OF SELECTED INDICES

DECEMBER 31, 2011 THROUGH DECEMBER 31, 2016



	Nasdaq Financial	Nasdaq Bank	S&P Small Cap 600	Russell 2000	Flagstar Bancorp
December 31, 2011	100	100	100	100	100
December 31, 2012	114	116	115	115	384
December 31, 2013	157	161	160	157	389
December 31, 2014	161	165	167	163	311
December 31, 2015	166	176	162	153	458
December 31, 2016	205	238	202	183	533

ITEM 6. SELECTED FINANCIAL DATA



	For the Years Ended December 31,
	2016			2015			2014			2013			2012
	(In millions, except share data and percentages)
Summary of Consolidated
Statements of Operations
Interest income	$	417		$	355		$	286		$	330		$	481
Interest expense	94			68			39			144			184
Net interest income	323			287			247			186			297
Provision (benefit) for loan losses	(8		)	(19		)	132			70			276
Net interest income after provision for loan losses	331			306			115			116			21
Noninterest income	487			470			372			653			1,021
Noninterest expense	560			536			590			918			989
Income before income taxes	258			240			(103		)	(149		)	53
Provision (benefit) for income taxes	87			82			(34		)	(416		)	(16		)
Net income (loss)	171			158			(69		)	267			69
Preferred stock dividends/accretion	—			—			(1		)	(6		)	(6		)
Net income (loss) from continuing operations	$	171		$	158		$	(70	)	$	261		$	63
Income (loss) per share:
Basic	$	2.71		$	2.27		$	(1.72	)	$	4.40		$	0.88
Diluted	$	2.66		$	2.24		$	(1.72	)	$	4.37		$	0.87
Weighted average shares outstanding:
Basic	56,569,307			56,426,977			56,246,528			56,063,282			55,762,196
Diluted	57,597,667			57,164,523			56,246,528			56,518,181			56,193,515



	December 31,
	2016		2015		2014		2013		2012
	(In millions, except per share data and percentages)
Summary of Consolidated
Statements of Financial Condition
Total assets	$	14,053	$	13,715	$	9,840	$	9,407	$	14,082
Loans receivable, net	9,465		9,226		6,523		6,637		10,914
Mortgage servicing rights	335		296		258		285		711
Total deposits	8,800		7,935		7,069		6,140		8,294
Short-term Federal Home Loan Bank advances	1,780		2,116		214		—		—
Long-term Federal Home Loan Bank advances	1,200		1,425		300		988		3,180
Long-term debt	493		247		331		353		247
Stockholders' equity (1)	1,336		1,529		1,373		1,426		1,159
Book value per common share	23.50		22.33		19.64		20.66		16.12
Number of common shares outstanding	56,824,802		56,483,258		56,332,307		56,138,074		55,863,053


(1)	Includes preferred stock totaling $0 million , $267 million , $267 million , $266 million , and $260 million for the years ended December 31, 2016 , 2015 , 2014 , 2013 and 2012 , respectively.



	At or For the Years Ended December 31,
	2016			2015			2014			2013			2012
	(In millions, except share data and percentages)
Average Balances:
Average interest earning assets	$	12,164		$	10,436		$	8,440		$	10,882		$	13,104
Average interest paying liabilities	$	9,757		$	8,305		$	6,780		$	9,338		$	10,786
Average stockholders’ equity	$	1,464		$	1,486		$	1,406		$	1,239		$	1,192
Selected Ratios:
Interest rate spread	2.45		%	2.58		%	2.80		%	1.50		%	1.96		%
Net interest margin	2.64		%	2.74		%	2.91		%	1.72		%	2.26		%
Return (loss) on average assets	1.23		%	1.32		%	(0.71		)%	2.08		%	0.43		%
Return (loss) on average equity	11.69		%	10.63		%	(4.97		)%	21.09		%	5.26		%
Return on average common equity	13.0		%	10.5		%	(6.1		)%	26.8		%	6.7		%
Equity-to-assets ratio	9.50		%	11.14		%	13.95		%	15.16		%	8.53		%
Common equity-to-assets ratio	9.50		%	9.20		%	11.24		%	12.33		%	6.38		%
Equity/assets ratio (average for the period)	10.52		%	12.43		%	14.22		%	9.87		%	8.10		%
Efficiency ratio	69.2		%	70.9		%	95.4		%	109.4		%	75.1		%
Bancorp Tier 1 leverage (to adjusted tangible assets) (1)(2)	8.88		%	11.51		%	N/A			N/A			N/A
Bank Tier 1 leverage (to adjusted tangible assets)	10.52		%	11.79		%	12.43		%	13.97		%	10.41		%
Selected Statistics:
Mortgage rate lock commitments (fallout-adjusted) (3)	$	29,372		$	25,511		$	24,007		$	31,590		$	50,633
Mortgage loans sold and securitized	$	32,033		$	26,307		$	24,407		$	39,075		$	53,094
Number of banking centers	99			99			107			111			111
Number of FTE employees	2,886			2,713			2,739			3,253			3,662


(1)	Applicable to Bancorp for the years ended December 31, 2016 and 2015 .


(2)	Basel III transitional


(3)	Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on previous historical experience and the level of interest rates.



ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS




Overview	26
Critical Accounting Estimates	26
Allowance for Loan Losses	26
Fair Value Measurements	27
Accounting and Reporting Developments	29
Summary of Operation	29
Net Interest Income and Rate/Volume Analysis	29
Provision for Loan Losses	32
Noninterest Income	33
Noninterest Expense	35
Provision (Benefit) for Income Taxes	36
Fourth Quarter Results	37
Operating Segments	38
Risk Management	41
Credit Risk	41
Loans Held-For-Investment	41
Loan Principal Payments	45
Credit Quality	45
Troubled Debt Restructuring	47
Allowance For Loan Losses	48
Market Risk	50
Loans Held-For-Sale	52
Mortgage Originations	53
Mortgage Servicing	53
Mortgage Servicing Rights	55
Investment Securities	56
Liquidity Risk	56
Deposits	57
Borrowings	59
Federal Home Loan Bank Stock	60
Contractual Obligations	60
Operational Risk	60
Loans with Government Guarantees	60
Representation and Warranty Reserve	61
Capital	61
Use of Non-GAAP Financial Measurements	64

The following is an analysis of our financial condition and results of operations. See the Glossary of Abbreviations and Acronyms on page 3 for definitions of terms used throughout this report. You should read this item in conjunction with our Consolidated Financial Statements and related notes filed with this report in Part II, Item 8. Financial Statements and Supplementary Data.

Overview

We are a Michigan-based savings and loan holding company founded in 1993. Our business is primarily conducted through our principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. We provide a range of commercial, small business, and consumer banking services and a complete set of mortgage and banking products and services distinguished by local delivery, customer service and competitive product pricing. For additional details and information on each of our lines of business, refer to Part 1, Item 1, Business, of this report.

Critical Accounting Estimates

Our Consolidated Financial Statements are prepared in accordance with U.S. GAAP and reflect general practices within our industry. Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements. Some of our significant accounting policies require complex judgments and estimates to determine values of assets and liabilities. The more judgmental, uncertain and complex estimates are further discussed below. These estimates are based on information available to management as of the date of the Consolidated Financial Statements. Accordingly, as this information changes, future financial statements could reflect different estimates or judgments.

Allowance for Loan Losses

The ALLL represents management’s estimate of probable credit losses inherent in our HFI loan portfolio. The ALLL is sensitive to a variety of internal factors, such as the mix and level of loan balances outstanding, TDR volume, net charge-off experience, as well as external factors, such as, property values, the general health of the economy, unemployment rates, bankruptcy filings, peer data, etc. Management considers these variables and all other available information when establishing the final level of the allowance. These variables and others have the ability to result in actual loan losses that differ from the originally estimated amounts.

The ALLL includes a component related to specifically identified TDR and NPL loans and a model based component. For further information on the methodologies used in determining our allowance, see Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting Standards.

Specifically identified component

The specifically identified component of the ALLL related to performing TDR loans is generally measured as the difference between the recorded investment in the specific loan and the present value of the cash flows expected to be collected, discounted at the loan’s original effective interest rate. Estimating the timing and amounts of future cash flow projections is highly judgmental and based upon assumptions including default rates, prepayment probability and loss severities. All of these estimates and assumptions require significant management judgment and certain assumptions are highly subjective.

Specifically identified collateral dependent NPL loans are generally measured as the difference between the recorded investment in the impaired loan and the underlying collateral value less estimated costs to sell. These estimates are dependent on third party property valuations which may be influenced by factors such as the current and future level of home prices, the duration of current overall economic conditions, and other macroeconomic and portfolio-specific factors.

Model based component

The model-based component of the ALLL is calculated on our consumer and commercial HFI loan portfolio by applying average historical loss rates experienced during an identified look back period to outstanding principal balances over an estimated loss emergence period. For portfolios that do not have adequate loss experience and purchased portfolios, we utilize peer loss data in determining the ALLL. The loss emergence period represents the time period between the date at which the loss is estimated to have been incurred and the ultimate realization of that loss (by a charge-off). Estimated loss emergence periods may vary by product and may change over time; management applies judgment in estimating loss emergence periods, using available credit information and trends.

The historical loss model calculation is then adjusted by taking factors into consideration, such as current economic events that have occurred but may not yet be reflected in the historical loss estimates and model imprecision. These adjustments are determined by analyzing the historical loss experience for each major product segment and its underlying credit characteristics. It is difficult to predict whether historical loss experience is indicative of current incurred loss levels, therefore, management applies judgment in making adjustments deemed necessary based on the following factors: changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and volume of the portfolio, changes in lending management, changes in credit quality statistics, changes in the quality of the loan review system, changes in the value of underlying collateral for collateral-dependent loans, the potential impact of payment recasts, changes in concentrations of credit, and other internal or external factor changes. The application of different inputs into the model calculation and the assumptions used by management to adjust the model calculation, are subject to significant management judgment and may result in actual loan losses that differ from the originally estimated amounts.

Fair Value Measurements

Certain assets and liabilities are carried at fair value on the Consolidated Statements of Financial Condition.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based on quoted market prices in an active market, or if market prices are not available, is estimated using models employing techniques such as matrix pricing or discounting expected cash flows.

The significant assumptions used in the models are independently verified against observable market data where possible. Where observable market data is not available, the estimate of fair value becomes more subjective and involves a high degree of judgment. In this circumstance, fair value is estimated based on management’s judgment regarding the value that market participants would assign to the asset or liability. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there are inherent limitations to any valuation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

A portion of our assets and liabilities are carried at fair value on the Consolidated Statements of Financial Condition. The majority of these assets and liabilities are measured at fair value on a recurring basis, however, certain assets are measured at fair value on a nonrecurring basis based on the fair value of the underlying collateral.

Level 3 Assets and Liabilities measured at fair value

Estimating fair value requires the application of judgment which is largely dependent on the amount of observable market information available to perform the valuation. Instruments classified within level 3 of the fair value hierarchy indicate that valuations are determined using internally developed methods and models that utilize significant unobservable inputs. Judgments used in these valuations are more significant than those required when estimating the fair value of instruments classified within levels 1 and 2.

Imprecision in estimating unobservable market inputs or other factors can affect the amount of gain or loss recorded. Furthermore, while we believe that our valuation methods are appropriate and consistent with those of other market participants, the methods and assumptions used reflect management judgment and may vary across businesses and portfolios.

The following table includes the fair value of our assets and liabilities classified within level 3 of the fair value hierarchy:



	December 31, 2016
	(Dollars in millions)
Level 3 Fair Value Assets
MSRs	$	335
Second mortgage loans	41
HELOC loans	24
Rate lock commitments, net	18
Total recurring	418
Total nonrecurring	39
Total level 3 fair value assets	$	457
Total fair value assets	5,155
Total assets	$	14,053
Level 3 assets as a percentage of:
Total assets	3.3		%
Fair value assets	8.9		%
Level 3 Fair Value Liabilities
DOJ litigation settlement	$	60

Mortgage Servicing Rights. When we sell mortgage loans in the secondary market, we frequently retain the right to continue to service these loans and earn a servicing fee. At the time the loan is sold on a servicing retained basis, we record the MSR as an asset at its fair value. Determining the fair value of MSRs involves a calculation of the present value of a set of market driven and MSR specific cash flows. MSRs do not trade in an active market with readily observable market prices. However, the market price of MSRs is generally a function of demand and interest rates. When mortgage interest rates decline, mortgage loan prepayments are expected to increase due to increased refinances. If this happens, the income stream from a MSR portfolio is expected to decline and the fair value of the portfolio will decline. Similarly, when mortgage interest rates increase, mortgage loan prepayments tend to slow and therefore the value of the MSR tends to increase. The fair value of the MSR is also sensitive to market implied interest rate volatility for which an increase has a negative impact on the value of the MSR and a decline has a positive impact on the value of the MSR. Accordingly, we must make assumptions about future interest rates, market implied interest rate volatility and other market conditions in order to estimate the current fair value of our MSR portfolio. In certain circumstances, based on the probability of the completion of a sale of MSRs pursuant to a bona-fide purchase offer, we consider the bid price of that offer and identifiable transaction costs in comparison to the calculated fair value and may adjust the estimate of fair value to reflect the terms of the pending transaction. For further information and a sensitivity analysis of our MSR fair values, see Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting Standards, Note 10 - Mortgage Servicing Rights, and Note 22 - Fair Value Measurements. On an ongoing basis, we compare our fair value estimates based on both unobservable inputs and market inputs, where available, to report the various assumptions. On a quarterly basis, our MSR valuation is compared to two independent valuations performed by third parties. For further information regarding interest rate sensitivity analysis on the MSRs, see Note 22 - Fair Value Measurements.

DOJ litigation settlement. We elected the fair value option to account for the liability representing the remaining future payments. We use a discounted cash flow model to determine the current fair value. The model utilizes our forecast and considers multiple scenarios and possible outcomes that impact the timing of the additional payments, which are discounted using a risk free rate adjusted for non-performance risk that represents our credit risk. These scenarios are probability weighted and consider the view of an independent market participant to estimate the most likely fair value of the liability. For further information on the DOJ liability, see Note 21 - Legal Proceedings, Contingencies and Commitments.

For further information regarding the valuation of our financial instruments, including those that utilize unobservable inputs see, Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting Standards and Note 22 - Fair Value Measurements. For further information and sensitivities related to the valuation of our MSR asset see, Note 10 - Mortgage Servicing Rights and Note 22 - Fair Value Measurements. For further information regarding the valuation of our DOJ liability see, Note 21 - Legal Proceedings, Contingencies and Commitments and Note 22 - Fair Value Measurements.

Accounting and Reporting Developments

For further information of recently issued accounting pronouncements and their expected impact on our Consolidated Financial Statements, see Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting Standards.

Summary of Operations



	For the Years Ended December 31,
	2016			2015			2014
	(Dollars in millions)
Net interest income	$	323		$	287		$	247
Provision (benefit) for loan losses	(8		)	(19		)	132
Total noninterest income	487			470			372
Total noninterest expense	560			536			590
Provision (benefit) for income taxes	87			82			(34		)
Preferred stock accretion	—			—			(1		)
Net income (loss)	$	171		$	158		$	(70	)
Income (loss) per share:
Basic	$	2.71		$	2.27		$	(1.72	)
Diluted	$	2.66		$	2.24		$	(1.72	)

Full year 2016 net income was $171 million , or $2.66 per diluted share, as compared to full year 2015 net income of $158 million , or $2.24 per diluted share. The 2016 full year results included a $24 million benefit related to a decrease in the fair value of the Department of Justice ("DOJ") settlement liability. Excluding this benefit, the Company had adjusted non-GAAP 2016 net income of $155 million , or $2.38 per diluted share. For a reconciliation and discussion of this non-GAAP financial measure, see MD&A - Use of Non-GAAP Financial Measures. The $13 million increase was primarily driven by a $36 million increase in net interest income and a $17 million increase in noninterest income partially offset by higher performance driven expenses and a lower benefit for loan losses. Net interest income increased as a result of growth in our interest earning assets as we execute on our strategic initiative to deploy capital and replace lower credit quality assets with higher quality residential and commercial loans. As a result of this initiative, we grew average interest earning assets by 17 percent from $10.4 billion during the year ended December 31, 2015 to $12.2 billion during the year ended December 31, 2016. Additional details of each key driver have been further explained in Management’s discussion below.

Net Interest Income

Net interest income is the amount we earn on the average balances of our interest-earning assets, less the amount the average balances of our interest-bearing liabilities cost us. Interest income recorded on loans is reduced by the amortization of net premiums and net deferred loan origination costs.

The following table presents on a consolidated basis interest income from average assets and liabilities, expressed in dollars and yields:



	For the Years Ended December 31,
	2016						2015						2014
	Average Balance		Interest		Average Yield/ Rate		Average Balance		Interest		Average Yield/ Rate		Average Balance		Interest		Average Yield/ Rate
	(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale	$	3,134	$	113	3.62	%	$	2,188	$	85	3.90	%	$	1,534	$	65	4.24	%
Loans held-for-investment
Consumer loans (1)	2,832		99		3.52	%	3,083		114		3.68	%	2,681		103		3.85	%
Commercial loans (1)	2,981		120		3.97	%	1,993		78		3.88	%	1,294		49		3.70	%
Loans held-for-investment	5,813		219		3.75	%	5,076		192		3.76	%	3,975		152		3.80	%
Loans with government guarantees	435		16		3.59	%	633		18		2.86	%	1,216		29		2.39	%
Investment securities	2,653		68		2.56	%	2,305		59		2.55	%	1,496		39		2.61	%
Interest-bearing deposits	129		1		0.50	%	234		1		0.50	%	219		1		0.25	%
Total interest-earning assets	12,164		$	417	3.42	%	10,436		$	355	3.38	%	8,440		$	286	3.38	%
Other assets	1,743						1,520						1,446
Total assets	$	13,907					$	11,956					$	9,886
Interest-Bearing Liabilities
Retail deposits
Demand deposits	$	489	$	1	0.18	%	$	429	$	1	0.14	%	$	422	$	1	0.14	%
Savings deposits	3,751		29		0.78	%	3,693		30		0.82	%	3,139		18		0.61	%
Money market deposits	278		1		0.44	%	258		1		0.31	%	266		1		0.20	%
Certificate of deposits	990		10		1.05	%	787		6		0.77	%	915		6		0.73	%
Total retail deposits	5,508		41		0.76	%	5,167		38		0.73	%	4,742		26		0.57	%
Government deposits
Demand deposits	228		1		0.39	%	257		1		0.39	%	182		1		0.38	%
Savings deposits	442		2		0.52	%	405		2		0.52	%	320		2		0.51	%
Certificate of deposits	382		2		0.40	%	358		1		0.39	%	349		1		0.33	%
Total government deposits	1,052		5		0.45	%	1,020		4		0.44	%	851		4		0.41	%
Total deposits	6,560		46		0.71	%	6,187		42		0.68	%	5,593		30		0.54	%
Short-term Federal Home Loan Bank advances and other	1,249		5		0.44	%	311		1		0.30	%	893		2		0.22	%
Long-term Federal Home Loan Bank advances	1,584		27		1.72	%	1,500		18		1.17	%	46		—		0.01	%
Other long-term debt	364		16		4.34	%	307		7		2.42	%	248		7		2.72	%
Total interest-bearing liabilities	9,757		94		0.97	%	8,305		68		0.82	%	6,780		39		0.58	%
Noninterest-bearing deposits (2)	2,202						1,690						1,141
Other liabilities	484						475						559
Stockholders’ equity	1,464						1,486						1,406
Total liabilities and stockholders' equity	$	13,907					$	11,956					$	9,886
Net interest-earning assets	$	2,407					$	2,131					$	1,660
Net interest income			$	323					$	287					$	247
Interest rate spread (3)					2.45	%					2.58	%					2.80	%
Net interest margin (4)					2.64	%					2.74	%					2.91	%
Ratio of average interest-earning assets to interest-bearing liabilities					124.7	%					125.7	%					124.5	%


(1)	Consumer loans include: residential first mortgage, second mortgage, HELOC and other consumer loans. Commercial loans include: commercial real estate, commercial and industrial, and warehouse lines. Includes nonaccrual loans, for further information relating to nonaccrual loans, see Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies.


(2)	Includes noninterest-bearing company controlled deposits that arise due to the servicing of loans for others.


(3)	Interest rate spread is the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities.


(4)	Net interest margin is net interest income divided by average interest-earning assets.

Rate/Volume Analysis

The following tables present the dollar amount of changes in interest income and interest expense for the components of interest-earning assets and interest-bearing liabilities that 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). The rate/volume variances are allocated to variances due to rate.



	For the Years Ended December 31,
	2016 Versus 2015 Increase (Decrease) Due to:									2015 Versus 2014 Increase (Decrease) Due to:
	Rate			Volume			Total			Rate			Volume			Total
	(Dollars in millions)
Interest-Earning Assets
Loans held-for-sale	$	(9	)	$	37		$	28		$	(8	)	$	28		$	20
Loans held-for-investment
Consumer loans (1)	(5		)	(10		)	(15		)	(5		)	16			11
Commercial loans (2)	3			39			42			3			26			29
Total loans held-for-investment	(2		)	29			27			(2		)	42			40
Loans with government guarantees	3			(5		)	(2		)	3			(14		)	(11		)
Investment securities	2			7			9			(1		)	21			20
Total interest-earning assets	$	(6	)	$	68		$	62		$	(8	)	$	77		$	69
Interest-Bearing Liabilities
Retail deposits
Savings deposits	(1		)	—			(1		)	8			4			12
Certificate of deposits	—			4			4			—			—			—
Total retail deposits	(1		)	4			3			8			4			12
Government deposits
Certificate of deposits	—			1			1			—			—			—
Total government deposits	—			1			1			—			—			—
Total deposits	(1		)	5			4			8			4			12
Short-term debt	2			2			4			—			—			—
Long-term debt	8			1			9			15			2			17
Other	7			2			9			—			—			—
Total interest-bearing liabilities	$	16		$	10		$	26		$	23		$	6		$	29
Change in net interest income	$	(22	)	$	58		$	36		$	(31	)	$	71		$	40


(1)	Consumer loans include: residential first mortgage, second mortgage, HELOC and other consumer loans.


(2)	Commercial loans include: commercial real estate, commercial and industrial, and warehouse lending.

2016 Compared to 2015

Net interest income increased $36 million for the year ended December 31, 2016 , compared to the same period in 2015 . The increase for the year was primarily driven by growth in average interest earning assets of 16.3 percent , partially offset by a decrease in the net interest margin driven by a competitive interest rate environment and issuance of 6.125 percent senior debt used to fund the TARP redemption. Net interest margin for the year ended December 31, 2016 was 2.64 percent , as compared to 2.74 percent for the year ended December 31, 2015 . The decrease in net interest margin from 2015 was driven by higher interest rates from longer term fixed rate debt taken to match-fund our longer duration asset growth, interest expense on senior debt issued to fund the TARP redemption and lower average interest rates on LHFS due to a more competitive interest rate environment. This decrease was partially offset by higher average yield on interest earning assets as we shifted from lower spread residential mortgage loans into higher spread commercial loans.

Average LHFS increased $946 million for the year ended December 31, 2016 , compared to the same period in 2015, due to an increase in mortgage production resulting from a low interest rate market which drove increased refinance activity.

Average LHFI increased $737 million for the year ended December 31, 2016 , compared to the same period in 2015, primarily due to growth in warehouse and commercial loans where we have increased our market share and begun to grow our new product portfolios.

2015 Compared to 2014

Net interest income increased $40 million for the year ended December 31, 2015 , compared to the same period in 2015 , primarily due to strong growth in interest-earning assets, partially offset by a decrease in the net interest margin.

Our net interest margin for the year ended December 31, 2015 was 2.74 percent , as compared to 2.91 percent for the year ended December 31, 2014 . The decrease from 2014 was primarily driven by a significant portion of the interest earning asset growth being in relatively lower spread mortgage loans which were funded with higher cost, longer tenured liabilities.

Interest income increased $69 million for the year ended December 31, 2015 , compared to the same period in 2014 , primarily driven by higher average LHFS, LHFI and investment securities, partially offset by a decrease in loans with government guarantees. Average warehouse loans increased $431 million for the year ended December 31, 2015 to $877 million, compared to $446 million for the year ended December 31, 2014 , primarily due to higher line utilization and new accounts. Average HELOC loans increased $225 million for the year ended December 31, 2015 to $347 million, compared to $122 million for the year ended December 31, 2014 , resulting from the acquisitions of loan portfolios in 2015 . Average residential first mortgage loans increased $195 million for the year ended December 31, 2015 to $2.6 billion, compared to $2.4 billion for the year ended December 31, 2014 , primarily due to retained loan production from our mortgage origination business. Average CRE loans increased $153 million for the year ended December 31, 2015 to $679 million, compared to $526 million for the year ended December 31, 2014 . Average C&I loans increased $116 million for the year ended December 31, 2015 to $438 million, compared to $322 million for the year ended December 31, 2014 , in line with our strategy to grow interest-earning assets.

Interest expense increased $29 million for the year ended December 31, 2015 , compared to the same period in 2014 , primarily due to increased FHLB advances and interest-bearing deposits. Average interest-bearing deposits were $6.2 billion during the year ended December 31, 2015 , increasing $0.6 billion or 10.6 percent, compared to the year ended December 31, 2014 . Retail deposits increased $0.4 billion, led by growth in savings deposits. Average FHLB advances were $1.8 billion for the year ended December 31, 2015 , an increase of $0.9 billion compared to the year ended December 31, 2014 . Throughout 2015 , we replaced certain short-term advances with longer term advances primarily to match- fund our longer duration asset growth which resulted in slightly higher cost debt.

Provision for Loan Losses

2016 Compared to 2015

The provision (benefit) for loan losses decreased $11 million for the year ended December 31, 2016 , as compared to the year ended December 31, 2015 . In 2016, the benefit resulted primarily from the sale of $1.2 billion unpaid principal balance of performing residential first mortgage loans and $110 million of unpaid principal balance of nonperforming, TDR and non-agency loans, partially offset by commercial loan growth. In 2015, the provision (benefit) for loan losses included a net reduction in the allowance for loan losses relating to several loan sales, including a net reduction in the allowance relating to interest-only residential first mortgage loans, partially offset by an increase related to the growth in our HFI loan portfolio

In 2016, we continued to experience strong credit quality. Our net charge-offs for the year ended December 31, 2016 totaled $30 million , compared to $91 million for the year ended December 31, 2015 . The decrease was primarily due to charge-offs taken in 2015 related to our interest only and lower performing loans sold or transferred to HFS. As a percentage of the average LHFI, annualized net charge-offs for the year ended December 31, 2016 decreased to 0.52 percent from 1.85 percent for the year ended December 31, 2015 . During the year ended December 31, 2016 and 2015 , the annualized net charge-offs as a percentage of the average LHFI, on a non-GAAP adjusted basis, were 0.15 percent and 0.40 percent , respectively, excluding the charge-offs related to the loan sales or transfers of $8 million and $69 million , respectively.

2015 Compared to 2014

The provision for loan losses decreased $151 million for the year ended December 31, 2015 , as compared to the year ended December 31, 2014 . In 2014 , we recorded a $132 million provision that was primarily driven by two changes in estimates: the evaluation of current data related to the loss emergence period on our residential mortgage loan portfolio and the

evaluation of the enhanced risk associated with payment resets relating to interest-only loans. In 2015, we sold 90 percent of our interest-only loans at prices that were favorable as compared to the continuing reset risk associated with us continuing to hold these loans in our portfolio when they were recorded consistent with our incurred loss methodology. This action along with the sale of $444 million TDR, nonperforming and jumbo loans resulted in a $69 million reduction to the ALLL which, along with an overall improvement in portfolio quality was the primary driver of the $19 million net benefit reported in 2015 being partially offset by a $1.9 billion increase in volume of average LHFI due to the origination of residential first mortgages and increased commercial lending.

Net charge-offs for the year ended December 31, 2015 totaled $91 million , compared to $42 million for the year ended December 31, 2014 . The increase was primarily due to charge-offs relating to loans sold or transferred to HFS during the year ended December 31, 2015 . We sought to de-risk the balance sheet by selling lower performing and interest-only loans. As a percentage of the average LHFI, annualized net charge-offs for the year ended December 31, 2015 increased to 1.85 percent from 1.07 percent for the year ended December 31, 2014 . During the year ended December 31, 2015 and 2014 , the annualized net charge-offs as a percentage of the average LHFI, on a non-GAAP adjusted basis, were 0.40 percent and 0.69 percent , respectively, excluding the charge-offs related to the loan sales or transfers of $69 million and $15 million , respectively.

For further information on the provision for loan losses see MD&A - Allowance for Loan Losses.

Noninterest Income

The following tables provide information on our noninterest income along with additional details related to our net gain on loan sales and activity that occurred within the period:



	For the Years Ended December 31,
	2016			2015			2014
	(Dollars in millions)
Net gain on loan sales	$	316		$	288		$	206
Loan fees and charges	76			67			73
Deposit fees and charges	22			25			22
Loan administration income	18			26			24
Net (loss) return on mortgage servicing rights	(26		)	28			24
Net (loss) gain on sale of assets	(2		)	(1		)	12
Representation and warranty (provision) benefit	19			19			(10		)
Other noninterest income	64			18			21
Total noninterest income	$	487		$	470		$	372



	For the Years Ended December 31,
	2016				2015			2014

Mortgage rate lock commitments (fallout-adjusted) (1)		$	29,372		$	25,511		$	24,007
Net margin on mortgage rate lock commitments (fallout-adjusted) (1) (2)		1.02		%	1.13		%	0.86		%
Net gain on loan sales on HFS		$	301		$	288		$	206
Net (loss) return on the mortgage servicing rights		$	(26	)	$	28		$	24
Gain on loan sales HFS + net (loss) return on the MSR		$	275		$	316		$	230
Residential loans serviced (number of accounts - 000's) (3)		383			$	361		$	383
Capitalized value of MSRs		1.07		%	1.13		%	1.01		%
Mortgage loans sold and securitized		$	32,033		26,307			24,407
Net margin on loan sales		0.94		%	1.09		%	0.84		%


(1)	Fallout adjusted refers to mortgage rate lock commitments which are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on previous historical experience and the level of interest rates.


(2)	Gain on sale margin is based on net gain on loan sales related to HFS loans to fallout-adjusted mortgage rate lock commitments.


(3)	Includes serviced for own loan portfolio, serviced for others and subserviced for others loans.

2016 Compared to 2015

Total noninterest income was $487 million during the year ended December 31, 2016 , which was a $17 million increase from $470 million during the year ended December 31, 2015 .

Net gain on loan sales increased $28 million for the year ended December 31, 2016 , compared to the same period in 2015 . The increase in gain on loan sales was primarily due to $3.9 million higher fallout-adjusted lock volume driven by an increase in refinance activity and a $14 million gain from the sale of performing LHFI. The increase was partially offset by lower loan sale margins driven by pricing competition.

Total loan fees and charges increased $9 million for the year ended December 31, 2016 , compared to the same period in 2015 , primarily due to higher mortgage loan closings.

Loan administration income decreased $8 million for the year December 31, 2016 to $18 million , compared to $26 million for the same period in 2015. The decrease was equally driven by lower fee revenue from loans subserviced for others and higher interest expense on average company controlled deposits which increased due primarily to higher refinance activity.

Our net loss on MSRs was $26 million for the year ended December 31, 2016 , compared to a return of $28 million for the same period in 2015 . The $54 million decrease was primarily due to a decline in fair value driven by higher prepayments, increased market implied interest rate volatility, and a $7 million charge related to MSR sales that closed during the year. These declines were partially offset by higher servicing fees and ancillary income received due to a higher average outstanding MSR balance carried throughout the year.

Other noninterest income increased $46 million , compared to the same period in 2015 . The increase was primarily due to a $24 million benefit related to the reduction in the fair value of the DOJ settlement liability and an $11 million net improvement in fair value adjustments. Higher income earned on our bank owned life insurance and gains on the sale of AFS investment securities about equally drove the remaining improvement.

2015 Compared to 2014

Total noninterest income increased $109 million during the year ended December 31, 2015 from the year ended December 31, 2014 . The increase was led by higher net gain on loan sales and lower representation and warranty provision, partially offset by a decrease in net gain on sale of assets and loan fees and charges.

Net gain on loan sales increased $82 million for the year ended December 31, 2015 , compared to the year ended December 31, 2014 . The increase in gain on loan sales was primarily due to higher fallout-adjusted lock volume and improved gain on loan sale margins. Loans sold and securitized increased to $26.3 billion during the year ended December 31, 2015 , compared to $24.4 billion sold and securitized in the year ended December 31, 2014 . For the year ended December 31, 2015 , the mortgage rate lock commitments increased to $31.7 billion , compared to $29.5 billion in the year ended December 31, 2014 .

Total loan fees and charges decreased $6 million for the year ended December 31, 2015 , compared to the year ended December 31, 2014 , primarily reflecting a decrease in deferred commercial and mortgage loan fees related to payoffs.

Net return on the MSR asset increased $4 million for the year ended December 31, 2015 , compared to the year ended December 31, 2014 . The increase was primarily due to elevated collections of contingent reserves, originally held back by the purchaser on prior MSR sales, partially offset by a decrease related to the net impact of market-driven changes. Also driving the increase was a benefit from slower prepayments and positive economic hedging results.

Net (loss) gain on sale of assets decreased $13 million to a loss of $1 million during the year ended December 31, 2015 , compared to a gain of $12 million for the year ended December 31, 2014 . The decrease was primarily due to a gain from loan sales during the year ended December 31, 2014 and a write down of land assets during the year ended December 31, 2015 .

Our provision for representation and warranty reserve was $29 million lower for the year ended December 31, 2015 , compared to the same period in 2014. An ongoing trend of lower charge-offs and volume of repurchase demands has been the primary driver of the decrease partially offset by an increase related to indemnification agreements on loans with government guarantees.

Other noninterest income decreased $3 million, compared to the same period in 2014 . The decrease was primarily due to a $11 million benefit related to the reduction in the fair value of the DOJ settlement liability which was initially recorded in 2014, partially offset by an increase in the fair value adjustment on residential first mortgages for the year ended December 31, 2015 .

Noninterest Expense

The following table sets forth the components of our noninterest expense:



	For the Years Ended December 31,
	2016			2015			2014
	(Dollars in millions)
Compensation and benefits	$	269		$	237		$	233
Commissions	55			39			35
Occupancy and equipment	85			81			80
Loan processing expense	55			52			37
Federal insurance premiums	11			23			23
Asset resolution	7			15			57
Legal and professional expense	29			36			51
Other noninterest expense	49			53			74
Total noninterest expense	$	560		$	536		$	590
Efficiency ratio	69.2		%	70.9		%	95.4		%

2016 Compared to 2015

Total noninterest expense increased $24 million during the year ended December 31, 2016 from the year ended December 31, 2015 .

The $32 million increase in compensation and benefits expense for the year ended December 31, 2016 , compared to the same period in 2015 , was primarily due to an increase in overall headcount in support of our new strategic initiatives along with an increase in performance-related compensation including the ExLTIP plan. For further information relating to ExLTIP plan, see Note 18 - Stock-Based Compensation. Our full-time equivalent employees increased overall by 173 from December 31, 2015 to a total of 2,886 full-time equivalent employees at December 31, 2016 .

Commission expense increased $16 million for the year ended December 31, 2016 , compared to the same period in 2015 . Higher loan production and unfavorable product mix about equally drove a $9 million increase with the remaining increase being driven by our investment in new strategic initiatives.

Occupancy and equipment expense increased $4 million for the year ended December 31, 2016 , compared to the same period in 2015 , primarily due to an increase in maintenance costs related to software that was implemented in the fourth quarter 2015 along with a higher average depreciable asset base.

Federal insurance premium expense decreased $12 million for the year ended December 31, 2016 , compared to the same period in 2015, primarily due to an improvement in our risk profile. During 2016, our FDIC rates declined due to improvements in our composition and level of capital, asset quality, and management of risk. The reduction in expense from this improved risk profile was partially offset by additional expense on our higher asset base.

Asset resolution expense decreased $8 million for the year ended December 31, 2016 , compared to the same period in 2015 , primarily due to a decrease in default servicing costs, foreclosure costs and an improvement in house prices.

Legal and professional expense decreased $7 million for the year ended December 31, 2016 compared to the same period in 2015, primarily due to implementation of company-wide cost savings initiatives resulting in decreased utilization of third party service providers.

Other noninterest expense decreased $4 million for the year ended December 31, 2016 , compared to the same period in 2015 primarily due to higher litigation and regulatory related expenses that occurred in 2015.

2015 Compared to 2014

Total noninterest expense decreased $43 million during the year ended December 31, 2015 from the year ended December 31, 2014 . The decrease during the year ended December 31, 2015 , was primarily due to decreases in asset resolution expense, legal and professional expenses and a CFPB penalty in 2014, which is included in other noninterest expense. These decreases were partially offset by increases in other noninterest expense, including higher general and administrative costs, an increase in fair value changes related to the DOJ settlement liability and an increase in the outstanding warrant.

The $4 million increase in compensation and benefits expense for the year ended December 31, 2015 , compared to the same period in 2014 , was primarily due to an increase in performance-related compensation, partially offset by lower overall headcount. Our full-time equivalent employees decreased overall by 26 from December 31, 2014 to a total of 2,713 full-time equivalent employees at December 31, 2015 .

Commission expense increased $4 million for the year ended December 31, 2015 , compared to the same period in 2014 , primarily due to an increase in the volume of loan originations. Loan originations increased to $29.9 billion for the year ended December 31, 2015 from $25.1 billion in the year ended December 31, 2014 .

Asset resolution expenses decreased $42 million for the year ended December 31, 2015 , compared to the same period in 2014 , primarily due to fewer repurchases related to servicer errors, lower compensatory fees resulting from our success rate on claim rebuttals and improved realization of claims and lower balances of FHA loans. In addition, there was a favorable variance in the repossessed asset portfolio driven by lower foreclosure expenses and higher gains on the sale of repossessed assets.

Loan processing expense increased $15 million for the year ended December 31, 2015 , compared to the same period in 2014 , primarily due to higher volume of loan closings.

Legal and professional expense decreased $15 million during the year ended December 31, 2015 , compared to the year ended December 31, 2014 , primarily due to a decrease in legal fees resulting from fewer litigation expenses and a reduction in consulting expenses resulting from cost saving initiatives.

Other noninterest expense decreased $21 million for the year ended December 31, 2015 , compared to the same period in 2014 , primarily due to a decrease of $38 million in expenses related to the CFPB settlement and penalties that occurred in 2014, partially offset by an $8 million increase in the value of the warrants as a result of an increase in the Bank's stock price.

Provision (benefit) for Income Taxes

Our provision for income taxes for the year ended December 31, 2016 was $87 million , compared to a provision of $82 million in 2015 and a benefit of $34 million in 2014 .

Our effective tax rate was 33.7 percent for 2016 and 34.2 percent in 2015 . The difference between the effective tax rate and the statutory tax rate of 35 percent is primarily due to the impact of the bank owned life insurance and state taxes in relation to pre-tax income.

Our effective tax rate for 2014 was ( 32.9 percent ). The difference between the effective tax rate and the statutory tax rate of 35 percent is primarily due to the exclusion of the non-deductible penalty paid to the CFPB and the non-taxable impact of changes related to our warrants.

For further information, see Note 19 - Income Taxes.

Fourth Quarter Results

The following table sets forth selected quarterly data:



	Three Months Ended
	December 31, 2016			September 30, 2016			December 31, 2015
	(Unaudited)			(Unaudited)			(Unaudited)
	(Dollars in millions)
Net interest income	$	87		$	80		$	76
Provision (benefit) for loan losses	1			7			(1		)
Net interest income after provision (benefit) for loan losses	86			73			77
Noninterest income	98			156			97
Noninterest expense	142			142			129
Income before income taxes	42			87			45
Provision for income taxes	14			30			12
Net income	$	28		$	57		$	33
Income per share
Basic	$	0.50		$	0.98		$	0.45
Diluted	$	0.49		$	0.96		$	0.44
Efficiency ratio	76.7		%	59.9		%	75.2		%

Fourth Quarter 2016 compared to Third Quarter 2016

Net income for the three months ended December 31, 2016 was $28 million , or $0.49 per diluted share, as compared to $57 million , or $0.96 per diluted share, for the three months ended September 30, 2016 .

Net interest income increased to $87 million for the three months ended December 31, 2016 , as compared to $80 million during the three months ended September 30, 2016 . The increase was primarily due to average earning asset increase of 4 percent , led by growth in investment securities, commercial loans and mortgage loans, and net interest margin expansion of 9 basis points. The increase from the prior quarter was primarily driven by terminating certain fixed rate FHLB advances resulting in a $2 million benefit to interest expense, which accounted for 6 basis points of the increase.

Average LHFI totaled $6.2 billion for the fourth quarter 2016 , increasing $315 million , or 5.4 percent , compared to the third quarter 2016 . The increase was driven by higher CRE loans, consumer loans and C&I loans. Average CRE loans grew $127 million , or 11.7 percent , average consumer loans rose $111 million , or 4.3 percent and average C&I loans rose $88 million , or 13.9 percent .

Average total deposits were $9.2 billion in the fourth quarter 2016 , increasing $107 million , or 1.2 percent , from the prior quarter. The increase was led by higher retail deposits, partially offset by lower government deposits. Average retail deposits increased $132 million , or 2.1 percent , primarily due to an $89 million increase in savings deposits and $28 million rise in demand deposits.

The provision for loan losses totaled $1 million for the fourth quarter 2016 , as compared to $7 million for the third quarter 2016 . The fourth quarter 2016 lower level of provision expense reflects strong asset quality and largely matched net charge-offs. Net charge-offs in the fourth quarter 2016 were $2 million , or 0.13 percent of applicable loans, compared to $7 million , or 0.51 percent of applicable loans in the prior quarter. The fourth quarter 2016 amount included $1 million of net charge-offs associated with loans with government guarantees compared to $5 million in the third quarter of 2016.

Fourth quarter 2016 noninterest income was $98 million , as compared to $156 million for the third quarter 2016 . The decrease was primarily due to a $37 million decrease in net gain on loan sales and a $24 million benefit that was recognized in the third quarter 2016 from the reduction in fair value of the DOJ settlement liability.

Fourth quarter 2016 net gain on loan sales decreased to $57 million , as compared to $94 million for the third quarter 2016 , primarily due to lower fallout-adjusted locks and a decrease in the gain on sale margin. Fallout-adjusted locks were $6.1 billion for the fourth quarter 2016 , as compared to $8.3 billion for the third quarter 2016 . The decrease was primarily due to

seasonality and lower refinance activity from significantly higher interest rates. The net gain on loan sale margin decreased to 0.93 percent for the fourth quarter 2016 , as compared to 1.13 percent for the third quarter 2016 driven by price competition.

Net return on the MSRs increased to a net loss of $5 million for the fourth quarter 2016, as compared to a net loss of $11 million for the third quarter 2016. The increase was primarily due to lower prepayments and a $7 million charge recognized in the third quarter 2016 related to MSR sales that closed in the fourth quarter 2016, partially offset by unfavorable changes in fair value driven by an increase in market implied interest rate volatility experienced in the fourth quarter 2016.

Loan fees and charges decreased to $20 million for the fourth quarter 2016 , as compared to $22 million in the third quarter 2016 . The decrease primarily reflected lower mortgage loan closings.

Noninterest expense was unchanged at $142 million for the fourth quarter 2016, as compared to the third quarter 2016, primarily due to an increase in legal and professional fees, partially offset by a decrease in compensation and benefits.

Fourth Quarter 2016 compared to Fourth Quarter 2015

Our net income from continuing operations for the three months ended December 31, 2016 was $28 million , or $0.49 per diluted share, as compared to income of $33 million , or $0.44 per diluted share, for the three months ended December 31, 2015 . The decrease was primarily driven by higher noninterest expense partially offset by higher net interest income.

Net interest income increased $11 million for the three months ended December 31, 2016 , compared to the same period in 2015 primarily due to growth in interest earning assets.

Net interest margin for the three months ended December 31, 2016 was 2.67 percent , compared to 2.69 percent for the three months ended December 31, 2015. The decrease from fourth quarter 2015 was primarily driven by higher interest rates on fixed rate long-term debt used to match-fund our longer duration asset growth and increased interest expense on senior debt issued in conjunction with the TARP redemption, both of which were mostly offset by higher yield on our commercial loan portfolio.

Average LHFS for the three months ended December 31, 2016 , increased $837 million or 33.7 percent compared to the same period in 2015, primarily due to slower deliveries of saleable mortgage loans to the Agencies. Average LHFI for the three months ended December 31, 2016 , increased $521 million or 9.2 percent , compared to the same period in 2015, due primarily to continued growth in our commercial loan portfolio.

Average total deposits were $9.2 billion in the fourth quarter 2016 , increasing $1.1 billion , or 13.5 percent , compared to the same quarter in 2015. The increase was led by higher retail deposits, partially offset by lower government deposits. Average retail deposits increased $557 million , or 9.7 percent , in the fourth quarter December 31, 2016 compared to the same quarter in 2015, primarily due to an $89 million increase in savings deposits and $28 million rise in demand deposits.

Noninterest income increased $1 million to $98 million for the three months ended December 31, 2016 , compared to $97 million during the same period in 2015 as higher gain on loan sale activity was mostly offset by a decrease in the net return on the MSR. Noninterest expense increased $13 million to $142 million for the three months ended December 31, 2016 , compared to $129 million during the same period in 2015 . The increase was primarily driven by a $15 million increase in compensation related expenses which have supported higher loan production through the year and supported our new strategic initiatives. This increase was partially offset by a $3 million decrease in federal insurance premiums due to an improvement in our risk profile.

Operating Segments

Overview

For detail on each segment's objectives, strategies, and priorities, please read this section in conjunction with Item 1: Business section and Note 23 - Segment Information, and other sections for a full understanding of our consolidated financial performance.

The net income (loss) by operating segment is presented in the following table:



	For the Years Ended December 31,
	2016			2015			2014
	(Dollars in millions)
Community Banking	$	70		$	40		$	(130	)
Mortgage Originations	185			240			115
Mortgage Servicing	(22		)	(54		)	(101		)
Other	(62		)	(68		)	47
Total net income (loss)	$	171		$	158		$	(69	)

Community Banking

2016 compared to 2015

During the year ended December 31, 2016 , the Community Banking segment net income increased $30 million to $70 million , compared to a net income of $40 million for the year ended December 31, 2015 . The increase was primarily due to a $35 million increase in net interest income resulting from growth in our warehouse, commercial, and home builder finance loan balances along with a net gain on loan sales of $21 million primarily driven by the sale of performing residential first mortgage loans out of the HFI portfolio during the year ended December 31, 2016. These increases were partially offset by a $20 million increase in noninterest expense driven by personnel related expenses and higher advertising expenses which have supported our strategic growth initiatives.

2015 compared to 2014

During the year ended December 31, 2015 , the Community Banking segment had net income of $40 million , compared to a net loss of $130 million for the year ended December 31, 2014 , primarily due to a decrease in provision for loan losses. In 2014, we recorded a $132 million provision that was primarily driven by two changes in estimates that occurred in the first quarter: the evaluation of current data related to the loss emergence period on our residential mortgage loan portfolio and the evaluation of the enhanced risk associated with payment resets relating to interest-only loans. In 2015, we sold 90 percent of our interest-only loans at prices that were favorable as compared to the continuing reset risk associated with us continuing to hold these loans which was recorded consistent with the incurred loss methodology. This action along with the sale of $444 million nonperforming loans resulted in a $69 million reduction to the ALLL which along with an overall improvement in portfolio quality was the primary driver of the $19 million net benefit reported in 2015. This was partially offset by a $1.9 billion increase in volume of average LHFI due to the origination of residential first mortgages and increased commercial lending. Net interest income increased during the year ended December 31, 2015 , compared to the year ended December 31, 2014 , primarily due to growth in the LHFI loan portfolios; including HELOC, residential first mortgage and total commercial loans.

Mortgage Originations

2016 compared to 2015

The Mortgage Originations segment net income decreased $55 million during the year ended December 31, 2016 , compared to the same period in 2015 , primarily due to $54 million lower net return on MSRs resulting from higher prepayments and an increased probability of prepayment assumption driven by the low interest rate environment experienced throughout the year. A $15 million increase in commissions, related primarily to higher mortgage originations, was mostly offset by an increase in net interest income resulting from higher average HFS loan balances in 2016.

2015 compared to 2014

The Mortgage Originations segment net income increased $125 million during the year ended December 31, 2015 , compared to the same period in 2014 , primarily due to an increase in net gain on loan sales, partially offset by increases in commissions and loan processing expense. The increase in net gain on loan sales during the year ended December 31, 2015 , as compared to the year ended December 31, 2014 was primarily driven by increased margin and higher fallout adjusted rate locks. During the year ended December 31, 2015 , total noninterest expense increased as compared to the year ended December 31, 2014 , primarily due to higher mortgage origination volume.

Mortgage Servicing

2016 compared to 2015

The Mortgage Servicing segment reported a net loss of $22 million for the year ended December 31, 2016 , compared to a net loss of $54 million for the year ended December 31, 2015 . The $32 million improvement is primarily due to a $20 million increase in net interest income resulting from higher funds transfer pricing earned on company controlled deposits and higher interest recoveries on modified loans with government guarantees. A decline in asset resolution expenses and loan processing expenses about equally drove the remaining improvement in results primarily due to a lower overall volume of performing and default loans serviced.

2015 compared to 2014

The Mortgage Servicing segment reported a net loss of $54 million for the year ended December 31, 2015 , compared to a net loss of $101 million for the year ended December 31, 2014 , primarily due to decreases in asset resolution expense, representation and warranty provision and the 2014 CFPB settlement, partially offset by an increase in loan processing expense and a decrease in net interest income due to lower average balances of loans with government guarantees. Total noninterest income decreased during the year ended December 31, 2015 , as compared to the year ended December 31, 2014 , which was primarily due to a benefit from a contract renegotiation achieved in 2014. Noninterest expense decreased for the year ended December 31, 2015 , as compared to the year ended December 31, 2014 , primarily due to the 2014 CFPB settlement and the benefit relating to the DOJ liability estimate that was recorded in 2014.

Other

2016 compared to 2015

For the year ended December 31, 2016 , the Other segment reported a net loss of $62 million for the year ended December 31, 2016 , compared to a net loss of $68 million for the year ended December 31, 2015 . The improvement was primarily due to an increase in noninterest income due to a $24 million decrease in the fair value of the DOJ settlement liability, and an increase from the improved cash surrender value of bank owned life insurance. These increases were primarily offset by an increase in interest expense due to higher average outstanding FHLB advances and senior debt issued for TARP redemption.

2015 compared to 2014

For the year ended December 31, 2015 , the Other segment net loss increased by $115 million , as compared to the year ended December 31, 2014 . The increase was primarily due to an increase in provision for income taxes due to higher pre-tax book income. Net interest income increased due to higher average balances of investment securities, partially offset by higher FHLB advances to match-fund our long-duration asset growth. Other noninterest income decreased for the year ended December 31, 2015 , as compared to the year ended December 31, 2014 , primarily due to an adjustment in HELOC valuation and FHLB dividend due to stock redemptions, partially offset by an increase in the return on MSRs resulting from higher service fee income driven by an increase in assets and a gain from the early settlement of FHLB debt.

RISK MANAGEMENT

Like all financial services companies, we engage in business activities and assume the related risks. The risks we are subject to in the normal course of business, include, but are not limited to, credit, regulatory compliance, legal, reputation, liquidity, market, operational, and strategic. We have made significant investments in our risk management activities which are focused on ensuring we properly identify, measure and manage such risks across the entire enterprise to maintain safety and soundness and maximize profitability. We hold capital to protect from the risk of unexpected loss.

A comprehensive discussion of risks affecting us can be found in the Risk Factors section included in Item 1A of this Form 10-K. Some of the more significant processes used to manage and control credit, liquidity, market, and operational risks are described in the following paragraphs.

Credit Risk

Credit risk is the risk of loss to us arising from an obligor’s inability or failure to meet contractual payment or performance terms. Like other financial services institutions, we make loans, extend credit, purchase securities, and enter into financial derivative contracts, all of which have related credit risk. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending.

Loans held-for-investment

Loans held-for-investment decreased $287 million at December 31, 2016 , from December 31, 2015 . The decrease was primarily due to a decrease in performing residential first mortgage loans from loan sales in the first half of 2016 of $1.2 billion unpaid principal balance, partially offset by growth in our higher spread, relationship-based commercial loan portfolio.

For further information relating to the LHFI, see Note 4 - Loans Held-for-Investment.

The following table sets forth a breakdown of our LHFI portfolio (unpaid principal balance) at December 31, 2016 :

LOANS HELD-FOR-INVESTMENT, BY RATE TYPE



	Fixed Rate		Adjustable Rate		Total
	(Dollars in millions)
Consumer loans
Residential first mortgage	$	253	$	2,060	$	2,313
Second mortgage	137		—		137
HELOC	—		317		317
Other	28		—		28
Total consumer loans	418		2,377		2,795
Commercial loans
Commercial real estate	54		1,212		1,266
Commercial and industrial	142		633		775
Warehouse lending	—		1,267		1,267
Total commercial loans	196		3,112		3,308
Total consumer and commercial loans held-for-investment (1)	$	614	$	5,489	$	6,103


(1)	Unpaid principal balance, net of write downs, does not include premiums or discounts.

The following two tables below provide a comparison of the breakdown of LHFI and the detail for the activity in our LHFI portfolio for each of the past five years:

LOANS HELD-FOR-INVESTMENT



	At December 31,
	2016			2015			2014			2013			2012
	(Dollars in millions)
Consumer loans
Residential first mortgage	$	2,327		$	3,100		$	2,193		$	2,509		$	3,009
Second mortgage	126			135			149			170			115
HELOC	317			384			257			290			179
Other	28			31			31			37			50
Total consumer loans	2,798			3,650			2,630			3,006			3,353
Commercial loans
Commercial real estate	1,261			814			620			409			640
Commercial and industrial	769			552			429			217			97
Warehouse lending	1,237			1,336			769			424			1,348
Total commercial loans	3,267			2,702			1,818			1,050			2,085
Total consumer and commercial loans held-for-investment	6,065			6,352			4,448			4,056			5,438
Allowance for loan losses	(142		)	(187		)	(297		)	(207		)	(305		)
Total loans held-for-investment, net	$	5,923		$	6,165		$	4,151		$	3,849		$	5,133

LOANS HELD-FOR-INVESTMENT PORTFOLIO ACTIVITY SCHEDULE



	For the Years Ended December 31,
	2016			2015			2014			2013			2012
	(Dollars in millions)
Balance, beginning of year	$	6,352		$	4,447		$	4,056		$	5,438		$	7,039
Loans originated and purchased (1)	1,771			2,975			894			868			901
Change in lines of credit (2)	957			678			424			380			139
Loans transferred from loans held-for-sale	2			32			56			64			62
Loans transferred to loans held-for-sale	(1,309		)	(1,198		)	(509		)	(832		)	(1,221		)
Loan amortization / prepayments	(1,700		)	(569		)	(451		)	(1,687		)	(1,113		)
Loans transferred to repossessed assets	(8		)	(13		)	(23		)	(175		)	(369		)
Balance, end of year	$	6,065		$	6,352		$	4,447		$	4,056		$	5,438


(1)	During the year ended December 31, 2013, there were $171 million of HELOC loans and $73 million of second mortgage loans that were reconsolidated at fair value as a result of the settlement agreements with Assured and MBIA.


(2)	A reclassification of warehouse loans is included in the schedule in 2014.

Residential first mortgage loans. We originate or purchase various types of conforming and non-conforming fixed and adjustable rate loans underwritten using Fannie Mae and Freddie Mac guidelines for the purpose of purchasing or refinancing owner occupied and second home properties. The debt-to-income ratio guidelines and documentation typically followed the automated underwriting system guidelines. The LTV requirements vary depending on occupancy, property type, loan amount, and FICO. Loans with LTVs exceeding 80 percent are required to obtain mortgage insurance. As of December 31, 2016 , the amounts of the ARM loans in our HFI loan portfolio with interest rate reset dates totaled $2 billion. These loans may reset more than once over a three-year period and nonperforming loans do not reset while in the nonperforming status. At December 31, 2016 , the amount of ARM loans in our HFI loan portfolio with interest rate reset dates average approximately $100 million per quarter over the next three-year period.

At December 31, 2016 , the largest geographic concentrations of our residential first mortgage loans in our held-for investment portfolio were in California, Michigan, and Florida, which together represented 55.4 percent of such loans outstanding.

The following table details the geographic distribution of properties collateralizing residential first mortgage LHFI throughout the United States (measured by unpaid principal balance and expressed as a percent of the total):



	December 31,
State	2016		2015
California	36.8	%	35.9	%
Michigan	10.3	%	9.0	%
Florida	8.3	%	7.9	%
Texas	5.9	%	6.2	%
Washington	5.8	%	5.4	%
Illinois	3.6	%	3.7	%
New York	3.0	%	2.1	%
All other states (1)	26.3	%	29.8	%
Total	100.0	%	100.0	%


(1)	No other state contains more than 3.0 percent of the total.

The following table identifies our residential first HFI mortgages by major category, at December 31, 2016 and December 31, 2015 :



	Unpaid Principal Balance (1)		Average Note Rate		Average Original FICO Score	Average Current FICO Score (2)	Weighted Average Maturity in Months (3)	Average Original LTV Ratio		Housing Price Index LTV, as recalculated (4)
December 31, 2016	(Dollars in millions)
Residential first mortgage loans
Amortizing (5)	$	2,244	3.45	%	756	757	321	65.5	%	56.1	%
Interest only (5)(6)	69		3.65	%	762	761	326	58.6	%	47.5	%
Total residential first mortgage loans	$	2,313	3.45	%	756	757	321	65.3	%	55.8	%

December 31, 2015
Residential first mortgage loans
Amortizing (5)	3,012		3.52	%	752	752	304	68.3	%	62.5	%
Interest only (5)(6)	64		3.48	%	753	755	320	62.0	%	55.1	%
Total residential first mortgage loans	$	3,076	3.52	%	752	752	304	68.2	%	62.4	%


(1)	Unpaid principal balance, net of write downs, does not include premiums or discounts.


(2)	Current FICO scores obtained at various times during the year ended December 31, 2016 .


(3)	In months, measured at origination.


(4)	The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2016 .


(5)	Includes 3,5, and 7 year adjustable rate mortgages along with fixed rate mortgages.


(6)	Includes only those loans that are currently in the interest-only phase of repayment. Loans originated as interest-only that are now amortizing are included in amortizing loans.

Second mortgage loans. The majority of second mortgages we currently originate are closed in conjunction with the closing of the residential first mortgages originated by us. We generally require the same levels of documentation and ratios as with our residential first mortgages. Our current allowable debt-to-income ratio for approval of second mortgages is capped at 43 percent. We generally limit the maximum CLTV to 80 percent and FICO scores to a minimum of 680. Current fixed rate loans are available with terms up to 15 years. The second mortgage loans require full documentation and are underwritten and priced to ensure high credit quality and loan profitability.

Home Equity Line of Credit loans. Underwriting guidelines for our HELOC originations have been established to attract higher credit quality loans with long-term profitability. HELOCs are adjustable-rate loans that generally contain a 10-

year interest-only draw period followed by a 20-year amortizing period. We also offer HELOC loans for a term period of 5 to 15 years to repay. Generally, the minimum FICO is 680, maximum CLTV up to 89 percent, and the maximum debt-to-income ratio is 43 percent. Included in HELOC loans are interest-only loans. At December 31, 2016, the unpaid principal balance of our interest-only mortgage loans was $69 million.

Commercial loans held-for-investment. During the year ended December 31, 2016 , we have continued to grow our commercial loan portfolio. Our Business Banking and Commercial Banking group includes relationships with relationship managers throughout Michigan's major markets. Our commercial LHFI totaled $3.3 billion at December 31, 2016 and $2.7 billion at December 31, 2015 . The portfolio consists of three loan types: commercial and industrial (includes direct finance leases), CRE, and warehouse, each of which is discussed in more detail below.

Commercial and industrial loans. Commercial and industrial HFI loan facilities typically include lines of credit and term loans to middle market businesses for use in normal business operations to finance working capital, equipment and capital purchases, acquisition and expansion projects. We lend to customers with a history of profitability and a long-term business model. Generally, the maximum leverage is 3 times and the minimum debt service coverage is 1.20. Most of our C&I loans earn interest at a variable rate and we offer our customers the ability to enter into interest rate swaps.

Commercial real estate loans . Our commercial real estate HFI loan portfolio is comprised of loans that are collateralized by diversified real estate properties intended to be income-producing in the normal course of business. Our commercial real estate lending relationships are primarily based in the Midwest. Generally, the maximum LTV is 80 percent, or 85 percent for owner-occupied real estate and debt service coverage of 1.20 to 1.35 percent. During the year ended December 31, 2016 , our commercial real estate HFI loan portfolio grew $447 million to a balance of $1.3 billion . This portfolio also includes owner occupied real estate loans, in addition to secured home builder loans. In 2016, we launched a national home builder finance program to grow our balance sheet, increase commercial deposits and develop incremental revenue through our retail purchase mortgage channel. We had $181 million of outstanding home builder loans at December 31, 2016 .

The following table presents our total unpaid principal balance (net of write downs) of CRE HFI loans by borrower geographic concentration and collateral type at December 31, 2016 :



	State
Collateral Type	Michigan			Florida			California			Other			Total (1)
	(Dollars in millions)
Retail	$	141		$	35		$	9		$	28		$	213
Office	187			—			7			—			194
Apartments	128			1			—			38			167
Industrial	122			—			25			5			152
Single family residence, which includes land	42			27			—			81			150
Hotel/motel	69			—			—			30			99
Parking garage/Lot	58			—			—			—			58
Senior living facility	49			—			—			—			49
Shopping center	36			—			—			5			41
Non profit	31			—			—			—			31
Marina	24			—			—			—			24
Land - residential development	12			8			—			1			21
Special Purpose and all other (2)	32			1			13			21			67
Total	$	931		$	72		$	54		$	209		$	1,266
Percent	73.5		%	5.7		%	4.3		%	16.5		%	100.0		%


(1)	Unpaid principal balance, net of write downs, does not include premiums or discounts. Includes $245 million of commercial owner occupied real estate loans at December 31, 2016.


(2)	Special purpose and other includes: condominium, land, nursing home, and movie theater.

Warehouse lending. We also offer warehouse lines of credit to other mortgage lenders. These allow the lender to fund the closing of residential first mortgage loans. Each extension or draw-down on the line is collateralized by mortgage loans being funded and is paid off once the loan is sold to an outside investor or retained within the Bank. Underlying mortgage loans are predominately originated using the agencies' underwriting standards. The guideline for debt to tangible net worth does not

exceed 15 to 1. We believe we are increasing market share in the warehouse lending market through our strategic initiative to increase lending to customers who originate loans they then sell to outside third party investors. We have a national platform with relationship managers covering both coasts and a large Michigan based sales team. The aggregate committed amount of adjustable-rate warehouse lines of credit granted to other mortgage lenders at December 31, 2016 was $2.9 billion, of which $1.2 billion was outstanding, compared to $2.2 billion committed at December 31, 2015 , of which $1.3 billion was outstanding.

Loan Principal Payments

The following tables set forth the expected repayment of our LHFI, both as fixed rate and adjustable-rate loans at December 31, 2016 :

LOAN PRINCIPAL REPAYMENT SCHEDULE

FIXED RATE LOANS



	December 31, 2016
	Within 1 Year		1 Year to 2 Years		2 Years to 3 Years		3 Years to 5 Years		5 Years to 10 Years		10 Years to 15 Years		Over 15 Years		Totals (1)
	(Dollars in millions)
Residential first mortgage	$	7	$	8	$	8	$	18	$	52	$	66	$	94	$	253
Second mortgage	10		11		12		25		79		—		—		137
Other consumer	6		5		5		5		7		—		—		28
Commercial real estate	20		21		13		—		—		—		—		54
Commercial and industrial	15		16		16		34		61		—		—		142
Total loans	$	58	$	61	$	54	$	82	$	199	$	66	$	94	$	614


(1)	Unpaid principal balance, net of write downs, does not include premiums or discounts.

LOAN PRINCIPAL REPAYMENT SCHEDULE

ADJUSTABLE RATE LOANS



	December 31, 2016
	Within 1 Year		1 Year to 2 Years		2 Years to 3 Years		3 Years to 5 Years		5 Years to 10 Years		10 Years to 15 Years		Over 15 Years		Totals (1)
	(Dollars in millions)
Residential first mortgage	$	48	$	49	$	51	$	107	$	300	$	354	$	1,151	$	2,060
HELOC	8		8		9		19		56		71		146		317
Commercial real estate	347		359		371		135		—		—		—		1,212
Commercial and industrial	203		211		218		1		—		—		—		633
Warehouse lending	1,267		—		—		—		—		—		—		1,267
Total loans	$	1,873	$	627	$	649	$	262	$	356	$	425	$	1,297	$	5,489


(1)	Unpaid principal balance, net of write downs, does not include premiums or discounts.

Credit Quality

Management considers a number of qualitative and quantitative factors in assessing the level of its ALLL. For further information see MD&A - Allowance for Loan Losses. As illustrated in the following tables, trends in certain credit quality characteristics such as nonperforming loans and past due statistics remain very strong and continue to show improvement. This is predominantly a result of the nonperforming and TDR loan sales, as well as run off of the legacy portfolios and the addition of new loans with strong credit characteristics to the HFI portfolio.

The following table sets forth certain information about our nonperforming assets as of the end of each of the last five years:

NONPERFORMING LOANS AND ASSETS



	At December 31,
	2016			2015			2014			2013			2012
Loans Held-for-Investment	(Dollars in millions)
Nonperforming loans	$	22		$	31		$	74		$	99		$	254
Nonperforming TDRs	8			7			29			26			61
Nonperforming TDRs at inception but performing for less than six months	10			28			17			21			85
Total nonperforming loans held-for investment (1)	40			66			120			146			400
Real estate and other nonperforming assets, net	14			17			19			36			121
Nonperforming assets held-for-investment, net	$	54		$	83		$	139		$	182		$	521
Ratio of nonperforming assets to total assets	0.39		%	0.61		%	1.41		%	1.94		%	3.70		%
Ratio of nonperforming LHFI to LHFI	0.67		%	1.05		%	2.71		%	3.59		%	7.35		%
Ratio of ALLL to LHFI (2)	2.37		%	3.00		%	7.01		%	5.42		%	5.61		%
Ratio of ALLL to LHFI and loans with government guarantees (2)	2.23		%	2.78		%	5.54		%	4.07		%	4.20		%
Ratio of net charge-offs to average LHFI (annualized) (2)	0.52		%	1.85		%	1.07		%	4.00		%	4.43		%
Ratio of nonperforming assets to LHFI and repossessed assets	0.90		%	1.32		%	3.12		%	4.46		%	9.36		%
Ratio of nonperforming assets to Tier 1 capital (to adjusted total assets) + ALLL (3)	3.93		%	5.12		%	9.50		%	12.45		%	32.52		%


(1)	Does not include nonperforming LHFS of $6 million , $12 million , $15 million , $1 million and $2 million at December 31, 2016 , 2015 , 2014 , 2013 , and 2012 , respectively.


(2)	Excludes loans carried under the fair value option.


(3)	Refer to MD&A - Use of Non-GAAP Financial Measures for calculation of ratio.

Past due loans held-for-investment

For all portfolios within the consumer and commercial loan portfolio, loans are placed on nonaccrual status when any portion of principal or interest is 90 days past due (nonperforming), or earlier when we become aware of information indicating that collection of principal and interest is in doubt. While it is the goal of management to collect on loans, we attempt to work out a satisfactory repayment schedule or modification with past due borrowers and will undertake foreclosure proceedings if the delinquency is not satisfactorily resolved. Our practices regarding past due loans are designed to both assist borrowers in meeting their contractual obligations and minimize losses incurred by the bank. When a loan is placed on nonaccrual status, the accrued interest income is reversed. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible. At December 31, 2016 , we had $50 million of past due (payment of principal or interest is 30 days past the scheduled payment date) LHFI. Of those past due loans, $40 million loans were nonperforming. At December 31, 2015 , we had $80 million of past due LHFI. Of those past due loans, $66 million loans were nonperforming. The decrease from December 31, 2016 as compared to December 31, 2015 was primarily due to improved asset quality and the sale of nonperforming residential first mortgage loans.

Consumer loans. As of December 31, 2016 , nonperforming consumer loans totaled $40 million , a decrease from $64 million at December 31, 2015 , primarily due to the sale of nonperforming residential first mortgage loans and improvement in our overall credit quality. Net charge-offs in consumer loans totaled $31 million for the year ended December 31, 2016 , compared to $90 million for the year ended December 31, 2015 , primarily due to charge-offs related to the sale of nonperforming residential first mortgage loans.

Commercial loans. As of December 31, 2016 , there were no nonperforming commercial loans. There were $2 million nonperforming commercial loans as of December 31, 2015. Net charge-offs in commercial loans totaled zero for the year ended December 31, 2016 , which was a decrease from net charge-offs of $1 million for the year ended December 31, 2015 , primarily due to nonperforming commercial loans and recoveries during the year ended December 31, 2016 .

The following table sets forth information regarding past due loans at the dates listed:

PAST DUE LOANS HELD-FOR-INVESTMENT



	December 31,
Days Past Due	2016		2015		2014		2013		2012
	(Dollars in millions)
30 – 59 days
Consumer loans
Residential first mortgage	$	6	$	7	$	29	$	37	$	63
Second mortgage	—		—		1		2		1
HELOC	1		2		4		2		2
Other	1		1		—		—		1
Commercial loans
Commercial real estate	—		—		—		—		7
Total 30 – 59 days past due	8		10		34		41		74
60 – 89 days
Consumer loans
Residential first mortgage	—		3		8		19		17
Second mortgage	1		—		1		—		1
HELOC	1		1		1		1		1
Commercial loans
Commercial real estate	—		—		—		—		7
Total 60 – 89 days past due	2		4		10		20		26
90 days or greater
Consumer loans
Residential first mortgage	29		53		115		134		306
Second mortgage	4		2		2		3		4
HELOC	7		9		3		7		3
Commercial loans
Commercial real estate	—		—		—		2		86
Commercial and industrial	—		2		—		—		—
Total 90 days or greater past due (1)	40		66		120		146		399
Total past due loans	$	50	$	80	$	164	$	207	$	499


(1)	Includes performing nonaccrual loans that are less than 90 days delinquent for which interest cannot be accrued.

The $30 million decrease in total past due loans at December 31, 2016 , compared to December 31, 2015 was primarily driven by improved asset quality coupled with the sale of $20 million of nonperforming residential first mortgage loans during the year ended December 31, 2016 . The 30 to 59 days past due loans decreased to $8 million at December 31, 2016 , compared to $10 million at December 31, 2015 , primarily driven by improved asset quality growth.

Troubled debt restructurings (held-for-investment)

Troubled debt restructurings ("TDRs") are modified loans in which a borrower demonstrates financial difficulties and for which a concession has been granted. The decrease of $51 million in our total TDR loans at December 31, 2016 , compared to December 31, 2015 was primarily due to the sale of $30 million UPB of TDR loans during the year ended December 31, 2016 . Nonperforming TDRs were 44.2 percent and 53.4 percent of total nonperforming loans at December 31, 2016 and December 31, 2015 , respectively.

Consumer loan modifications. For consumer loan programs (e.g., residential first mortgages, second mortgages, HELOC, and other consumer), we enter into a modification when the borrower has indicated a hardship, including illness or death in the family or a loss of employment. Other modifications occur when it is confirmed that the borrower does not possess the financial resources necessary to continue making loan payments at the current amount, but our expectation is that payments at lower amounts can be made. The primary concession given to consumer loan borrowers includes a reduced interest rate and/or an extension of the amortization period or maturity date.

Commercial loan modifications. Modifications of terms for commercial loans are based on individual facts and circumstances. Commercial loan modifications may involve a reduction of the interest rate and/or an extension of the term of the loan. We also engage in other loss mitigation activities with troubled borrowers, which include repayment plans, forbearance arrangements, and the capitalization of past due amounts.

Nonperforming TDRs are included in nonaccrual loans. TDRs remain in nonperforming status until a borrower has made at least six consecutive months of payments under the modified terms. Performing TDRs are excluded from nonaccrual loans because it is reasonably assured that all contractual principal and interest due under the restructured terms will be collected. Within consumer nonperforming loans, residential first mortgage TDRs were 37.4 percent of residential first mortgage nonperforming loans at December 31, 2016 , compared to 50.5 percent at December 31, 2015 .

The following table sets forth a summary of TDRs by performing status and activity during each of the years presented with respect to performing:



	TDRs
	For the Years Ended December 31,
	2016			2015			2014
Performing	(Dollars in millions)
Beginning balance	$	101		$	362		$	383
Additions	8			75			44
Transfer to nonperforming TDR	(9		)	(16		)	(34		)
Transfer from nonperforming TDR	11			5			7
Principal repayments	(4		)	(3		)	(7		)
Reductions (1)	(40		)	(322		)	(31		)
Ending balance (2)(3)	$	67		$	101		$	362
Nonperforming
Beginning balance	$	35		$	46		$	47
Additions	7			23			14
Transfer to nonperforming TDR	9			16			34
Transfer from nonperforming TDR	(11		)	(5		)	(7		)
Principal repayments	(1		)	—			(1		)
Reductions (1)	(21		)	(45		)	(41		)
Ending balance (2)	$	18		$	35		$	46


(1)	Includes loans paid in full or otherwise settled, sold or charged off.


(2)	Consumer loans include: residential first mortgage, second mortgage, HELOC and other consumer loans. The ALLL on consumer TDR loans totaled $9 million and $15 million at December 31, 2016 and 2015 , respectively.


(3)	There were no commercial TDRs at December 31, 2016 and 2015 . At December 31, 2014, there was $1 million in performing TDR loans. Commercial loans include: commercial real estate, commercial and industrial, and warehouse loans.

Allowance for Loan Losses

The allowance for loan losses represents management's estimate of probable losses that are inherent in our loans held-for-investment portfolio but which have not yet been realized. The consumer loan portfolio includes residential first mortgages, second mortgages, HELOC, and other consumer loans. The commercial loan portfolio includes CRE, C&I and warehouse lending. For further information, see Note 4 - Loans Held-for-Investment.

The ALLL was $142 million and $187 million at December 31, 2016 and 2015 , respectively. The decrease from December 31, 2015 was primarily driven by sales of residential first mortgage loans, nonperforming, TDR, and non-agency loans, in addition to a change in mix from consumer to commercial loans and a sustained period of strong credit quality during which we have experienced low net charge-offs. These factors reducing the reserve were partially offset by an increase in the volume of HFI loans.

The ALLL as a percentage of LHFI decreased to 2.4 percent as of December 31, 2016 from 3.0 percent as of December 31, 2015 . At December 31, 2016 , we had a 3.3 percent allowance coverage of our consumer loan portfolio, consistent with the continued low levels of consumer past due loans as well as sale of lower quality assets. The commercial

loan ALLL coverage ratio was 1.6 percent at December 31, 2016 , reflecting the strong credit quality of this portfolio and growth in CRE and C&I loans during the year ended December 31, 2016 .

For further information, see Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting Standards and Note 4 - Loans Held-for-Investment.

The following table set forth certain information regarding the allocation of our ALLL to each loan category:

ALLOWANCE FOR LOAN LOSSES



	December 31, 2016
	Investment Loan Portfolio		Percent of Portfolio		Allowance Amount		Allowance as a Percentage of Loan Portfolio
	(Dollars in millions)
Consumer loans
Residential first mortgage	$	2,320	38.7	%	$	65	2.8	%
Second mortgage	85		1.4	%	8		9.4	%
HELOC	293		4.9	%	16		5.5	%
Other	28		0.5	%	1		3.6	%
Total consumer loans	2,726		45.5	%	90		3.3	%
Commercial loans
Commercial real estate	1,261		21.0	%	28		2.2	%
Commercial and industrial	769		12.8	%	17		2.2	%
Warehouse lending	1,237		20.6	%	7		0.6	%
Total commercial loans	3,267		54.5	%	52		1.6	%
Total consumer and commercial loans (1)	$	5,993	100.0	%	$	142	2.4	%


(1)	Excludes loans carried under the fair value option.

The following tables set forth certain information regarding our ALLL and the allocation of the ALLL over the past five years:

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES



	At December 31,
	2016				2015				2014				2013				2012
	Allowance Amount		Allowance to Total Loans		Allowance Amount		Allowance to Total Loans		Allowance Amount		Allowance to Total Loans		Allowance Amount		Allowance to Total Loans		Allowance Amount		Allowance to Total Loans
	(Dollars in millions)
Consumer loans
Residential first mortgage	$	65	1.1	%	$	116	1.9	%	$	234	5.6	%	$	162	4.2	%	$	220	4.0	%
Second mortgage	8		0.1	%	11		0.2	%	12		0.3	%	12		0.3	%	20		0.4	%
HELOC	16		0.3	%	21		0.3	%	19		0.4	%	8		0.2	%	18		0.3	%
Other	1		—	%	2		—	%	1		—	%	2		0.1	%	2		0.1	%
Total consumer loans	90		1.5	%	150		2.4	%	266		6.3	%	184		4.8	%	260		4.8	%
Commercial loans
Commercial real estate	28		0.5	%	18		0.3	%	17		0.4	%	19		0.5	%	41		0.7	%
Commercial and industrial	17		0.3	%	13		0.2	%	11		0.2	%	3		0.1	%	3		0.1	%
Warehouse lending	7		0.1	%	6		0.1	%	3		0.1	%	1		—	%	1		—	%
Total commercial loans	52		0.9	%	37		0.6	%	31		0.7	%	23		0.6	%	45		0.8	%
Total consumer and commercial loans (1)	$	142	2.4	%	$	187	3.0	%	$	297	7.0	%	$	207	5.4	%	$	305	5.6	%


(1)	Excludes loans carried under the fair value option.

ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES



	For the Years Ended December 31,
	2016			2015			2014			2013			2012
	(Dollars in millions)
Beginning balance	$	187		$	297		$	207		$	305		$	318
Provision (benefit) for loan losses (1)	(15		)	(19		)	132			70			276
Charge-offs
Consumer loans
Residential first mortgage	(29		)	(87		)	(38		)	(133		)	(176		)
Second mortgage	(2		)	(4		)	(3		)	(6		)	(19		)
HELOC	(2		)	(3		)	(6		)	(5		)	(17		)
Other consumer	(3		)	(4		)	(2		)	(4		)	(4		)
Total consumer loans	(36		)	(98		)	(49		)	(148		)	(216		)
Commercial loans
Commercial real estate	—			—			(3		)	(47		)	(105		)
Commercial and industrial	—			(3		)	—			(2		)	(6		)
Total commercial loans	—			(3		)	(3		)	(49		)	(111		)
Total charge offs	(36		)	(101		)	(52		)	(197		)	(327		)
Recoveries
Consumer loans
Residential first mortgage	2			3			3			15			19
Second mortgage	—			2			1			1			2
HELOC	—			—			—			1			—
Other consumer	3			3			3			2			2
Total consumer loans	5			8			7			19			23
Commercial loans
Commercial real estate	1			2			3			10			15
Total commercial loans	1			2			3			10			15
Total recoveries	6			10			10			29			38
Charge-offs, net of recoveries	(30		)	(91		)	(42		)	(168		)	(289		)
Ending balance	$	142		$	187		$	297		$	207		$	305
Net charge-off ratio to LHFI (2)	0.52		%	1.85		%	1.07		%	4.00		%	4.43		%
Net charge-off ratio, adjusted (2) (3)	0.15		%	0.40		%	0.69		%	2.36		%	4.43		%

(1)

Does not include $7 million provision expense recorded in the Consolidated Statements of Operations to reserve for repossessed loans with government guarantees at December 31, 2016 . There was no provision for loan losses for repossessed loans with government guarantees recorded during the years ended December 31, 2015 , December 31, 2014 , December 31, 2013 , and December 31, 2012 , respectively.


(2)	Excludes loans carried under the fair value option.

(3)

Excludes charge-offs of $8 million , $69 million , $15 million , $69 million , and zero related to the transfer and subsequent sale of loans at December 31, 2016 , 2015 , 2014 , 2013 , and 2012 , respectively. Also excludes charge-offs related to loans with government guarantees of $14 million and $3 million , during the years ended December 31, 2016 and 2015 , respectively. There were no charge-offs relating to loans with government guarantees during the years ended December 31, 2014 , December 31, 2013 , and December 31, 2012 , respectively.

Market Risk

Market risk is the risk of reduced earnings and or declines in the net market value of the balance sheet primarily due to changes in interest rates, currency exchange rates, or equity prices. We do not have any material foreign currency exchange risk or equity price risk. The primary market risk is interest rate risk and results from timing differences in the repricing of our assets and liabilities, changes in the relationships between rate indices, and the potential exercise of explicit or embedded options.

Interest rate risk is monitored by the ALCO, which is composed of our executive officers and other members of management, in accordance with policies approved by our board of directors. In determining the appropriate level of interest

rate risk, the ALCO considers the impact projected interest rate scenarios have on earnings and capital, liquidity, business strategies, and other factors. The ALCO meets monthly or as deemed necessary to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and fair values of assets and liabilities, unrealized gains and losses, purchase and sale activity, LHFS and commitments to originate loans, and the maturities of investments, borrowings and time deposits.

Financial instruments used to manage interest rate risk include derivative financial instruments such as interest rate swaps and forward sales commitments. For further information, see Note 11 - Derivative Financial Instruments and Note 22 - Fair Value Measurements. All of our derivatives are accounted for at fair market value. All mortgage loan production originated for sale is accounted for on a fair value basis.

To effectively measure and manage interest rate risk, sensitivity analysis is used to determine the impact on earnings and the net market value of the balance sheet across various interest rate scenarios, balance sheet trends, and strategies. From these simulations, interest rate risk is quantified and appropriate strategies are developed and implemented. Additionally, duration and net interest income sensitivity measures are utilized when they provide added value to the overall interest rate risk management process. The overall interest rate risk position and strategies are reviewed by executive management and the board of directors on an ongoing basis. However, management has the latitude to increase interest rate sensitivity within certain limits if, in management's judgment, the increase will enhance profitability.

Net interest income simulation analysis provides estimated net interest income of the current balance sheet across alternative interest rate scenarios. The net interest income analysis measures the sensitivity of interest sensitive earnings over a 12 month time horizon. The analysis holds the current balance sheet values constant and does not take into account management intervention. The net interest income simulation demonstrates the level of interest rate risk inherent in the existing balance sheet.

The following table is a summary of the changes in our net interest income that are projected to result from hypothetical changes in market interest rates. The interest rate scenarios presented in the table include interest rates as of December 31, 2016 and December 31, 2015 and rates in those periods adjusted by instantaneous parallel rate changes plus or minus 200 basis points. The minus 200 basis point shock scenario is a flattener scenario as rates are floored at zero given the current interest rate levels.



December 31, 2016
Scenario	Net interest Income		$ Change			% Change
(Dollars in millions)
200	$	321	$	19		6.3	%
Constant	301		—			—	%
(200)	245		(57		)	(18.9	)%



December 31, 2015
Scenario	Net interest Income		$ Change			% Change
(Dollars in millions)
200	$	312	$	6		2.0	%
Constant	306		—			—	%
(200)	258		(48		)	(16.0	)%

At December 31, 2016 , the $5 million decline in the net interest margin in the constant scenario as compared to December 31, 2015 , was primarily driven by a decreased yield on other investments and consumer loans.

We have also projected the potential impact to net interest income in a hypothetical interest rate scenario as of December 31, 2016 . When increasing short-term interest rates instantaneously by 100 basis points and holding the longer term interest rates unchanged, the decrease to net interest income over a 12-month and 24-month period based on our forecasted balance sheet is a loss of $25 million and $32 million, respectively.

In the net interest income simulation, our balance sheet exhibits slight asset sensitivity. When interest rates rise our interest income increases. Conversely when interest rates fall our interest income decreases. The net interest income simulation measures the interest rate risk of the balance sheet over a short period of time, typically 12 months. An additional analysis is completed that measures the interest rate risk over an extended period of time. The EVE analysis provides a fair value of the

balance sheet in alternative interest rate scenarios. The EVE analysis does not take into account management intervention and assumes the new rate environment is constant and the change is instantaneous.

The table below is a summary of the changes in our EVE that are projected to result from hypothetical changes in market interest rates. EVE is the market value of assets, less the market value of liabilities, adjusted for the market value of off-balance sheet instruments. The interest rate scenarios presented in the table include interest rates at December 31, 2016 and December 31, 2015 , and as adjusted by instantaneous parallel rate changes upward to 300 basis points and downward to 100 basis points. The scenarios are not comparable due to differences in the interest rate environments, including the absolute level of rates and the shape of the yield curve. Each rate scenario reflects unique prepayment, repricing, and reinvestment assumptions. Management derives these assumptions by considering published market prepayment expectations, the repricing characteristics of individual instruments or groups of similar instruments, our historical experience, and our asset and liability management strategy. Further, this analysis assumes that certain instruments would not be affected by the changes in interest rates or would be partially affected due to the characteristics of the instruments.

Further, as this framework evaluates risks to the current statement of financial condition only, changes to the volumes and pricing of new business opportunities that can be expected in the different interest rate outcomes are not incorporated in this analytical framework. For instance, analysis of our history suggests that declining interest rate levels are associated with higher loan production volumes at higher levels of profitability. While this "natural business hedge" historically offset most, if not all, of the identified risks associated with declining interest rate scenarios, these factors fall outside of the EVE framework. Further, there can be no assurance that this natural business hedge would positively affect the EVE in the same manner and to the same extent as in the past.

There are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates. It is not possible to fully model the market risk in instruments with leverage, option, or prepayment risks. Also, we are affected by basis risk, which is the difference in repricing characteristics of similar term rate indices. As such, this analysis is not intended to be a precise forecast of the effect a change in market interest rates would have on us.

If EVE increases in any interest rate scenario, that would indicate an increasing direction for the margin in that hypothetical rate scenario. A perfectly matched balance sheet would possess no change in the EVE, no matter what the rate scenario. The following table presents the EVE in the stated interest rate scenarios:



December 31, 2016										December 31, 2015
Scenario	EVE		EVE%		$ Change			% Change		Scenario	EVE		EVE%		$ Change			% Change
(Dollars in millions)
300	$	1,927	13.9	%	$	(173	)	(8.2	)%	300	$	1,788	14.6	%	$	(247	)	(12.1	)%
200	2,005		14.4	%	(95		)	(4.5	)%	200	1,889		14.9	%	(146		)	(7.2	)%
100	2,073		14.9	%	(28		)	(1.3	)%	100	1,978		15.1	%	(57		)	(2.8	)%
Current	2,100		15.1	%	—			—	%	Current	2,035		15.0	%	—			—	%
(100)	2,067		14.9	%	(33		)	(1.6	)%	(100)	2,001		14.7	%	(34		)	(1.7	)%

Our balance sheet exhibits sensitivity in a rising interest rate scenario as the EVE decreases. The decrease in EVE is the result of the amount of liabilities that would be expected to reprice exceeding the amount of assets repriced in the up to 200 scenario. The (100) is a flattener scenario as shorter term rates are unable to decrease 100 basis points due to the absolute level of rates. Therefore, the yields of the longer term variable rate assets decrease by the full 100 basis points, but the liabilities repricing to shorter term rates decrease to less than 100 basis points, leading to a reduction in EVE.

Loans held-for-sale

Most of our mortgage loans originated are sold into the secondary market on a whole loan basis. Sales of loans totaled $32 billion , or 98.7 percent of originations during the year ended December 31, 2016 , compared to $26.3 billion , or 89.5 percent of originations during the year ended December 31, 2015 . The increase in the dollar volume of sales during the year ended December 31, 2016 was primarily due to the increase in origination volumes, as compared to the year ended December 31, 2015 . The increase in our percentage of originations sold during the year ended December 31, 2016 as compared to the year ended December 31, 2015 , was the result of us deliberately slowing our deliveries to the Agencies to better optimize profitability in 2015. During the year ended December 31, 2016 , LHFS were held an average of 28 days compared to an average of 38 days during the year ended December 31, 2015 . Under certain conditions, we intentionally hold HFS loans for longer periods, prior to sale, in order to benefit from advantageous interest rates. As of December 31, 2016 , we had outstanding

commitments to sell $5.4 billion of mortgage loans. Generally, these commitments are funded within 120 days. At December 31, 2016 and 2015 , consumer HFS, which are primarily residential mortgage loans, loans totaled $3.2 billion and $2.6 billion , respectively. For further information on LHFS, see Note 3 - Loans Held-for-Sale.

We are a leading national originator of mortgage loans based on our residential first mortgage loan originations. The following tables disclose residential first mortgage loan originations by channel, type and mix for each respective period:



	At December 31,
	2016		2015		2014
Correspondent	$	24,488	$	20,543	$	18,052
Broker	5,890		7,335		5,339
Retail	2,039		1,490		1,194
Total	$	32,417	$	29,368	$	24,585
Purchase originations	$	13,672	$	13,696	$	14,654
Refinance originations	18,745		15,672		9,931
Total	$	32,417	$	29,368	$	24,585
Conventional	$	18,156	$	17,571	$	15,158
Government	7,859		6,385		6,134
Jumbo	6,402		5,412		3,293
Total	$	32,417	$	29,368	$	24,585

Mortgage Servicing

The Mortgage Servicing segment services and subservices mortgage loans for others on a fee for service basis and may also collect ancillary fees and earn income through the use of noninterest bearing escrows. Revenue for those serviced and subserviced loans is earned on a contractual fee basis, with the fees varying based on our responsibilities and the status of the underlying loans. The Mortgage Servicing segment services residential mortgages for our own HFI loan portfolio in the Community Banking segment for which it earns revenue via an intercompany service fee allocation.

We are a top 25 mortgage servicer in the nation. The following table presents the unpaid principal balance (net of write downs) of residential loans serviced and the number of accounts associated with those loans:



	December 31, 2016			December 31, 2015
	Amount		Number of accounts	Amount		Number of accounts
	(Dollars in millions)
Residential loan servicing
Serviced for own loan portfolio (1)	$	5,816	29,244	$	6,088	30,683
Serviced for others	31,207		133,270	26,145		118,662
Subserviced for others (2)	43,127		220,075	40,287		211,937
Total residential loans serviced	$	80,150	382,589	$	72,520	361,282


(1)	Includes LHFI (residential first mortgage, second mortgage and HELOC), LHFS (residential first mortgage), loans with government guarantees and repossessed assets.


(2)	Includes temporary short-term subservicing performed as a result of sales of servicing-released MSRs. Includes repossessed assets.

The following table describes the characteristics of the mortgage loans serviced for others at December 31, 2016 , by year of origination:



Year of Origination	2012 and Prior			2013			2014			2015			2016			Total / Weighted Average
	(Dollars in millions)
Unpaid principal balance (1)	$	1,037		$	386		$	2,738		$	9,565		$	17,481		$	31,207
Average unpaid principal balance per loan (thousands)	$	149		$	143		$	168		$	233		$	264		$	234
Weighted average service fee (basis points)	28.4			26.6			25.7			26.2			26.9			26.6
Weighted average coupon	4.42		%	4.44		%	4.23		%	4.01		%	3.71		%	3.88		%
Weighted average original maturity (months)	355			324			326			329			321			325
Weighted average age (months)	86			38			29			18			6			15
Average current FICO score (2)	719			733			736			744			751			746
Average original LTV ratio	78.8		%	81.4		%	75.9		%	72.2		%	70.5		%	71.9		%
Housing Price Index LTV, as recalculated (3)	58.1		%	61.8		%	61.6		%	63.5		%	68.0		%	65.6		%
Loan count	6,943			2,701			16,349			40,982			66,294			133,269


(1)	Unpaid principal balance, net of write downs, does not include premiums or discounts.


(2)	Current FICO scores obtained at various times during the life of the loan.


(3)	The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2016 .

The following table presents past due trends in mortgage loans serviced for others at December 31, 2016 , by year of origination:



Year of Origination	2012 and Prior		2013		2014		2015		2016		Total
	(Dollars in millions)
30-59 days past due	$	39	$	5	$	38	$	47	$	26	$	155
60-89 days past due	10		1		6		6		3		26
90 days or greater past due	41		7		31		20		3		102
Total past due	90		13		75		73		32		283
Current	947		373		2,663		9,492		17,449		30,924
Unpaid principal balance (1)	$	1,037	$	386	$	2,738	$	9,565	$	17,481	$	31,207


(1)	Unpaid principal balance, net of write downs, does not include premiums or discounts.

At December 31, 2016 , the unpaid balance relating to originations within the past two years has decreased to 86.7 percent of the total unpaid balance, compared to 91.4 percent at December 31, 2015 . The loan count for the same two year period has also decreased as a percentage of the total loan count, from 87.9 percent at December 31, 2015 to 80.5 percent at December 31, 2016 .

The unpaid balance of loans originated four years ago and prior has improved to 3.3 percent of the total unpaid balance, compared to 4.2 percent at December 31, 2015 . The loan count for this category has also improved from 7,407 at December 31, 2015 to 6,943 at December 31, 2016 , representing an improvement as a percentage of the total loan count, from 6.2 percent to 5.2 percent, respectively.

Mortgage loans originated four years ago and prior continue to represent the highest percentage of loans past due within the respective buckets, with 91.3 percent being current within that category at December 31, 2016 . This represents an improvement from December 31, 2015 which exhibited a current rate of 89.1 percent within the same category.

By year of origination, the current bucket has improved in most categories and has improved in totality from 98.8 percent at December 31, 2015 to 99.1 percent at December 31, 2016 . We continue to focus on collections and keeping customers current in order to limit the number of loans in default.

The following table describes the characteristics of the residential mortgage loans subserviced for others at December 31, 2016 , by year of origination:



Year of Origination	2012 and Prior			2013			2014			2015			2016			Total / Weighted Average
	(Dollars in millions)
Unpaid principal balance (1)	$	17,285		$	7,009		$	2,065		$	7,837		$	8,931		$	43,127
Average unpaid principal balance per loan (thousands)	$	168		$	203		$	202		$	222		$	240		$	196
Weighted average service fee (basis points)	29.2			27.3			29.4			33.1			36.2			31.0
Weighted average coupon	4.04		%	3.59		%	4.08		%	3.84		%	3.54		%	3.83		%
Weighted average original maturity (months)	329			328			354			349			347			337
Weighted average age (months)	64			44			28			17			6			39
Average current FICO score (2)	742			752			721			710			702			728
Average original LTV ratio	75.4		%	74.8		%	85.7		%	88.0		%	89.9		%	81.1		%
Housing Price Index LTV, as recalculated (3)	51.4		%	52.7		%	71.9		%	79.5		%	87.9		%	65.3		%
Loan count	102,691			34,552			10,214			35,347			37,271			220,075


(1)	Unpaid principal balance, net of write downs, does not include premiums or discounts.


(2)	Current FICO scores obtained at various times during the life of the loan.


(3)	The HPI LTV is updated from the original LTV based on Metropolitan Statistical Area-level OFHEO data as of September 30, 2016 .

The following table presents the past due trends in residential mortgage loans subserviced for others at December 31, 2016 , by year of origination:



Year of Origination	2012 and Prior		2013		2014		2015		2016		Total
	(Dollars in millions)
30-59 days past due	$	332	$	44	$	40	$	128	$	70	$	614
60-89 days past due	107		7		8		30		12		164
90 days or greater past due	331		40		7		51		12		441
Total past due	770		91		55		209		94		1,219
Current	16,515		6,918		2,010		7,628		8,837		41,908
Unpaid principal balance (1)	$	17,285	$	7,009	$	2,065	$	7,837	$	8,931	$	43,127


(1)	Unpaid principal balance, net of write downs, does not include premiums or discounts.

Mortgage servicing rights

At December 31, 2016 , MSRs at fair value increased $39 million to $335 million , compared to $296 million at December 31, 2015 , primarily due to additions from loan sales where we retained servicing, partially offset by actual and pending MSR sales and higher prepayments.

Once fully phased in, the Basel III capital rules will significantly reduce the allowable amount of the fair value of MSRs included in Tier 1 capital. Our ratio of MSRs to Tier 1 capital was 26.7 percent and 20.6 percent at December 31, 2016 and December 31, 2015 , respectively. During the year ended December 31, 2016 , we had MSR sales with a fair value of $84 million. These sales represent nearly all of the Company's remaining Ginnie Mae MSRs.

The principal balance of the loans underlying our total MSRs was $31.2 billion at December 31, 2016 , compared to $26.1 billion at December 31, 2015 , with the increase primarily attributable to an increase in servicing loan volume, partially offset by loan payoffs and MSR sales of $8.9 billion in underlying loans.

The recorded amount of the MSR portfolio at December 31, 2016 and 2015 as a percentage of the unpaid principal balance of the loans we are servicing was 1.1 percent . When we sell mortgage loans in the secondary market, we usually retain the right to continue to service the mortgage loans for a fee. The weighted average service fee on loans serviced for others is

currently 26.7 basis points of the unpaid principal balance. The amount of MSRs initially recorded is based on the fair value of the MSRs determined on the date when the underlying loan is sold. Our determination of fair value, and the amount we record (i.e., the capitalization amount) is based on internal valuations and available market pricing. Estimates of fair value reflect the anticipated prepayment speeds (also known as the constant prepayment rate, product type (i.e., conventional, government, balloon)), fixed or adjustable rate of interest, interest rate, term (i.e., 15 or 30 years), servicing costs per loan, discounted yield rate and estimate of ancillary income such as late fees and prepayment fees.

At December 31, 2016 , the fair value of the MSR was based upon the following weighted-average assumptions: (1) an option adjusted spread (OAS) of 7.8 percent ; (2) an anticipated loan prepayment rate of 16.7 CPR; and (3) annual servicing costs of $67 per conventional loan, $88 for each government loan and $85 for each adjustable-rate loan, respectively. At December 31, 2015 , the fair value of the MSR was based upon the following weighted-average assumptions: (1) an option adjusted spread (OAS) of 8.2 percent ; (2) an anticipated loan prepayment rate of 12.6 CPR; and (3) servicing costs of $67 per conventional loan, $88 for each government loan, and $85 for each adjustable-rate loan, respectively.

The following table sets forth activity in loans serviced for others during the past five years:

LOANS SERVICED FOR OTHERS



	For the Years Ended December 31,
	2016			2015			2014			2013			2012
	(Dollars in millions)
Balance, beginning of year	$	26,145		$	25,427		$	25,743		$	76,821		$	63,771
Loans serviced additions	31,645			26,306			24,407			35,827			53,094
Loan amortization/prepayments	(17,680		)	(6,612		)	(3,919		)	(9,896		)	(22,097		)
Servicing sales	(8,903		)	(18,976		)	(20,804		)	(77,009		)	(17,947		)
Balance, end of year	$	31,207		$	26,145		$	25,427		$	25,743		$	76,821

Investment securities

Investment securities AFS, increased from $1.3 billion at December 31, 2015 , to $1.5 billion at December 31, 2016 . The increase was primarily due to purchases of $680 million of agency securities, which included U.S. government sponsored agency MBS and municipal obligations, partially offset by sales and principal payments of $477 million .

Investment securities HTM decreased from $1.3 billion at December 31, 2015 to $1.1 billion at December 31, 2016 , primarily due to principal payments of $190 million .

For further information on Investment Securities, see Note 2 - Investment Securities.

Liquidity Risk

Liquidity risk is the risk that we will not have sufficient funds to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate and market opportunities. The ability of a financial institution to meet current financial obligations is a function of the balance sheet structure, the ability to liquidate assets, and access to various sources of funds.

We primarily originate agency-eligible LHFS and therefore the majority of new residential first mortgage loan originations are readily convertible to cash, either by selling them as part of our monthly agency sales, private party whole loan sales, or by pledging them to the FHLB of Indianapolis and borrowing against them. We use the FHLB of Indianapolis as a significant source for funding our residential mortgage banking business due to its flexibility in terms of being able to borrow or repay borrowings as daily cash needs require.

We have arrangements with the FRB of Chicago to borrow as appropriate from its discount window. The discount window is a borrowing facility that is intended to be used only for short-term liquidity needs arising from special or unusual circumstances. The amount we are allowed to borrow is based on the lendable value of the collateral that we provide. To collateralize the line, we pledge investment securities and loans that are eligible based on FRB of Chicago guidelines.

The amount we can borrow, or the value we receive for the assets pledged to our liquidity providers, varies based on the amount and type of pledged collateral as well as the perceived market value of the assets and the "haircut" of the market value of the assets. That value is sensitive to the pricing and policies of our liquidity providers and can change with little or no notice.

Our Consolidated Statements of Cash Flows shows cash used in operating activities of $16.4 billion , $9.5 billion , and $8.1 billion for the years ended December 31, 2016 , 2015 and 2014 , respectively. This primarily reflects our mortgage operations and is a reflection of the manner in which we execute certain loan sales for which the cash outflow is included in operating activities and the corresponding cash inflow is included in the investing section.

As governed and defined by our internal liquidity policy, we maintain adequate excess liquidity levels appropriate to cover unanticipated liquidity needs. In addition to this liquidity, we also maintain targeted minimum levels of unused collateralized borrowing capacity as another cushion against unexpected liquidity needs. Each business day, we forecast 90 days of daily cash needs. This allows us to determine our projected near term daily cash fluctuations and also to plan and adjust, if necessary, future activities. As a result, in an adverse environment, we would be able to make adjustments to operations as required to meet the liquidity needs of our business, including adjusting deposit rates to increase deposits, planning for additional FHLB borrowings, accelerating sales of LHFS (agencies and/or private), selling loans held-for-investment or securities, borrowing through the use of repurchase agreements, reducing originations, making changes to warehouse funding facilities, or borrowing from the discount window.

Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. We balance the liquidity of our loan assets to our available funding sources. Our HFI portfolio is funded with stable core deposits whereas our warehouse and HFS loans are funded with FHLB borrowings.

Management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations.

Parent Company Liquidity

The Company obtains its liquidity from multiple sources, including dividends from the Bank and the issuance of debt and equity securities. The primary uses of the Company's liquidity are debt service on our senior notes, dividends to common stockholders, capital contributions to the Bank and operating expenses. The Company's most liquid assets are cash it holds at the Bank and interest-bearing demand accounts at correspondent banks, all of which totaled $70 million at December 31, 2016 .

The OCC regulates all capital distributions made by the Bank, directly or indirectly, to the holding company, including dividend payments. A subsidiary of a savings and loan holding company, such as the Bank, must file a notice or application with the OCC at least 30 days prior to each proposed capital distribution. Whether an application is required is based on a number of factors including whether the institution qualifies for expedited treatment under the OCC rules and regulations or if the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two years. In addition, as a subsidiary of a savings and loan holding company, the Bank must receive approval from the FRB before declaring any dividends. Additional restrictions on dividends apply if the Bank fails the QTL test.

For further information and restrictions related to the Bank’s payment of dividends, see MD&A - Capital.

Deposits

Our deposits consist of three primary categories: retail deposits, government deposits, and company controlled deposits. Total deposits increased $865 million , or 10.9 percent at December 31, 2016 , compared to December 31, 2015 , primarily due to an increase in retail deposits and company controlled deposits.

We have continued to focus on increasing our core deposit accounts such as branch and commercial demand deposits, savings and money market accounts. These core deposits provide a lower cost funding source to the Bank. During the year ended December 31, 2016 our core deposits increased $259 million , primarily driven by growth in commercial demand deposits, partially offset by a decline in retail money market demand accounts.

We utilize local governmental agencies, and other public units, as an additional source for deposit funding. As a Michigan bank, we are not required to hold collateral against our government deposits from Michigan municipalities as they are

covered by the Michigan Business and Growth Fund. This results in higher margins earned on these deposits which can be used to fund higher yielding commercial loans. Government deposit accounts include $329 million of certificates of deposit with maturities typically less than one year and $701 million in checking and savings accounts at December 31, 2016 .

Company controlled deposits arise due to our servicing or sub-servicing of loans for others and represent the portion of the investor custodial accounts on deposit with the Bank. Certain deposits require us to reimburse the owner for the spread on these funds. This cost is a component of net loan administration income. During the year ended December 31, 2016 , these deposits increased $407 million. These balances increase or decrease based upon the volume of loans serviced and sub-serviced for others, borrower payment behaviors and the timing of withdrawals. The total UPB of loans serviced and sub-serviced for others increased $8 billion from $72.5 billion at December 31, 2015 to $80.1 billion at December 31, 2016 .

We participate in the CDARS program, through which certain customer CDs are exchanged for CDs of similar amounts from other participating banks. This gives customers the potential to receive FDIC insurance up to $50 million. At December 31, 2016 , we had $231 million of total CDs enrolled in the CDARS program. The total CDARS balances decreased $79 million at December 31, 2016 , from December 31, 2015 .

The following table sets forth the composition of our deposits:



	December 31,
	2016						2015
	Balance		Yield/Rate		% of Deposits		Balance		Yield/Rate		% of Deposits
	(Dollars in millions)
Retail deposits
Branch retail deposits
Demand deposit accounts	$	852	0.05	%	9.7	%	$	797	0.07	%	10.0	%
Savings accounts	3,824		0.77	%	43.5	%	3,717		0.79	%	46.8	%
Money market demand accounts	138		0.14	%	1.6	%	163		0.15	%	2.1	%
Certificates of deposit/CDARS (1)	1,055		1.04	%	12.0	%	811		0.86	%	10.2	%
Total branch retail deposits	5,869		0.70	%	66.7	%	5,488		0.68	%	69.2	%
Commercial deposits
Demand deposit accounts	282		0.16	%	3.2	%	194		0.41	%	2.4	%
Savings accounts	63		0.62	%	0.7	%	34		0.56	%	0.4	%
Money market demand accounts	109		0.77	%	1.2	%	104		0.76	%	1.3	%
Certificate of deposit/CDARS (1)	1		1.58	%	—	%	14		1.03	%	0.2	%
Total commercial deposits	455		0.37	%	5.1	%	346		0.55	%	4.3	%
Total retail deposits subtotal	$	6,324	0.67	%	71.9	%	$	5,834	0.67	%	73.5	%
Government deposits
Demand deposit accounts	250		0.39	%	2.8	%	302		0.39	%	3.8	%
Savings accounts	451		0.52	%	5.1	%	363		0.51	%	4.6	%
Certificate of deposit/CDARS	329		0.74	%	3.7	%	397		0.55	%	5.0	%
Total government deposits (2)	1,030		0.56	%	11.7	%	1,062		0.49	%	13.4	%
Company controlled deposits (3)	1,446		—	%	16.4	%	1,039		—	%	13.1	%
Total deposits (4)	$	8,800	0.55	%	100.0	%	$	7,935	0.56	%	100.0	%


(1)	The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $1 billion and $0.9 billion at December 31, 2016 and December 31, 2015 , respectively.


(2)	Government deposits include funds from municipalities and schools.


(3)	These accounts represent a portion of the investor custodial accounts and escrows controlled by us in connection with loans serviced for others and that have been placed on deposit with the Bank.


(4)	The aggregate amount of deposits with a balance over $250,000 was approximately $4.0 billion and $3.4 billion at December 31, 2016 and December 31, 2015 , respectively.

The following table indicates the scheduled maturities of our certificates of deposit with a minimum denomination of $100,000 by acquisition channel as of December 31, 2016 :



	Retail Deposits		Government Deposits		Total
	(Dollars in millions)
Twelve months or less	$	539	$	312	$	851
One to two years	76		10		86
Two to three years	13		—		13
Three to four years	27		1		28
Four to five years	7		—		7
Thereafter	22		—		22
Total	$	684	$	323	$	1,007

The following table sets forth information relating to our total deposit flows for each of the years indicated:



	For the Years Ended December 31,
	2016		2015		2014		2013			2012
	(Dollars in millions)
Beginning deposits	$	7,935	$	7,068	$	6,140	$	8,294		$	7,690
Interest credited	42		42		30		42			70
Net deposit increase (decrease)	823		825		898		(2,196		)	534
Total deposits, end of the year	$	8,800	$	7,935	$	7,068	$	6,140		$	8,294

Borrowings

The FHLB provides loans, also referred to as advances, on a fully collateralized basis, to savings banks and other member financial institutions. We are currently authorized through a resolution of our board of directors to apply for advances from the FHLB using approved loan types as collateral. At December 31, 2016 , we had the authority and approval from the FHLB to utilize a line of credit of up to $7 billion and we may access that line to the extent that collateral is provided. At December 31, 2016 , we had $3 billion of advances outstanding and an additional $1.1 billion of collateralized borrowing capacity available at FHLB. At December 31, 2016 , we pledged collateral amounting to $496 million with a lendable value of $474 million . At December 31, 2015 , we pledged collateral amounting to $75 million with a lendable value of $45 million . At December 31, 2016 and 2015 , we had no borrowings outstanding against this line of credit.

Federal Home Loan Bank advances. FHLB advances decreased $561 million at December 31, 2016 from December 31, 2015 . We rely upon advances from the FHLB as a source of funding for the origination or purchase of loans for sale in the secondary market and for providing duration specific short-term and long-term financing. The outstanding balance of FHLB advances fluctuates from time to time depending on our current inventory of mortgage LHFS and the availability of lower cost funding sources. Our portfolio includes short-term fixed rate advances, long-term LIBOR adjustable advances, and long-term fixed rate advances. Interest rates on the LIBOR index advances reset every three-months and the advances may be prepaid without penalty, with notification, at scheduled three-month intervals after an initial 12-month lockout period.

For further information relating to FHLB advances, see Note 13 - Borrowings.

Debt. As part of our overall capital strategy, we previously raised capital through the issuance of junior subordinated notes to our special purpose trusts formed for the offerings, which issued preferred stock (trust preferred securities). The trust preferred securities are callable by us at any time. Interest is payable on a quarterly basis; however, we may defer interest payments for up to 20 quarters without default or penalty. In January, 2012, we exercised our contractual right to defer regularly scheduled quarterly payments of interest. In July 2016, we made $34 million of payments to bring current our previously deferred interest as of that date.

On July 11, 2016, we issued $250 million of senior notes ("2021 Senior Notes") which mature on July 15, 2021. The proceeds from these notes were used to bring current and redeem our outstanding Series C Preferred Stock.

Prior to June 15, 2021, we may redeem some or all of the 2021 Senior Notes at a redemption price equal to the greater of 100 percent of the aggregate principal amount of the 2021 Senior Notes to be redeemed or the sum of the present values of the remaining scheduled payments plus, in each case, accrued and unpaid interest.

For further information relating to long-term debt, see Note 13 - Borrowings.

Federal Home Loan Bank stock

As a member of the FHLB, we are required to hold shares of FHLB stock in an amount equal to at least one percent of aggregate unpaid principal balance of our mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 4.5 percent of our FHLB advances, whichever is greater. Once purchased, FHLB shares must be held for five years before they can be redeemed. At December 31, 2016 , holdings of FHLB stock increased to $180 million from $170 million at December 31, 2015 , due to a FHLB stock purchase which was required due to our higher borrowing levels.

Contractual Obligations

We have various financial obligations, including contractual obligations, which require future cash payments. For further information, see Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting Standards, Note 12 - Deposit Accounts and Note 13 - Borrowings. The following table summarizes contractual obligations at December 31, 2016 , and the future periods in which the obligations are expected to be settled in cash:



	Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years		Total
	(Dollars in millions)
Deposits without stated maturities	$	5,970	$	—	$	—	$	—	$	5,970
Certificates of deposits	1,105		183		65		31		1,384
Short-term Federal Home Loan Bank advances and other	1,780		—		—		—		1,780
Long-term Federal Home Loan Bank advances	50		125		—		1,025		1,200
Senior notes	—		—		246		—		246
Trust preferred securities	—		—		—		247		247
Operating leases	4		5		3		—		12
DOJ litigation settlement	—		—		—		118		118
Total	$	8,909	$	313	$	314	$	1,421	$	10,957

Operational Risk

Operational risk is the risk of loss due to human error; inadequate or failed internal systems and controls; violations of, or noncompliance with, laws, rules and regulations, prescribed practices, or ethical standards; and external influences such as market conditions, fraudulent activities, disasters, and security risks. We continuously strive to strengthen our system of internal controls to ensure compliance with laws, rules, and regulations, and to improve the oversight of our operational risk. We evaluate internal systems, processes, and controls to mitigate loss from cyber-attacks and, to date, have not experienced any material losses. The goal of this framework is to implement effective operational risk techniques and strategies, minimize operational and fraud losses, and enhance our overall performance.

Loans with government guarantees

As of December 31, 2016 our loans with government guarantees portfolio totaled $365 million . Repossessed assets and the associated claims related to loans with government guarantees recorded in other assets totaled $135 million . In the prior year, loans with government guarantees totaled $485 million and repossessed assets and the associated claims related to loans with government guarantees recorded in other assets totaled $210 million . The decline in the loans with government guarantees portfolio was primarily due to loans transferred to HFS and resold to Ginnie Mae outpacing new repurchases. The decline in the amount reported in other assets was primarily due to loan liquidations and the receipt of claims outpacing new foreclosures. In the fourth quarter of 2016, we sold the vast majority of our outstanding Ginnie Mae MSRs and as of December 31, 2016 had $603 million UPB outstanding as compared to $5.1 billion as of December 31, 2015

Substantially all of these loans continue to be insured or guaranteed by the FHA or the U.S. Department of Veterans Affairs and management believes that the reimbursement process is proceeding appropriately. Nonperforming repurchased loans in this portfolio earn interest at a rate based upon the 10 -year U.S. Treasury note rate from the time the underlying loan becomes delinquent, which is not paid by the FHA until claimed. Certain loans within our portfolio may be subject to indemnifications and insurance limits which exposes us to limited credit risk. In 2016, we experienced net charge-offs of $14 million and have reserved for the remaining risks within other assets and as a component of our ALLL on residential first mortgages. These charge-offs arise due to insurance limits on VA insured loans and FHA property foreclosure and preservation requirements that may result in a loss of the guarantee.

For further information on loans with government guarantees, see Note 5 - Loans with Government Guarantees.

Representation and warranty reserve

When we sell mortgage loans, we make customary representations and warranties to the purchasers, including sponsored securitization trusts and their insurers (primarily Fannie Mae and Freddie Mac).

REPRESENTATION AND WARRANTY RESERVE



	For the Years Ended December 31,
	2016			2015			2014			2013			2012
	(Dollars in millions)
Beginning balance	$	40		$	53		$	54		$	193		$	120
Charge to gain on sale for current loan sales	5			7			7			18			24
Provision (benefit) representation and warranty reserve - change in estimate	(19		)	(19		)	10			36			256
(Charge-offs), Recoveries, net	1			(1		)	(18		)	(193		)	(207		)
Ending balance	$	27		$	40		$	53		$	54		$	193

Note: In the fourth quarter 2013, we settled substantially all of the repurchase requests and obligations associated with loans originated between January 1, 2000 and December 31, 2008 and sold to Fannie Mae and Freddie Mac which has resulted in lower charge offs subsequent to 2013.

The benefit from the provision adjustment charged to representation and warranty reserve expense during the year ended December 31, 2016 , was primarily due to lower net charge-offs coupled with our ongoing efforts to continue to refine our estimates as more data becomes available reflecting the trend under the revised representation and warranty reserve framework as published by the Federal Housing Finance Agency. Under the new framework, subject to certain conditions, the duration of the put-back uncertainty associated with new loans delivered has been significantly reduced. A shorter duration of put-back uncertainty, all else being equal, results in lower reserve estimates.

During the year ended December 31, 2016 , we had $19 million in Fannie Mae new repurchase demands and $13 million in Freddie Mac new repurchase demands. During the year ended December 31, 2015 , we had $81 million in Fannie Mae new repurchase demands and $30 million in Freddie Mac new repurchase demands. The total UPB of 2009 and later vintage loans sold to Fannie Mae and Freddie Mac was $183 million and $162 million at December 31, 2016 and December 31, 2015 , respectively.

For further information on the Representation and Warranty Reserve, see Note 14 - Representation and Warranty Reserve.

Capital

Under the OCC's capital distribution regulations, a savings bank that is a subsidiary of a savings and loan holding company may need to notify or seek approval from the OCC at least 30 days prior to the declaration of a dividend or the approval by the board of directors of the proposed capital distribution. The 30-day period allows the OCC to determine whether the distribution would not be advisable. Also, under Federal Reserve requirements, the Bank may need to provide a 30-day notice to the Federal Reserve prior to declaring or paying dividends. In addition, under the Supervisory Agreement, the Company agreed to request prior non-objection of the Federal Reserve to pay dividends or other capital distributions. We seek to manage our capital levels and overall business in a manner which we consider to be prudent and work with our regulators to ensure that our capital levels are appropriate considering our risk profile and evaluation of the capital levels maintained by peer institutions.

Consent Orders

On December 19, 2016, the OCC terminated its Consent Order with the Bank. In response to the Consent Order, the Bank implemented and adopted enhanced practices related to, among other things, regulatory compliance, enterprise risk management, capital and liquidity. The lifting of the Consent Order signifies that the OCC has determined that the Bank has met all of the Consent Order requirements.

On September 29, 2014, the Bank entered into a Consent Order with the CFPB. The Consent Order relates to alleged violations of federal consumer financial laws arising from the Bank’s residential first mortgage loan loss mitigation practices and default servicing operations dating back to 2011. Under the terms of the Consent Order, the Bank has paid $28 million for borrower remediation and $10 million in civil money penalties. The settlement does not involve any admission of wrongdoing on the part of the Bank or its employees, directors, officers, or agents. For further information and a complete description of all of the terms of the Consent Order, please refer to our Current Report on Form 8-K filed on September 29, 2014.

Supervisory Agreement

On January 28, 2010, we became subject to the Supervisory Agreement, which will remain in effect until terminated, modified, or suspended in writing by the Federal Reserve. The failure to comply with the Supervisory Agreement could result in the initiation of further enforcement action by the Federal Reserve, including the imposition of further operating restrictions, and could result in additional enforcement actions against us. We have taken actions which we believe are appropriate to comply with, and intend to maintain compliance with, all of the requirements of the Supervisory Agreement. For further information and a complete description of all of the terms of the Supervisory Agreement, please refer to the copy of the Supervisory Agreement filed with the SEC as an exhibit to our Current Report on Form 8-K filed on January 28, 2010.

Department of Justice Settlement Agreement

On February 24, 2012, the Bank entered into a Settlement Agreement with the DOJ under which we made an initial payment of $15 million and agreed to make future payments totaling $118 million in annual increments of up to $25 million upon meeting all of the following conditions which are evaluated quarterly and include: (a) the reversal of the deferred tax asset valuation allowance, which occurred at the end of 2013; (b) the repayment of the Fixed Rate Cumulative Perpetual Preferred Stock, Series C (the "TARP Preferred"), which occurred in July 2016; and (c) our Bank has a Tier 1 Leverage Capital Ratio of 11 percent or greater. Additionally, if the Bank or Bancorp become party to a business combination in which the Bank and Bancorp represent less than 33.3 percent of the resulting company’s assets, annual payments would commence twelve months after the date of that business combination. Further, should all conditions for payment be satisfied, an annual payment under the settlement agreement would be made, and any further payments would be made only so long as such conditions are satisfied at the time required for such further payments.

Within six months of satisfying the conditions specified above, the Bank would make an additional payment, to occur no more frequently than annually, provided that doing so would not violate any material banking regulatory requirement or the OCC does not object in writing. Consistent with our business and regulatory requirements, Flagstar shall seek in good faith to fulfill the conditions, and will not undertake any conduct or fail to take any action the purpose of which is to frustrate or delay our ability to fulfill any of the conditions.

In July 2016, we paid a $200 million dividend from the Bank to the Bancorp and issued $250 million in Senior Notes to a) bring current the interest payments on our trust preferred securities, b) become current on our deferred interest and dividends related to our TARP Preferred and c) repay our TARP Preferred. To support the on-going debt service and other Bancorp expenses, we also intend to reduce our Bancorp double leverage and debt to equity ratios to be more consistent with such ratios at other mid-sized banks, which would likely require further dividend payments from the Bank to the Bancorp for the foreseeable future.

Future annual payments of $25 million or the final payment of the remaining balance under the Settlement Agreement could be required if the Tier 1 Leverage Ratio of the Bank meets or exceeds 11 percent after adjusting for any outstanding TARP Preferred. Following the TARP Preferred redemption, which included a $200 million dividend from the Bank to Bancorp, the Bank’s Tier 1 Leverage Ratio is less than 11 percent. The combination of (a) future dividends from the Bank to Bancorp and (b) continued growth in earning assets at the Bank are expected to continue to limit the growth rate of the Bank’s Tier 1 Leverage Ratio, which could have an impact on the timing of expected cash flows under the Settlement Agreement.

The Settlement Agreement meets the definition of a financial instrument for which we elected the fair value option. The fair value of the liability is subject to significant uncertainty and is impacted by forecasted estimates of equity, earnings, timing and amount of dividends and growth of the balance sheet and their related impacts on forecasted Tier 1 Capital. We consider the assumptions a market participant would make to transfer the liability and evaluate multiple possible outcomes and our estimates of the likelihood of these outcomes, which may change over time.

Regulatory Capital Composition - Transition

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors. We are currently subject to regulatory capital rules issued by U.S. banking regulators.

Effective January 1, 2015, we became subject to the Basel III rules, which include certain transition provisions. Capital deductions related to the Company's MSRs and deferred tax assets are recognized in 20 percent annual increments, and will be fully recognized as of January 1, 2018. When presented on a fully phased-in basis, capital, risk-weighted assets, and the capital ratios assume all regulatory capital adjustments and deductions are fully recognized. As of December 31, 2016 , the Company and the Bank were subject to the transitional phase-in limitation on deductions related to MSRs and certain deferred tax assets. The annual incremental change in the deductions due to the increase in the transitional phase-in from 40 percent in 2015 to 60 percent in 2016 reduced our regulatory capital ratios. These transitional phase in amounts increase to 80 percent in 2017 and 100 percent in 2018.

Effective January 1, 2016, we became subject to the capital conservation buffer under the Basel III rules, subjecting a banking organization to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer above the minimum risk based capital requirements. The capital conservation buffer for 2016 must be greater than 0.625 percent in order to not be subject to limitations. The Company and the Bank had a capital conservation buffer of 8.5 percent and 11.3 percent, respectively as of December 31, 2016. When fully phased-in on January 1, 2019, the capital conservation buffer must be greater than 2.5 percent.

Dodd-Frank Act Section 171, commonly known as the Collins Amendment, grandfathered the regulatory capital treatment of hybrid debt and equity securities, such as trust preferred securities issued prior to May 19, 2010, for banks or holding companies with less than $15 billion in total consolidated assets as of December 31, 2009.

At December 31, 2016 , we were considered "well-capitalized" for regulatory purposes. The following table shows the regulatory capital ratios as of the dates indicated:



	December 31, 2016				December 31, 2015
Bancorp	Amount		Ratio		Amount		Ratio
Tier 1 leverage (to adjusted tangible assets)	$	1,256	8.88	%	$	1,435	11.51	%
Total adjusted tangible asset base (1)	$	14,149			$	12,474
Tier 1 capital (to RWA)	$	1,256	15.12	%	$	1,435	18.98	%
Common equity Tier 1 (to RWA)	$	1,084	13.06	%	$	1,065	14.09	%
Total risk-based capital (to RWA)	$	1,363	16.41	%	$	1,534	20.28	%
Risk weighted asset base (1)	$	8,305			$	7,561



	December 31, 2016				December 31, 2015
Bank	Amount		Ratio		Amount		Ratio
Tier 1 leverage (to adjusted tangible assets)	$	1,491	10.52	%	$	1,472	11.79	%
Total adjusted tangible asset base (1)	$	14,177			$	12,491
Tier 1 capital (to RWA)	$	1,491	17.90	%	$	1,472	19.42	%
Common equity Tier 1 (to RWA)	$	1,491	17.90	%	$	1,472	19.42	%
Total risk-based capital (to RWA)	$	1,598	19.18	%	$	1,570	20.71	%
Risk weighted asset base (1)	$	8,332			$	7,582


(1)	Based on adjusted total assets for purposes of Tier 1 leverage capital and risk-weighted assets for purposes Tier1, common equity Tier 1, and total risk-based capital.

Our Tier 1 leverage ratio decreased at December 31, 2016 , as compared to December 31, 2015 , primarily as a result of transactions related to the payoff of TARP, the payment of TARP dividends in arrears, along with an increase in the deductions related to DTAs and MSRs due to the change in the transitional phase-in limitation from 40 percent at December 31, 2015 to 60 percent at December 31, 2016.

Banks with assets greater than $10 billion are required to submit a Dodd-Frank Act Stress Test ("DFAST") under the final rules established by their primary regulator. DFAST requires banks to project results over a nine-quarter planning horizon under three scenarios (baseline, adverse, and severely adverse) published by the Federal Reserve and to show that the bank would exceed regulatory minimum capital standards for the Tier 1 leverage ratio, Tier 1 common ratio, Tier 1 risk-based capital ratio, and the Total risk-based capital ratio under all of these scenarios. We are not subject to the Federal Reserve’s Comprehensive Capital Analysis and Review program.

Certain regulatory capital ratios for the Bank and the Company as of December 31, 2016 are shown in the following table:



December 31, 2016	Regulatory Minimums		Regulatory Minimums to be Well-Capitalized		Bank		Bancorp
Basel III Ratios (transitional)
Common equity Tier I capital ratio	4.50	%	6.50	%	17.90	%	13.06	%
Tier I leverage ratio	4.00	%	5.00	%	10.52	%	8.88	%

Basel III Ratios (fully phased-in) (1)
Common equity Tier I capital ratio	4.50	%	6.50	%	16.09	%	10.25	%
Tier I leverage ratio	4.00	%	5.00	%	9.76	%	7.82	%


(1)	Refer to MD&A - Use of Non-GAAP Financial Measures.

The impact under the fully phased in Basel III rules to our Tier 1 leverage ratio is mostly driven by the treatment that MSRs receive under Basel III. Over the long term, we plan to continue to reduce our MSRs to Tier 1 ratio, taking into consideration market conditions to guide our pace of MSR reduction. At December 31, 2016 we had $335 million of MSRs, representing 26.6 percent of Tier 1 capital. We will continue to look for opportunities to reduce our MSRs exposure over time.

Use of Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this report includes non-GAAP financial measures such as the estimated fully implemented Basel III capital levels and ratios. We believe these non-GAAP financial measures provide additional information that is useful to investors in helping to understand the underlying performance and trends of the Company.

Non-GAAP financial measures have inherent limitations, which are not required to be uniformly applied and are not audited. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To mitigate these limitations, we have practices in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and to ensure that our performance is properly reflected to facilitate consistent period-to-period comparisons. Our method of calculating these non-GAAP measures may differ from methods used by other companies. Although we believe the non-GAAP financial measures disclosed in this report enhance investors' understanding of our business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for those financial measures prepared in accordance with GAAP. Where non-GAAP financial measures are used, the most directly comparable GAAP or regulatory financial measure, as well as the reconciliation to the most directly comparable GAAP or regulatory financial measure, can be found in this report.

Nonperforming assets / Tier 1 + Allowance for Loan Losses. The ratio of nonperforming assets to Tier 1 and ALLL divides the total level of nonperforming assets HFI by Tier 1 capital (to adjusted total assets), as defined by bank regulations, plus ALLL. We believe these measurements are meaningful measures of capital adequacy used by investors, regulators, management and others to evaluate the adequacy of capital in comparison to other companies within the industry.



	December 31,
	2016			2015			2014			2013			2012
	(Dollars in millions)
Nonperforming assets / Tier 1 capital + ALLL
Nonperforming assets	$	54		$	83		$	139		$	182		$	521
Tier 1 capital (to adjusted total assets) (1)	1,256			1,435			1,184			1,281			1,296
Allowance for loan losses	(142		)	(187		)	(297		)	(207		)	(305		)
Tier 1 capital + ALLL	$	1,398		$	1,622		$	1,481		$	1,488		$	1,601
Nonperforming assets / Tier 1 capital + ALLL	3.9		%	5.1		%	9.5		%	12.5		%	32.5		%


(1)	Represents Tier 1 capital for the Bank prior to 2013.

Basel III (transitional) to Basel III (fully phased-in) reconciliation. On January 1, 2015, the Basel III rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments impacting common equity Tier 1 capital and Tier 1 capital. When fully phased-in, Basel III, will increase capital requirements through higher minimum capital levels as well as through increases in risk-weights for certain exposures. Additionally, the final Basel III rules place greater emphasis on common equity. In October 2013, the OCC and Federal Reserve released final rules detailing the U.S. implementation of Basel III and the application of the risk-based and leverage capital rules to top-tier savings and loan holding companies. We have transitioned to the Basel III framework beginning in January 2015 and are subject to a phase-in period extending through 2018. Accordingly, the calculations provided below and on the previous page, are estimates. These measures are considered to be non-GAAP financial measures because they are not formally defined by GAAP and the Basel III implementation regulations. The Common Equity Tier 1, Tier 1, Total Capital and Leverage ratios will not be fully phased-in until January 1, 2018 and the Capital Conservation buffer will not be fully phased-in until January 1, 2019. The regulations are subject to change as clarifying guidance becomes available and the calculations currently include our interpretations of the requirements including informal feedback received through the regulatory process. Other entities may calculate the Basel III ratios differently from ours based on their interpretation of the guidelines. Since analysts and banking regulators may assess our capital adequacy using the Basel III framework, we believe that it is useful to provide investors information enabling them to assess our capital adequacy on the same basis.



December 31, 2016	Common Equity Tier 1 (to Risk Weighted Assets)			Tier 1 Leverage (to Adjusted Tangible Assets)			Tier 1 Capital (to Risk Weighted Assets)			Total Risk-Based Capital (to Risk-Weighted Assets)
Flagstar Bancorp	(Dollars in millions)
Regulatory capital – Basel III (transitional) to Basel III (fully phased-in)
Basel III (transitional)	$	1,084		$	1,256		$	1,256		$	1,363
Increased deductions related to deferred tax assets, MSRs, and other capital components	(230		)	(162		)	(162		)	(160		)
Basel III (fully phased-in) capital	$	854		$	1,094		$	1,094		$	1,203
Risk-weighted assets – Basel III (transitional) to Basel III (fully phased-in)
Basel III assets (transitional)	$	8,305		$	14,149		$	8,305		$	8,305
Net change in assets	35			(161		)	35			35
Basel III (fully phased-in) assets	$	8,340		$	13,988		$	8,340		$	8,340
Capital ratios
Basel III (transitional)	13.06		%	8.88		%	15.12		%	16.41		%
Basel III (fully phased-in)	10.25		%	7.82		%	13.12		%	14.43		%



December 31, 2016	Common Equity Tier 1 (to Risk Weighted Assets)			Tier 1 Leverage (to Adjusted Tangible Assets)			Tier 1 Capital (to Risk Weighted Assets)			Total Risk-Based Capital (to Risk-Weighted Assets)
Flagstar Bank	(Dollars in millions)
Regulatory capital – Basel III (transitional) to Basel III (fully phased-in)
Basel III (transitional)	$	1,491		$	1,491		$	1,491		$	1,598
Increased deductions related to deferred tax assets, MSRs, and other capital components	(119		)	(119		)	(119		)	(116		)
Basel III (fully phased-in) capital	$	1,372		$	1,372		$	1,372		$	1,482
Risk-weighted assets – Basel III (transitional) to Basel III (fully phased-in)
Basel III assets (transitional)	$	8,332		$	14,177		$	8,332		$	8,332
Net change in assets	196			(119		)	196			196
Basel III (fully phased-in) assets	$	8,528		$	14,058		$	8,528		$	8,528
Capital ratios
Basel III (transitional)	17.90		%	10.52		%	17.90		%	19.18		%
Basel III (fully phased-in)	16.09		%	9.76		%	16.09		%	17.38		%

Adjusted Net Income, Diluted Income per Share and Adjusted Return on Average Assets. In addition to analyzing the Company's results on a reported basis, management reviews the Company's results and the results on an adjusted basis. These non-GAAP measures reflect the adjustment of the reported U.S.GAAP results for significant items that management does not believe are reflective of the Company's current and ongoing operations. These are measures that management uses to assess performance of the Company against its peers and evaluate overall performance. The Company believes these non-GAAP financial measures provide useful information for investors, securities analysts and others because they provide a tool to evaluate the Company’s performance on an ongoing basis and compared to its peers.

The following table provides a reconciliation of non-GAAP financial measures:



	Year Ended
	December 31, 2016
	(Dollars in millions)
Net income	$	171
Adjustment to remove DOJ adjustment	(24		)
Tax impact of adjusting item	8
Adjusted net income	$	155

Diluted income per share	$	2.66
Adjustment to remove DOJ adjustment	(0.42		)
Tax impact of adjusting item	0.14
Diluted adjusted income per share	$	2.38

Return on average assets	1.23		%
Adjustment to remove DOJ adjustment including tax impact	(0.12		)%
Adjusted return on average assets	1.11		%

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A discussion regarding our management of market risk is included in "Market Risk" in this report in Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations."



ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements




Report of Independent Registered Public Accounting Firms	68
Consolidated Statements of Financial Condition as of December 31, 2016 and 2015	70
Consolidated Statements of Operations for the years ended December 31, 2016, 2015, and 2014	71
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016, 2015 and 2014	72
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014	72
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014	73
Notes to Consolidated Financial Statements	74
Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting Standards	74
Note 2 - Investment Securities	82
Note 3 - Loans Held-for-Sale	85
Note 4 - Loans Held-for-Investment	85
Note 5 - Loans with Government Guarantees	93
Note 6 - Repossessed Assets	93
Note 7 - Variable Interest Entities ("VIEs")	94
Note 8 - Federal Home Loan Bank Stock	94
Note 9 - Premises and Equipment	94
Note 10 - Mortgage Servicing Rights	95
Note 11 - Derivative Financial Instruments	96
Note 12 - Deposit Accounts	100
Note 13 - Borrowings	101
Note 14 - Representation and Warranty Reserve	103
Note 15 - Warrants	103
Note 16 - Accumulated Other Comprehensive Income (Loss)	104
Note 17 - Earnings (Loss) Per Share	105
Note 18 - Stock-Based Compensation	105
Note 19 - Income Taxes	107
Note 20 - Regulatory Matters	109
Note 21 - Legal Proceedings, Contingencies and Commitments	111
Note 22 - Fair Value Measurements	113
Note 23 - Segment Information	122
Note 24 - Holding Company Only Financial Statements	125
Note 25 - Quarterly Financial Data	127

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Flagstar Bancorp, Inc.

In our opinion, the accompanying consolidated statements of financial condition as of December 31, 2016 and 2015 , and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the years then ended present fairly, in all material respects, the financial position of Flagstar Bancorp, Inc. and its subsidiaries at December 31, 2016 and 2015 , and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Detroit, Michigan

March 13, 2017

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Flagstar Bancorp, Inc.

We have audited the accompanying related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for the year in the period ended December 31, 2014 of Flagstar Bancorp, Inc. and subsidiaries (the "Company"). The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Our audits of the financial statements include examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Flagstar Bancorp Inc. and subsidiaries as of December 31, 2014, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

/s/ Baker Tilly Virchow Krause, LLP

Southfield, Michigan

March 16, 2015, except for Note 23, as to which the date is October 7, 2016

Flagstar Bancorp, Inc.

Consolidated Statements of Financial Condition

(In millions, except share data)



	December 31,
	2016			2015
Assets
Cash	$	84		$	54
Interest-earning deposits	74			154
Total cash and cash equivalents	158			208
Investment securities available-for-sale	1,480			1,294
Investment securities held-to-maturity	1,093			1,268
Loans held-for-sale ($3,145 and $2,541 measured at fair value, respectively)	3,177			2,576
Loans held-for-investment ($72 and $111 measured at fair value, respectively)	6,065			6,352
Loans with government guarantees	365			485
Less: allowance for loan losses	(142		)	(187		)
Total loans held-for-investment and loans with government guarantees, net	6,288			6,650
Mortgage servicing rights	335			296
Net deferred tax asset	286			364
Federal Home Loan Bank stock	180			170
Premises and equipment, net	275			250
Other assets	781			639
Total assets	$	14,053		$	13,715
Liabilities and Stockholders’ Equity
Noninterest bearing deposits	$	2,077		$	1,574
Interest bearing deposits	6,723			6,361
Total deposits	8,800			7,935
Short-term Federal Home Loan Bank advances	1,780			2,116
Long-term Federal Home Loan Bank advances	1,200			1,425
Other long-term debt	493			247
Representation and warranty reserve	27			40
Other liabilities ($60 and $84 measured at fair value, respectively)	417			423
Total liabilities	12,717			12,186
Stockholders’ Equity
Preferred stock $0.01 par value, liquidation value $1,000 per share, 25,000,000 shares authorized; 0 and 266,657 issued and outstanding, respectively	—			267
Common stock $0.01 par value, 70,000,000 shares authorized; 56,824,802 and 56,483,258 shares issued and outstanding, respectively	1			1
Additional paid in capital	1,503			1,486
Accumulated other comprehensive (loss) income	(7		)	2
Accumulated deficit	(161		)	(227		)
Total stockholders’ equity	1,336			1,529
Total liabilities and stockholders’ equity	$	14,053		$	13,715

The accompanying notes are an integral part of these Consolidated Financial Statements.

Flagstar Bancorp, Inc.

Consolidated Statements of Operations

(In millions, except per share data)



	For the Years Ended December 31,
	2016			2015			2014
Interest Income
Loans	$	348		$	295		$	246
Investment securities	68			59			39
Interest-earning deposits and other	1			1			1
Total interest income	417			355			286
Interest Expense
Deposits	46			42			30
Short-term Federal Home Loan Bank advances and other	5			1			—
Long-term Federal Home Loan Bank advances	27			18			2
Other long-term debt	16			7			7
Total interest expense	94			68			39
Net interest income	323			287			247
Provision (benefit) for loan losses	(8		)	(19		)	132
Net interest income after provision (benefit) for loan losses	$	331		$	306		$	115
Noninterest Income
Net gain on loan sales	$	316		$	288		$	206
Loan fees and charges	76			67			73
Deposit fees and charges	22			25			22
Loan administration income	18			26			24
Net (loss) return on mortgage servicing rights	(26		)	28			24
Net (loss) gain on sale of assets	(2		)	(1		)	12
Representation and warranty (provision) benefit	19			19			(10		)
Other noninterest income	64			18			21
Total noninterest income	$	487		$	470		$	372
Noninterest Expense
Compensation and benefits	$	269		$	237		$	233
Commissions	55			39			35
Occupancy and equipment	85			81			80
Asset resolution	7			15			57
Federal insurance premiums	11			23			23
Loan processing expense	55			52			37
Legal and professional expense	29			36			51
Other noninterest expense	49			53			74
Total noninterest expense	$	560		$	536		$	590
Income (loss) before income taxes	$	258		$	240		$	(103	)
Provision (benefit) for income taxes	87			82			(34		)
Net income (loss)	171			158			(69		)
Preferred stock dividend/accretion	—			—			(1		)
Net income (loss) from continuing operations	$	171		$	158		$	(70	)
Income (loss) per share
Basic	$	2.71		$	2.27		$	(1.72	)
Diluted	$	2.66		$	2.24		$	(1.72	)
Weighted average shares outstanding
Basic	56,569,307			56,426,977			56,246,528
Diluted	57,597,667			57,164,523			56,246,528

The accompanying notes are an integral part of these Consolidated Financial Statements.

Flagstar Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In millions)



	For the Years Ended December 31,
	2016			2015			2014
Net income (loss)	$	171		$	158		$	(69	)
Other comprehensive income (loss), net of tax
Investment securities	(13		)	(3		)	13
Derivatives and hedging activities	4			(3		)	—
Other comprehensive income (loss), net of tax	(9		)	(6		)	13
Comprehensive income	$	162		$	152		$	(56	)

The accompanying notes are an integral part of these Consolidated Financial Statements.

Flagstar Bancorp, Inc.

Consolidated Statements of Stockholders' Equity

(In millions, except share data)



	Preferred Stock					Common Stock
	Number of Shares Outstanding		Amount of Preferred Stock			Number of Shares Outstanding	Amount of Common Stock		Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
Balance at December 31, 2013	266,657		$	266		56,138,074	$	1	$	1,479	$	(5	)	$	(315	)	$	1,426
Net loss	—		—				—		—		—			(69		)	(69		)
Total other comprehensive income	—		—				—		—		13			—			13
Accretion of preferred stock	—		1				—		—		—			(1		)	—
Stock-based compensation	—		—			194,233	—		3		—			—			3
Balance at December 31, 2014	266,657		$	267		56,332,307	$	1	$	1,482	$	8		$	(385	)	$	1,373
Net income	—		$	—		—	$	—	$	—	$	—		$	158		$	158
Total other comprehensive loss	—		—				—		—		(6		)	—			(6		)
Stock-based compensation	—		—			150,951	—		3		—			—			3
Warrant exercise	—		—			—	—		1		—			—			1
Balance at December 31, 2015	266,657		$	267		56,483,258	$	1	$	1,486	$	2		$	(227	)	$	1,529
Net income	—		$	—		—	$	—	$	—	$	—		$	171		$	171
Total other comprehensive loss	—		—			—	—		—		(9		)	—			(9		)
Preferred stock redemption	(266,657	)	(267		)	—	—		—		—			—			(267		)
Dividends on preferred stock	—		—			—	—		—		—			(105		)	(105		)
Warrant exercise	—		—			—	—		6		—			—			6
Stock-based compensation	—		—			341,544	—		11		—			—			$	11
Balance at December 31, 2016	—		$	—		56,824,802	$	1	$	1,503	$	(7	)	$	(161	)	$	1,336

The accompanying notes are an integral part of these Consolidated Financial Statements.

Flagstar Bancorp, Inc.

Consolidated Statements of Cash Flows

(In millions)



	For the Years Ended December 31,
	2016			2015			2014
Operating Activities
Net income (loss)	$	171		$	158		$	(69	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization	32			24			24
Representation and warranty provision (benefit)	(19		)	(19		)	10
Provision (benefit) for loan losses	(8		)	(19		)	132
Changes in valuation allowance on deferred tax assets	2			11			8
Net gain on loan and asset sales	(314		)	(288		)	(218		)
Proceeds from sales of HFS	16,168			18,467			17,189
Origination, premium paid and purchase of loans, net of principal repayments	(32,295		)	(28,008		)	(24,899		)
Change in fair value and other non-cash changes	(168		)	(132		)	(280		)
Net change in:
Accrued interest receivable	(1		)	(8		)	33
Deferred income taxes	76			67			(36		)
Other assets, excludes purchase of other investments	(59		)	211			(33		)
Other liabilities	55			(11		)	(6		)
Net cash used in operating activities	$	(16,360	)	$	(9,547	)	$	(8,145	)
Investing Activities
Proceeds from sale of AFS securities including loans that have been securitized	$	17,422		$	9,098		$	9,191
Collection of principal on investment securities AFS	187			218			160
Purchase of investment securities AFS and other	(680		)	(1,148		)	(1,278		)
Collection of principal on investment securities HTM	190			85			—
Purchase of investment securities HTM	(15		)	(217		)	—
Proceeds received from the sale of LHFI	229			946			73
Origination and purchase of LHFI, net of principal repayments	(1,073		)	(3,130		)	(923		)
Purchase of bank owned life insurance	(85		)	(175		)	—
Proceeds from the disposition of repossessed assets	19			24			39
Net (purchase) redemption of FHLB stock	(10		)	(15		)	54
Acquisition of premises and equipment, net of proceeds	(52		)	(46		)	(33		)
Proceeds from the sale of MSRs	69			245			226
Net cash provided by investing activities	$	16,201		$	5,885		$	7,509
Financing Activities
Net increase in deposit accounts	$	866		$	866		$	928
Net change in short term FHLB borrowings and other short term debt	(336		)	1,902			(774		)
Proceeds from increases in long term FHLB Advances	445			1,500			300
Repayment of long term FHLB advances	(425		)	(375		)	—
Repayment of trust preferred securities and long-term debt	—			(88		)	(29		)
Net (disbursement) receipt of payments of loans serviced for others	(64		)	(76		)	70
Preferred stock dividends	(105		)	—			—
Redemption of preferred stock	(267		)	—			—
Net (disbursement) receipt of escrow payments	(5		)	5			(4		)
Net cash provided by financing activities	$	109		$	3,734		$	491
Net (decrease) increase in cash and cash equivalents	(50		)	72			(145		)
Beginning cash and cash equivalents	208			136			281
Ending cash and cash equivalents	$	158		$	208		$	136
Supplemental disclosure of cash flow information
Interest paid on deposits and other borrowings	$	112		$	58		$	32
Income tax payments (refund)	$	7		$	6		$	(1	)
Non-cash reclassification of investment securities AFS to HTM	$	—		$	1,112		$	—
Non-cash reclassification of loans originated HFI to LHFS	$	1,331		$	1,140		$	426
Non-cash reclassification of mortgage loans originated HFS to HFI	$	2		$	30		$	19
Non-cash reclassification of mortgage LHFS to AFS securities	$	17,130		$	8,853		$	8,800
Non-cash reclassification of loans with government guarantees to other assets	$	—		$	373		$	—
MSRs resulting from sale or securitization of loans	$	228		$	260		$	271

The accompanying notes are an integral part of these Consolidated Financial Statements.

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Note 1 — Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies

Description of Business

Flagstar Bancorp, Inc., is a Michigan-based savings and loan holding company founded in 1993. The Company's business is primarily conducted through its principal subsidiary, Flagstar Bank, FSB (the "Bank"), a Michigan-based federally chartered stock savings bank founded in 1987. We are one of the largest banks headquartered in Michigan. When we refer to "Flagstar", "the Company", "we", "our", or "us," we mean Flagstar Bancorp, Inc. and our consolidated subsidiaries.

The Company is subject to regulation, examination and supervision by the Board of Governors of the Federal Reserve ("Federal Reserve"). The Bank is subject to regulation, examination and supervision by the OCC of the U.S. Department of the Treasury, the CFPB and the FDIC. The Bank is a member of the FHLB of Indianapolis and its deposits are insured by the FDIC through the Deposit Insurance Fund.

Consolidation and Basis of Presentation

The accounting and financial reporting policies of us and our subsidiaries conform to accounting principles generally accepted in the United States. Additionally, where applicable the policies conform to the accounting and reporting guidelines prescribed by regulatory authorities. Certain prior period amounts have been reclassified to conform to the current period presentation. The preparation of the Consolidated Financial Statements, requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, revenues and expenses and disclosures of contingent assets and liabilities. Actual results could be materially different from these estimates.

Subsequent Events

We have evaluated all subsequent events for potential recognition and disclosure through the filing date of this Form 10-K.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from correspondent banks and the FRB, and Short-term investments that have a maturity at the date of acquisition of three months or less and are readily convertible to cash.

Investment Securities

We measure securities classified as AFS at fair value, with unrealized gains and losses, net of tax, included in "other comprehensive income (loss)" in stockholders’ equity. We recognize realized gains and losses on AFS securities when securities are sold. The cost of securities sold is based on the specific identification method. Any gains or losses realized upon the sale of a security are reported in "other noninterest income" in the Consolidated Statements of Operations. The fair value of investment securities is based on observable market prices, when available. If observable market prices are not available, our valuations are based on alternative methods, including: quotes for similar fixed-income securities, matrix pricing, discounted cash flow using benchmark interest rate curves or other factors. The fair values, obtained through an independent third party utilizing a pricing service, are compared to independent pricing sources on a quarterly basis. For further information, see Note 2 - Investment Securities and Note 22 - Fair Value Measurements.

Investment securities HTM are carried at amortized cost and adjusted for amortization of premiums and accretion of discounts using the interest method. Transfers of investment securities into the HTM category from the AFS category are accounted for at fair value at the date of transfer. Any related unrealized holding gain (loss), net of tax, that was included in the transfer is retained in other comprehensive income (loss) and is amortized as an adjustment to interest income over the remaining life of the securities.

We evaluate AFS and HTM investment securities for other than temporary impairment on a quarterly basis. An OTTI is considered to have occurred when the fair value of a debt security is below its amortized costs and we (1) have the intent to sell the security, (2) will more likely than not be required to sell the security before recovery of its amortized cost, or (3) does not expect to recover the entire amortized cost basis of the security. Investments that have an OTTI are written down through a charge to earnings for the amount representing the credit loss on the security. Gains and losses related to all other factors are

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

recognized in other comprehensive income (loss). For the years ended December 31, 2014 through December 31, 2016, we did not recognize any OTTI losses.

Investment securities transactions are recorded on the trade date for purchases and sales. Interest earned on investment securities, including the amortization of premiums and the accretion of discounts are determined using the effective interest method over the period of maturity, recorded in interest income in the Consolidated Statements of Operations. For further information, see Note 2 - Investment Securities.

Loans Held-for-Sale

We classify loans as HFS when we originate or purchase loans that we intend to sell. We have elected the fair value option for the majority of our LHFS. We estimate the fair value of mortgage loans based on quoted market prices for securities backed by similar types of loans, where available, or by discounting estimated cash flows using observable inputs inclusive of interest rates, prepayment speeds and loss assumptions for similar collateral. LHFS that are recorded at lower of cost or fair value may be carried at fair value on a nonrecurring basis when the fair value is less than cost. For further information, see Note 22 - Fair Value Measurements.

Loans that are transferred into the HFS portfolio from the HFI portfolio, due to a change in intent, are recorded at the lower of cost or fair value. Gains or losses recognized upon the sale of loans are determined using the specific identification method.

Loans Held-for-Investment

We classify loans that we have the intent and ability to hold for the foreseeable future or until maturity as HFI. Loans held-for-investment are reported at their amortized cost, which includes the outstanding principal balance adjusted for any unamortized premiums, discounts, deferred fees and costs. Premiums and discounts on purchased loans and non-refundable loan origination and commitment fees, net of direct costs of originating or acquiring loans, are deferred and recognized over the estimated lives of the related loans as an adjustment to the loans’ effective yield, which is included in interest income on loans in the Consolidated Statements of Operations.

Loans originally classified as HFS, for which we have elected the fair value option, and subsequently transferred to HFI continue to be measured and reported at fair value on a recurring basis. Changes in fair value are recorded to "other noninterest income" on the Consolidated Statements of Operations. The fair value of these loans is determined using the same methods described above for LHFS. For additional information relating to recurring fair value disclosures, see Note 22 - Fair Value Measurements.

When loans originally classified as HFS or as HFI are reclassified due to a change in intent or ability to hold, cash flows associated with the loans will be classified in the Consolidated Statements of Cash Flows as operating or investing, as appropriate, in accordance with the initial classification of the loans.

Past Due and Impaired Loans

Loans are considered to be past due when any payment of principal or interest is 30 days past the scheduled payment date. While it is the goal of management to collect on loans, we attempt to work out a satisfactory repayment schedule or modification with past due borrowers and will undertake foreclosure proceedings if the delinquency is not satisfactorily resolved. Our practices regarding past due loans are designed to both assist borrowers in meeting their contractual obligations and minimize losses incurred by the bank.

We cease the accrual of interest on all classes of consumer and commercial loans once they become 90 days past due, or when doubt exists as to the ultimate collection of principal or interest (classified as nonaccrual or nonperforming loans). When a loan is placed on nonaccrual status, the accrued interest income is reversed and may only return to accrual status when principal and interest become current and are anticipated to be fully collectible.

Loans are considered impaired if it is probable that payment of interest and principal will not be made in accordance with the original contractual terms of the loan agreement or when any portion of principal or interest is 90 days past due. This classification includes both performing and nonperforming modified loans. For further information, see Note 22 - Fair Value Measurements.

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

When a loan is considered impaired, the accrual of interest income is discontinued until the receipt of principal and interest is no longer in doubt. Interest income is recognized on impaired loans using a cost recovery method unless amounts contractually due are not in doubt. Cash received on impaired loans are applied entirely against principal until the loan has been collected in full, after which time any additional cash receipts are recognized as interest income.

Loan Modifications (Troubled Debt Restructurings)

We may modify certain loans in both our consumer and commercial loan portfolios to retain customers or to maximize collection of the outstanding loan balance. We have programs designed to assist borrowers by extending payment dates or reducing the borrower's contractual payments. All loan modifications are made on a case-by-case basis. Our standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. TDRs result in those instances in which a borrower demonstrates financial difficulty and for which a concession has been granted, which includes reductions of interest rate, extensions of amortization period, principal and/or interest forgiveness and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. These loans are classified as nonperforming TDRs if the loan was nonperforming prior to the restructuring, or based upon the results of a contemporaneous credit evaluation. Such loans will continue on nonaccrual status until the borrower has established a willingness and ability to make the restructured payments for at least six months, after which they will be classified as performing TDRs and begin to accrue interest. Performing and nonperforming TDRs remain impaired as interest and principal will not be received in accordance with the original contractual terms of the loan agreement.

Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, but may give rise to potential incremental losses. We measure impairments using a discounted cash flow method for performing TDRs and measure impairment based on collateral values for nonperforming TDRs.

Allowance for Loan Losses

The allowance for loan losses represents management's estimate of probable losses in our LHFI portfolio, excluding loans carried under the fair value option. We establish an allowance when (a) available information indicates that it is probable that a loss has occurred and (b) the amount of the loss can be reasonably estimated. The allowance provides for probable losses that have been identified with specific customer relationships (individually evaluated) and for probable losses believed to be inherent in the loan portfolio but that have not been specifically identified (collectively evaluated). Management assigns qualitative factors to each loan portfolio segment based on consideration of the following factors: changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and volume of the portfolio, changes in lending management, changes in credit quality statistics, changes in the quality of the loan review system, changes in the value of underlying collateral for collateral-dependent loans, changes in concentrations of credit, and other internal or external factor changes.

A specific allowance is established on impaired loans when it is probable all amounts due will not be collected pursuant to the original contractual terms of the loan and the recorded investment in the loan exceeds its fair value. The required allowance is measured using either the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral less estimated disposal costs if the loan is collateral dependent.

A general allowance is established for losses inherent on non-impaired loans by segmenting the portfolio based upon common risk characteristics. The general loss is then determined by using a historical loss model which utilizes our loss history by specific product, or if the product is not sufficiently seasoned, per readily available industry peer loss data. The loss model utilizes a loss emergence period that represents the average amount of time between when the loss event first occurs and when the specific loan is charged-off. In addition to the loss history or peer data, we also include a qualitative adjustment that considers economic risks, industry and geographic concentrations and other factors not adequately captured in our methodology.

Consumer loans secured by real estate are charged-off to the estimated fair value of the collateral when a loss is confirmed or at 180 days past due, whichever is sooner. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure or receipt of an asset valuation indicating a collateral deficiency and the asset is the sole source of repayment. For consumer loans not secured by real estate, the charge-off is taken upon confirmation or 120 days past due.

Commercial loans are evaluated on a loan level basis and either charged-off or written down to net realizable value if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment.

Transfers of Financial Assets

Our recognition of gain or loss on the sale of loans for which we surrender control is accounted for as a sale to the extent that 1) the transferred assets are legally isolated from the us or our consolidated affiliates, even in bankruptcy or other receivership, 2) the transferee has the right to pledge or exchange the assets with no conditions that constrain the transferee and provide more than a trivial benefit to the Company, and 3) we do not maintain the obligation or unilateral ability to reclaim or repurchase the assets. If the sale criteria are met, the transferred financial assets are removed from the Consolidated Statements of Financial Condition and a gain or loss on sale is recognized.

Variable Interest Entities

An entity that has a controlling financial interest in a variable interest entity ("VIE") is referred to as the primary beneficiary and consolidates the VIE. The Corporation is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. For further information, see Note 7 - Variable Interest Entities.

Repossessed Assets

Repossessed assets include one-to-four family residential property, commercial property and one-to-four family homes under construction that were acquired through foreclosure or acceptance of a deed-in-lieu of foreclosure. Repossessed assets are initially recorded in other assets at the estimated fair value of the collateral less estimated costs to sell. Losses arising from the initial acquisition of such properties are charged against the ALLL at the time of transfer. Subsequent declines in value, as well as gains and losses on disposal of these properties, are charged to "asset resolution" within noninterest expense in the Consolidated Statements of Operations as incurred. For Further information, see Note 22 - Fair Value Measurements.

Loans with Government Guarantees

We originate government guaranteed loans which are pooled and sold as Ginnie Mae MBS. Pursuant to Ginnie Mae servicing guidelines, we have the unilateral right to repurchase loans 90 days or more past due securitized in Ginnie Mae pools. As a result, once the delinquency criteria have been met, and regardless of whether the repurchase option has been exercised, we account for the loans as if they had been repurchased. We recognize the loans and corresponding liability as loans with government guarantees and other liabilities, respectively, in the Consolidated Statements of Financial Condition. If the loan is repurchased, the liability is cash settled and the loan with government guarantee remains. Once repurchased, we may collect losses through a claims process with the government agency, as an approved lender.

Federal Home Loan Bank Stock

We own stock in the FHLB of Indianapolis as required to permit us to obtain membership in and to borrow from the FHLB. No market quotes exist for the stock. The stock is redeemable at par and is carried at cost.

Premises and Equipment

Premises and equipment are carried at cost less accumulated depreciation. Land is carried at historical cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets which generally ranges from three to thirty years. Capitalized software is amortized on a straight-line basis over its useful life, which generally ranges from three to seven years. Software expenditures, repair and maintenance costs that are considered general, administrative, or of a maintenance nature are expensed as incurred.

Mortgage Servicing Rights

We purchase and originate mortgage loans for sale to the secondary market and sell the loans on either a servicing-retained or servicing-released basis. If we retain the right to service the loan, an MSR is created at the time of sale which is recorded at fair value. We use an internal valuation model that utilizes an option-adjusted spread and other assumptions to determine the fair value of MSRs. The key assumptions used in the valuation of MSRs include mortgage prepayment speeds

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

and discount rates. Management obtains third-party valuations of the MSR portfolio on a quarterly basis from independent valuation services to assess the reasonableness of the fair value calculated by our internal valuation model. Changes in fair value of our MSRs are reported on the Consolidated Statements of Operations in "net return on mortgage servicing." For Further information, see Note 22 - Fair Value Measurements.

We periodically enter into agreements to sell certain of our MSRs, which qualify as sales transactions. A transfer of servicing rights related to loans previously sold qualifies as a sale at the date on which title passes, if substantially all risks and rewards of ownership have irrevocably passed to the transferee and any protection provisions retained by the transferor are minor and can be reasonably estimated. In addition, if a sale is recognized and only minor protection provisions exist, a liability is accrued for the estimated obligation associated with those provisions.

Servicing Fee Income

Servicing fee income, late fees and ancillary fees received on loans for which we own the MSR, are included in the net return on MSR line of the Consolidated Statements of Operations. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. Subservicing fees, which are included in loan administration income on the Consolidated Statements of Operations are based on a contractual monthly amount per loan including late fees and other ancillary income.

Derivatives

We utilize derivative instruments to manage the fair value changes in our MSR asset, interest rate lock commitments and loans held for sale portfolio which are exposed to price and interest rate risk, facilitate asset/liability management, minimize the variability of future cash flows on long-term debt, and to meet the needs of our customers. All derivatives are recognized on the Consolidated Statements of Financial Condition as other assets and liabilities, as applicable, at their estimated fair value. For those derivatives designated as qualified cash flow hedges, changes in the fair value of the derivatives, to the extent effective as a hedge, are recorded in accumulated other comprehensive income, net of income taxes, and reclassified into earnings concurrently with the earnings of the hedged item. For derivative instruments designated as qualified fair value hedges, which are used to hedge the exposure of fair value changes of an asset or liability attributable to a particular risk, the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings during the period of the change in fair values. For all other derivatives, changes in the fair value of the derivative are recognized immediately in earnings. A majority of these derivatives are subject to master netting agreements and cleared through a Central Counterparty Clearing House, which mitigates non-performance risk with counterparties and enables us to settle activity on a net basis.

We use interest rate swaps, swaptions, futures, and forward loan sale commitments to mitigate the impact of fluctuations in interest rates and interest rate volatility on the fair value of the MSRs. These derivatives are not designated as qualifying hedges. Accordingly, changes in their fair value are reflected in current period earnings under the "net return on MSRs." Interest rate swaps, swaptions, futures, and forward loan sale commitments are valued based on quoted prices for similar assets in an active market with inputs that are observable.

We also enter into various derivative agreements with customers and correspondents in the form of interest-rate lock commitments and forward purchase contracts which are commitments to originate or purchase mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The derivatives are valued using internal models that utilize market interest rates and other unobservable inputs. Changes in the fair value of these commitments due to fluctuations in interest rates that are to be originated to our HFS portfolio are economically hedged through the use of forward loan sale commitments of MBS. The gains and losses arising from this derivative activity are reflected in current period earnings under the "net gain on loan sales." Interest rate lock commitments are valued using internal models with significant unobservable market parameters. Forward loan sale commitments are valued based on quoted prices for similar assets in an active market with inputs that are observable.

At certain times we may also enter into various derivative agreements with correspondents in the form of forward purchase contracts at the time the correspondent customer enters into an interest-rate lock commitment. The derivatives are valued using internal models that utilize market interest rates and other unobservable inputs.

We utilize interest rate swaps to hedge the forecasted cash flows from our underlying variable-rate FHLB advances and forecasted FHLB advances in qualifying cash flow hedge accounting relationships. Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income on the Consolidated Statement of Financial

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Condition and reclassified into interest expense concurrently with the interest expense on the debt. Interest rate swaps are valued based on quoted prices for similar assets in an active market with inputs that are observable. These hedges are evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period. For forecasted FHLB advances being hedged, each reporting period we evaluate the likelihood of the transaction occurring based on the current facts and circumstances to ensure the hedge relationship still qualifies for hedge accounting. If we de-designate a hedge relationship or determine that an interest rate swap no longer qualifies for hedge accounting changes in fair value are no longer recorded in other comprehensive income. If the hedged item remains probable to occur, the effective amounts previously recorded in other comprehensive income are recognized in earnings over the remaining life of the hedged item as an adjustment to yield.

We also utilize interest rate swaps to manage fair value changes of our fixed-rate FHLB advances in a qualifying fair value hedge accounting relationship. Changes in the fair value of derivatives designated as fair value hedges, as well as the change in fair value of the hedged item, are recognized in current period earnings. The corresponding adjustment is recorded as a basis adjustment to the hedged item and hedging instrument. Interest rate swaps are valued based on quoted prices for similar assets in an active market with inputs that are observable. These hedges are evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period. If the Company determines an interest rate swap no longer qualifies for fair value hedge accounting or is de-designated, the hedged item will no longer be adjusted for changes in fair value and the amounts previously recorded as a basis adjustment are recognized in earnings over the remaining life of the hedged item as an adjustment to yield.

If a previously hedged item is extinguished or sold, the remaining unamortized balance in other comprehensive income balance for prior cash flow hedges and the remaining basis adjustment of the hedged item for prior fair value hedges will be reclassified to current period earnings.

To assist our customers in meeting their needs to manage interest rate risk, we enter into interest rate swap derivative contracts. To economically hedge this risk, we enter into offsetting derivative contracts to effectively eliminate the interest rate risk associated with these contracts.

For further information regarding the accounting for derivatives see, Note 11 - Derivative Financial Instruments and additional recurring fair value disclosures in Note 22 - Fair Value Measurements.

Bank Owned Life Insurance

Our bank owned life insurance policies are recorded at their cash surrender value in Other assets on the Consolidated Statements of Financial Condition. We recognize tax-exempt income from the periodic increases in the cash surrender value of these policies and from death benefits in other noninterest income on the Consolidated Statements of Operations. The total cash surrender value of our bank owned life insurance policies totaled $271 million and $178 million at December 31, 2016 and 2015 , respectively.

Income Taxes

We evaluate two components of income tax expense: current and deferred. Current income tax expense represents our estimated taxes to be paid or refunded for the current period. Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. We evaluate our deferred tax assets to determine if, based on all available evidence, it is more likely than not that they will be realized. If it is determined that it is more likely than not that the deferred taxes will not be realized, we establish a valuation allowance. For further information, see Note 19 - Income Taxes.

Representation and Warranty Reserve

When we sell mortgage loans into the secondary mortgage market, 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. For eligible loans sold to the Agencies after December 31, 2014, certain of these representations and warranties expire after 36 months. Typically, all other 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

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

either repurchase the loan, pay a fee or indemnify the purchaser for losses it sustains on the loan. If there are no such defects, the Company has no liability to the purchaser for losses it may incur on such loan. Upon the sale of a loan, the Company recognizes a liability for that guarantee at its fair value as a reduction of our net gain on loan sales. Subsequent to the sale, the liability is re-measured on an ongoing basis based on an estimate of probable future losses. In each case, these estimates are based on our most recent data including loss severity on repurchased and indemnified loans, repurchase requests and other factors. Changes to our previous estimates are recorded in the representation and warranty (provision) benefit in the Consolidated Statements of Operations.

Advertising Costs

Advertising costs are expensed in the period they are incurred and are included as part of other noninterest expense in the Consolidated Statements of Operations. Advertising expenses totaled $11 million , $9 million , and $10 million for the years ended December 31, 2016 , 2015 and 2014 , respectively.

Stock-Based Compensation

All share-based payments to employees, including grants of employee stock options and restricted stock units, are classified as equity with expenses being recognized in compensation and benefits in the Consolidated Statements of Operations based on their fair values. The amount of compensation is measured at the grant date and is expensed over the requisite service period, which is normally the vesting period. For further information, see Note 18 - Stock-Based Compensation.

Department of Justice Litigation Settlement

The executed settlement agreement with the DOJ representing the obligation to make future additional payments establishes a legally enforceable contract with a stipulated payment plan that meets the definition of a financial liability. We have elected the fair value option to account for this financial liability included in "other liabilities" on the Consolidated Financial Statements. For further information on the valuation of the DOJ litigation settlement, see Note 22 - Fair Value Measurements.

Recently Issued Accounting Pronouncements

Business Combinations - In January 2017, the FASB issued ASU 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business. Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a "set") that is a business usually has outputs, outputs are not required to be present. This amendment provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. ASU 2017-1 is effective for fiscal years beginning after December 15, 2017. We are currently evaluating this guidance.

Statement of Cash Flows - Restricted Cash - In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendment does not provide a definition of restricted cash or restricted cash equivalents. The amendments in this update apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017. We are currently evaluating this guidance.

Consolidation - In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests held through related parties that are under Common Control. ASU 2016-17 amends the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The amendments in this update are effective for fiscal years beginning after December 15, 2016.

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Income Taxes - In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The amendments in this update are effective for annual reporting periods beginning after December 15, 2017. We are currently evaluating this guidance and the impact it will have on our Consolidated Financial Statements.

Statement of Cash Flows - In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. This amendment addresses eight issues which current GAAP does not include specific guidance or is unclear, pertaining to: Debt Prepayment or Debt Extinguishment Costs, Settlement of Zero-Coupon Debt Instruments, Contingent Consideration Payments Made after a Business Combination, Proceeds from the Settlement of Insurance Claims, Proceeds from the Settlement of Corporate-Owned or Bank-Owned Life Insurance Policies, Distributions Received from Equity Method Investees, Beneficial Interest in Securitization Transactions, and Separately Identifiable Cash Flows and Application of the Predominance Principle. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 and early adoption is permitted. We are currently evaluating this guidance and the impact it will have on our Consolidated Financial Statements.

Credit Losses - In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The ASU alters the current method for recognizing credit losses within the reserve account. Currently, an institution uses the incurred loss method, the new guidance requires financial assets to be presented at the net amount expected to be collected (i.e., net of expected credit losses). The measurement of expected credit losses should be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. We have established an internal steering committee to lead the implementation efforts. The steering committee is in the process of evaluating control and process framework, data, model, and resource requirements and areas where modifications will be required. We are currently evaluating the impact adoption of the guidance will have on our Consolidated Financial Statements, but highlight that any impact will be contingent upon the underlying characteristics of the affected portfolio and macroeconomic and internal forecasts at adoption date.

Stock Compensation - In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in ASU 2016-09 affect all entities that issue share-based payment awards to their employees. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective retrospectively for fiscal years beginning after December 15, 2016 and early adoption is permitted. This Update was adopted in the current reporting period with no significant impact recognized on our Consolidated Financial Statements.

Derivatives and Hedging - In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815) - Contingent Put and Call Options in Debt Instruments. The amendments in ASU 2016-06 clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in ASU 2016-06 is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. ASU 2016-06 is effective retrospectively for fiscal years beginning after December 15, 2016 and early adoption is permitted. This guidance is not expected to have a material impact upon adoption on our Consolidated Financial Statements, but disclosures to the Notes thereto will be updated per the requirements.

Leases - In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): Section A - Leases: Amendments to the FASB Accounting Standards Codification, Section B - Conforming Amendments Related to Leases: Amendment to the FASB Accounting Standards Codification, Section C - Background Information and Basis For Conclusions. Lessees will need to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting. ASU 2016-02 is effective retrospectively for fiscal years beginning after December 15, 2018 and early adoption is permitted. The guidance in ASU 2016-02 supersedes Topic 840, Leases. Upon adoption and implementation, we expect to gross up assets and liabilities due to the recognition of lease liabilities and right of use assets associated with the underlying lease contracts. While we do not expect the adoption of the guidance to have a material impact on our Consolidated Statements of Operations given our current inventory of leases, review is ongoing and we will continue to evaluate the impact to the Consolidated Statements of Financial Condition and to capital.

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Financial Instruments - In January 2016, the FASB issued Update 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new standard significantly revises an entity’s accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 is effective retrospectively for fiscal years beginning after December 15, 2017 and early adoption is permitted. We are currently evaluating this guidance and does not expect this guidance to have a material impact on the Company’s Consolidated Financial Statements, if any.

Revenue from Contracts with Customers - In May 2014, FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." Under the amended guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration in exchange for those goods or services. The FASB has voted to approve a year deferral of the effective date from January 1, 2017 to January 1, 2018. In April 2016, the FASB clarified the following two aspects: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. In May 2016, the FASB issued ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, to provide a limited number of changes to its revenue recognition standard. The amendments clarify the assessment of the likelihood that revenue will be collected from a contract, the guidance for presenting sales taxes and similar taxes, and the timing for measuring customer payments that are not in cash. The amendment also specifies that a contract should be considered complete if all, or substantially all, of its revenue has been collected prior to making the transition to the new standard. In addition, the update clarifies the disclosure requirements for transition to the new standard by adjusting amounts from prior reporting periods. In December 2016, the FASB issued ASU 2016-20 Technical Corrections and Improvement to Topic 606, Revenue from Contracts with Customers. We expect to implement the revenue recognition guidance in the first quarter of 2018 utilizing the cumulative-effect approach. Our implementation of the guidance will include creation of an inventory of revenue contracts and assessing whether the recognition of revenue associated with each contract will be impacted by the new guidance, particularly related to certain fees. Lease contracts and financial instruments, which includes loans and securities, are excluded from the scope of this standard. Therefore, we do not anticipate the implementation of the revenue recognition guidance to have a material impact on our Consolidated Statements of Financial Condition.

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Note 2 — Investment Securities

As of December 31, 2016 and 2015 , investment securities were comprised of the following:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in millions)
December 31, 2016
Available-for-sale securities
Agency - Commercial	$	551	$	2	$	(5	)	$	548
Agency - Residential	913		1		(16		)	898
Municipal obligations	34		—		—			34
Total available-for-sale securities (1)	$	1,498	$	3	$	(21	)	$	1,480
Held-to-maturity securities
Agency - Commercial	$	595	$	—	$	(6	)	$	589
Agency - Residential	498		1		(4		)	495
Total held-to-maturity securities (1)	$	1,093	$	1	$	(10	)	$	1,084

December 31, 2015
Available-for-sale securities
Agency - Commercial	$	766	$	3	$	(3	)	$	766
Agency - Residential	514		2		(2		)	514
Municipal obligations	14		—		—			14
Total available-for-sale securities (1)	$	1,294	$	5	$	(5	)	$	1,294
Held-to-maturity securities
Agency - Commercial	$	634	$	—	$	(2	)	$	632
Agency - Residential	634		—		(4		)	630
Total held-to-maturity securities (1)	$	1,268	$	—	$	(6	)	$	1,262


(1)	There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10 percent of stockholders’ equity at December 31, 2016 or December 31, 2015 .

Management evaluates our securities portfolio each quarter to determine if any security is considered to be other than temporarily impaired. In making this evaluation, management considers our ability and intent to hold securities to recover current market losses. During the years ended December 31, 2016 , 2015 and 2014 , we had no OTTI.

Available-for-sale securities

Securities available-for-sale are carried at fair value, with unrealized gains and losses, to the extent they are temporary in nature, reported as a component of other comprehensive income.

We purchased $680 million of AFS securities, which included U.S. government sponsored agency MBS and municipal obligations during the year ended December 31, 2016 . During the year ended December 31, 2015 , we purchased $1.1 billion of investment securities, all of which were U.S. government sponsored agencies, comprised of MBS and collateralized mortgage obligations and $14 million of municipal obligations, compared to $1.2 billion of investment securities, all of which were U.S. government sponsored agencies, comprised of MBS and collateralized mortgage obligations during the year ended December 31, 2014 .

Gains (losses) on the sales of AFS securities are reported in other noninterest income in the Consolidated Statements of Operations. During the year ended December 31, 2016 , there were $291 million in sales of U.S. government sponsored agency securities, which resulted in a gain of $4 million . During the year ended December 31, 2015 , we sold $170 million of U.S. government sponsored agency securities, which resulted in a gain of $3 million , compared to $414 million of U.S. government sponsored agencies, which resulted in a gain of $4 million during the year ended December 31, 2014 .

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Held-to-maturity securities

Transfers of investment securities into the HTM category from the AFS category are accounted for at fair value at the date of transfer. During the year ended December 31, 2015 , we transferred $1.1 billion of AFS securities to HTM securities including a premium of $8 million , reflecting our intent and ability to hold those securities to maturity. The related $5 million of unrealized holding gain, net of tax, that was included in the transfer is retained in other comprehensive income (loss) and is being amortized as an adjustment to interest income over the remaining life of the securities. There were no gains or losses recognized as a result of this transfer.

We purchased $15 million of HTM securities, which included U.S. government sponsored agency MBS during the year ended December 31, 2016 . We purchased $217 million of HTM securities, which included agency-collateralized mortgage obligations during the year ended December 31, 2015 . There were no purchases of HTM securities during the year ended December 31, 2014 . We had no sales of HTM securities during the years ending December 31, 2016 , 2015 and 2014 , respectively.

The following table summarizes, by duration, the unrealized loss positions on investment securities:



	Unrealized Loss Position with Duration 12 Months and Over					Unrealized Loss Position with Duration Under 12 Months
	Fair Value		Number of Securities	Unrealized Loss		Fair Value		Number of Securities	Unrealized Loss
	(Dollars in millions)
December 31, 2016
Available-for-sale securities
Agency - Commercial	$	6	1	$	—	$	345	29	$	(5	)
Agency - Residential	—		—	—		748		55	(16		)
Municipal obligations	—		—	—		17		8	—
Held-to-maturity securities
Agency - Commercial	$	—	—	$	—	$	528	34	$	(6	)
Agency - Residential	—		—	—		385		43	(4		)
December 31, 2015
Available-for-sale securities
Agency - Commercial	$	—	—	$	—	$	482	27	$	(3	)
Agency - Residential	8		2	—		224		15	(2		)
Held-to-maturity securities
Agency - Commercial	$	—	—	$	—	$	471	27	$	(2	)
Agency - Residential	—		—	—		547		50	(4		)

The amortized cost and estimated fair value of securities at December 31, 2016 , are presented below by contractual maturity:



	Investment Securities Available-for-Sale						Investment Securities Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Weighted-Average Yield		Amortized Cost		Estimated Fair Value		Weighted-Average Yield
	(Dollars in millions)						(Dollars in millions)
December 31, 2016
Due after one year through five years	$	16	$	16	3.79	%	$	—	$	—	—	%
Due after five years through 10 years	6		5		2.66	%	61		61		2.50	%
Due after 10 years	1,476		1,459		2.29	%	1,032		1,023		2.39	%
Total	$	1,498	$	1,480			$	1,093	$	1,084

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

We pledge investment securities, primarily municipal taxable and agency collateralized mortgage obligations, to collateralize lines of credit and/or borrowings. We had pledged investment securities of $879 million , $14 million , and less than $1 million at December 31, 2016 , 2015 and 2014 , respectively.

Note 3 — Loans Held-for-Sale

The majority of our mortgage loans originated as LHFS are sold into the secondary market on a whole loan basis or by converting the loans to securities or securitizing the loans. At December 31, 2016 and 2015 , LHFS totaled $3.2 billion and $2.6 billion , respectively. For the years ended December 31, 2016 , 2015 and 2014 , we reported net gain on loan sales associated with LHFS of $301 million , $288 million , and $206 million , respectively.

At December 31, 2016 and 2015 , $32 million and $35 million , respectively, of LHFS were recorded at lower of cost or fair value. The remainder of the loans in the portfolio are recorded at fair value as we have elected the fair value option for such loans.

Note 4 — Loans Held-for-Investment

Loans held-for-investment are summarized as follows:



	December 31, 2016		December 31, 2015
	(Dollars in millions)
Consumer loans
Residential first mortgage	$	2,327	$	3,100
Second mortgage	126		135
HELOC	317		384
Other	28		31
Total consumer loans	2,798		3,650
Commercial loans
Commercial real estate (1)	1,261		814
Commercial and industrial	769		552
Warehouse lending	1,237		1,336
Total commercial loans	3,267		2,702
Total loans held-for-investment	6,065		6,352


(1)	Includes $245 million and $188 million of owner occupied commercial real estate loans at December 31, 2016 and December 31, 2015, respectively.

During the year ended December 31, 2016 , we sold nonperforming, TDR and non-agency loans with unpaid principal balances totaling $110 million . Upon a change in our intent, the loans were transferred to HFS and subsequently sold resulting in a loss on sale of $2 million during the year ended December 31, 2016 , which is recorded in net loss on sale of assets on the Consolidated Statements of Operations. A portion of the general ALLL associated with these loans was reduced, resulting in a

$13 million reduction in allowance.

Also, during the year ended December 31, 2016 , we sold performing residential first mortgage loans with unpaid principal balances of $1.2 billion . Upon a change in our intent, the loans were transferred to HFS and subsequently sold resulting in a gain of $14 million , which is recorded in net gain on loan sales on the Consolidated Statements of Operations.

During the year ended December 31, 2015 , we sold or transferred interest-only residential first mortgage loans with unpaid principal balances totaling $601 million and residential first mortgage jumbo loans with unpaid principal balances of $9 million . In addition, we sold past due (including nonperforming) and troubled debt restructured first residential mortgage loans with unpaid principal balances of $427 million and $8 million of other residential first mortgage loans. Upon a change in our intent, the loans were transferred to HFS and subsequently sold resulting in a gain on sale of $1 million , which is recorded in net gain on sale of assets on the Consolidated Statements of Operations. A portion of the general ALLL associated with these loans was reduced, resulting in a $69 million reduction in allowance.

During the year ended December 31, 2014 , we sold nonperforming, troubled debt restructured residential first mortgage and residential first mortgage jumbo loans with unpaid principal balances totaling $632 million and $20 million of

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

other residential first mortgage loans. A portion of the ALLL associated with these loans was reduced, resulting in a $9 million reduction in allowance. Upon a change in our intent, the loans were transferred to HFS and subsequently sold resulting in a gain on sale of $11 million , which is recorded in net gain on sale of assets on the Consolidated Statements of Operations.

During the year ended December 31, 2016 , we purchased jumbo residential first mortgage loans with an unpaid principal balance of $175 million and a premium of $1 million . During the year ended December 31, 2015 , we purchased $197 million of HELOC loans with a premium of $7 million , none of which were credit impaired.

We have pledged certain LHFI, LHFS, and loans with government guarantees to collateralize lines of credit and/or borrowings with the FRB of Chicago and the FHLB of Indianapolis. At December 31, 2016 and 2015 , we had pledged $5.3 billion and $5.8 billion , respectively.

The ALLL by class of loan are summarized in the following tables:



	Residential First Mortgage (1)			Second Mortgage			HELOC			Other Consumer			Commercial Real Estate			Commercial and Industrial			Warehouse Lending		Total
Year Ended December 31, 2016	(Dollars in millions)
Beginning balance ALLL	$	116		$	11		$	21		$	2		$	18		$	13		$	6	$	187
Charge-offs (2)	(29		)	(2		)	(2		)	(3		)	—			—			—		(36		)
Recoveries	2			—			—			3			1			—			—		6
Provision (benefit) (3)	(24		)	(1		)	(3		)	(1		)	9			4			1		(15		)
Ending balance ALLL	$	65		$	8		$	16		$	1		$	28		$	17		$	7	$	142
Year Ended December 31, 2015
Beginning balance ALLL	$	234		$	12		$	19		$	1		$	17		$	11		$	3	$	297
Charge-offs (2)	(87		)	(4		)	(3		)	(4		)	—			(3		)	—		(101		)
Recoveries	3			2			—			3			2			—			—		10
Provision (benefit)	(34		)	1			5			2			(1		)	5			3		(19		)
Ending balance ALLL	$	116		$	11		$	21		$	2		$	18		$	13		$	6	$	187
Year Ended December 31, 2014
Beginning balance ALLL	$	162		$	12		$	8		$	2		$	19		$	3		$	1	$	207
Charge-offs	(38		)	(3		)	(6		)	(2		)	(3		)	—			—		(52		)
Recoveries	3			1			—			3			3			—			—		10
Provision (benefit)	107			2			17			(2		)	(2		)	8			2		132
Ending balance ALLL	$	234		$	12		$	19		$	1		$	17		$	11		$	3	$	297


(1)	Includes allowance and charge-offs related to loans with government guarantees.

(2)

Includes charge-offs of $8 million , $69 million and $15 million related to the transfer and subsequent sale of loans during the year ended December 31, 2016 , December 31, 2015 , and December 31, 2014 , respectively. Also includes charge-offs related to loans with government guarantees of $14 million , $3 million , and zero during the year ended December 31, 2016 , December 31, 2015 , and December 31, 2014 , respectively.


(3)	Does not include $7 million for provision expense for loan losses recorded in the Consolidated Statements of Operations to reserve for repossessed loans with government guarantees at December 31, 2016 . There was no provision for loan losses for repossessed loans with government guarantees recorded at December 31, 2015 , and December 31, 2014 , respectively.

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements



	Residential First Mortgage (1)		Second Mortgage		HELOC		Other Consumer		Commercial Real Estate		Commercial and Industrial		Warehouse Lending		Total
	(Dollars in millions)
December 31, 2016
Loans held-for-investment
Individually evaluated	$	46	$	26	$	3	$	—	$	—	$	—	$	—	$	75
Collectively evaluated (2)	2,274		59		290		28		1,261		769		1,237		5,918
Total loans	$	2,320	$	85	$	293	$	28	$	1,261	$	769	$	1,237	$	5,993
Allowance for loan losses
Individually evaluated	$	5	$	6	$	2	$	—	$	—	$	—	$	—	$	13
Collectively evaluated (2)	60		2		14		1		28		17		7		129
Total allowance for loan losses	$	65	$	8	$	16	$	1	$	28	$	17	$	7	$	142
December 31, 2015
Loans held-for-investment
Individually evaluated	$	87	$	28	$	3	$	—	$	—	$	2	$	—	$	120
Collectively evaluated (2)	3,007		65		318		31		814		550		1,336		6,121
Total loans	$	3,094	$	93	$	321	$	31	$	814	$	552	$	1,336	$	6,241
Allowance for loan losses
Individually evaluated	$	12	$	6	$	1	$	1	$	—	$	—	$	—	$	20
Collectively evaluated (2)	104		5		20		1		18		13		6		167
Total allowance for loan losses	$	116	$	11	$	21	$	2	$	18	$	13	$	6	$	187


(1)	Includes allowance related to loans with government guarantees.


(2)	Excludes loans carried under the fair value option.

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

The following table sets forth the LHFI aging analysis as of December 31, 2016 and December 31, 2015 , of past due and current loans:



	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due (1)		Total Past Due		Current		Total Investment Loans
	(Dollars in millions)
December 31, 2016
Consumer loans
Residential first mortgage	$	6	$	—	$	29	$	35	$	2,292	$	2,327
Second mortgage	—		1		4		5		121		126
HELOC	1		1		7		9		308		317
Other	1		—		—		1		27		28
Total consumer loans	8		2		40		50		2,748		2,798
Commercial loans
Commercial real estate	—		—		—		—		1,261		1,261
Commercial and industrial	—		—		—		—		769		769
Warehouse lending	—		—		—		—		1,237		1,237
Total commercial loans	—		—		—		—		3,267		3,267
Total loans (2)	$	8	$	2	$	40	$	50	$	6,015	$	6,065
December 31, 2015
Consumer loans
Residential first mortgage	$	7	$	3	$	53	$	63	$	3,037	$	3,100
Second mortgage	—		—		2		2		133		135
HELOC	2		1		9		12		372		384
Other	1		—		—		1		30		31
Total consumer loans	10		4		64		78		3,572		3,650
Commercial loans
Commercial real estate	—		—		—		—		814		814
Commercial and industrial	—		—		2		2		550		552
Warehouse lending	—		—		—		—		1,336		1,336
Total commercial loans	—		—		2		2		2,700		2,702
Total loans (2)	$	10	$	4	$	66	$	80	$	6,272	$	6,352


(1)	Includes loans 90 days or greater past due and performing nonaccrual loans that are less than 90 days past due.


(2)	Includes $13 million and $10 million of loans 90 days or greater past due accounted for under the fair value option at December 31, 2016 and 2015 , respectively.

Interest that would have been accrued on impaired loans totaled approximately $2 million , $6 million and $17 million during the years ended December 31, 2016 , 2015 and 2014 , respectively. At December 31, 2016 and 2015 , we had no loans 90 days or greater past due and still accruing interest.

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Troubled Debt Restructurings

The following table provides a summary of TDRs by type and performing status:



	TDRs
	Performing		Nonperforming		Total
December 31, 2016	(Dollars in millions)
Consumer loans (1)
Residential first mortgage	$	22	$	11	$	33
Second mortgage	35		4		39
HELOC	10		3		13
Total consumer loans	67		18		85
Total TDRs (2)	$	67	$	18	$	85
December 31, 2015
Consumer loans (1)
Residential first mortgage	$	49	$	27	$	76
Second mortgage	32		1		33
HELOC	20		7		27
Total TDRs (2)	$	101	$	35	$	136


(1)	The ALLL on consumer TDR loans totaled $9 million and $15 million at December 31, 2016 and 2015 , respectively.


(2)	Includes $25 million and $32 million of TDR loans accounted for under the fair value option at December 31, 2016 and 2015 , respectively.

The following table provides a summary of newly modified TDRs:



	New TDRs
	Number of Accounts	Pre-Modification Unpaid Principal Balance		Post-Modification Unpaid Principal Balance (1)		Increase (Decrease) in Allowance at Modification
Year Ended December 31, 2016	(Dollars in millions)
Residential first mortgages	23	$	4	$	5	$	—
Second mortgages	56	3		3		—
HELOC (2)(3 )	87	6		5		—
Commercial & Industrial	1	$	2	$	1	$	—
Total TDR loans	167	$	15	$	14	$	—
Year Ended December 31, 2015
Residential first mortgages	325	$	81	$	80	$	(2	)
Second mortgages	97	4		3		—
HELOC (2)(3 )	273	17		15		—
Other consumer	3	—		—		—
Total TDR loans	698	$	102	$	98	$	(2	)
Year Ended December 31, 2014
Residential first mortgages	165	$	48	$	47	$	3
Second mortgages	325	11		10		—
HELOC (2)	30	1		1		—
Total TDR loans	520	$	60	$	58	$	3


(1)	Post-modification balances include past due amounts that are capitalized at modification date.


(2)	HELOC post-modification unpaid principal balance reflects write downs.


(3)	Includes loans carried at fair value option.

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

The following table provides a summary of newly modified TDRs in the past 12 months that have been subsequently defaulted during the years ended December 31, 2016 , 2015 and 2014 . All TDR classes within consumer and commercial loan portfolios are considered subsequently defaulted when greater than 90 days past due. The UPB associated with the TDR classes in the table below was less than $1 million for each class and in the aggregate for the years ended December 31, 2016 , 2015 and 2014 . There was no increase or decrease in the allowance associated with these TDRs at subsequent default. Subsequent default is defined as a payment re-defaulted within 12 months of the restructuring date:



	Years Ended December 31,
	2016	2015	2014
	Number of Accounts
Residential first mortgages	1	3	2
Second mortgages	0	2	18
HELOC (1)	7	3	5
Total TDR loans	8	8	25


(1)	HELOC post-modification unpaid principal balance reflects write downs.

Impaired Loans

The following table presents individually evaluated impaired loans and the associated allowance:



	December 31, 2016						December 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in millions)
With no related allowance recorded
Consumer loans
Residential first mortgage	$	6	$	6	$	—	$	20	$	20	$	—
Commercial loans
Commercial and industrial	—		—		—		5		2		—
	$	6	$	6	$	—	$	25	$	22	$	—
With an allowance recorded
Consumer loans
Residential first mortgage	$	40	$	40	$	5	$	65	$	67	$	12
Second mortgage	26		26		6		28		28		6
HELOC	3		3		2		3		3		1
Other consumer	—		—		—		—		—		1
	$	69	$	69	$	13	$	96	$	98	$	20
Total
Consumer loans
Residential first mortgage	$	46	$	46	$	5	$	85	$	87	$	12
Second mortgage	26		26		6		28		28		6
HELOC	3		3		2		3		3		1
Other consumer	—		—		—		—		—		1
Commercial loans
Commercial and industrial	—		—		—		5		2		—
Total impaired loans	$	75	$	75	$	13	$	121	$	120	$	20

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

The following table presents average impaired loans and the interest income recognized:



	For the Years Ended December 31,
	2016				2015				2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in millions)
Consumer loans
Residential first mortgage	$	52	$	1	$	150	$	5	$	402	$	11
Second mortgage	26		2		29		—		28		1
HELOC	4		—		10		—		1		—
Commercial loans
Commercial real estate	—		—		—		—		1		—
Commercial and industrial	2		—		2		—		—		—
Total impaired loans	$	84	$	3	$	191	$	5	$	432	$	12

Credit Quality

We utilize an internal risk rating system in accordance with the Rating Credit Risk booklet of the Comptroller's Handbook, April 2011 and the Uniform Retail Credit classification and Account Management Policy issued June 20, 2000 by the Federal Financial Institution Examination Council which is applied to all consumer and commercial loans. Descriptions of our internal risk ratings as they relate to credit quality follow the ratings used by the U.S. bank regulatory agencies as listed below.

Pass. Pass assets are not impaired nor do they have any known deficiencies that could impact the quality of the asset.

Watch. Watch assets are defined as pass rated assets that exhibit elevated risk characteristics or other factors that deserve management’s close attention and increased monitoring. However, the asset does not exhibit a potential or well-defined weakness that would warrant a downgrade to criticized or adverse classification.

Special mention. Assets identified as special mention possess credit deficiencies or potential weaknesses deserving management's close attention. Special mention assets have a potential weakness or pose an unwarranted financial risk that, if not corrected, could weaken the assets and increase risk in the future. Special mention assets are criticized, but do not expose an institution to sufficient risk to warrant adverse classification.

Substandard . Assets identified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. For HELOC loans and other consumer loans, we evaluate credit quality based on the aging and status of payment activity and any other known credit characteristics that call into question full repayment of the asset. Nonperforming loans are classified as either substandard, doubtful or loss.

Doubtful . An asset classified as doubtful has all the weaknesses inherent in one classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. A doubtful asset has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral, and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Because of high probability of loss, non-accrual accounting treatment is required for doubtful assets.

Loss. An asset classified as loss is considered uncollectible and of such little value that the continuance as bankable asset is not warranted. This classification does not mean that an asset has absolutely no recovery or salvage value, but, rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Commercial Loans

Management conducts periodic examinations which serve as an independent verification of the accuracy of the ratings assigned. Loan grades are based on different factors within the borrowing relationship: entity sales, debt service coverage, debt/total net worth, liquidity, balance sheet and income statement trends, management experience, business stability, financing structure of the deal, and financial reporting requirements. The underlying collateral is also rated based on the specific type of collateral and corresponding LTV. The combination of the borrower and collateral risk ratings result in the final rating for the borrowing relationship.

Consumer Loans

The same rating principles are used for consumer and commercial loans, but the principles are applied differently for consumer loans. Consumer loans consist of open and closed end loans extended to individuals for household, family, and other personal expenditures, and includes consumer loans, loans to individuals secured by their personal residence, including first mortgage, home equity, and home improvement loans. Because consumer loans are usually relatively small-balance, homogeneous exposures, consumer loans are rated primarily on payment performance. Payment performance is a proxy for the strength of repayment capacity and loans are generally classified based on their payment status rather than by an individual review of each loan.

In accordance with regulatory guidance, we assign risk ratings to consumer loans in the following manner:

• Consumer loans are classified as Watch once the loan becomes 60 days past due.

• Open and closed-end consumer loans 90 days or more past due are classified Substandard.



	December 31, 2016
Commercial Credit Loans	Commercial Real Estate		Commercial and Industrial		Warehouse		Total Commercial
	(Dollars in millions)
Grade
Pass	$	1,225	$	678	$	1,168	$	3,071
Watch	27		59		16		102
Special Mention	3		21		53		77
Substandard	6		11		—		17
Total loans	$	1,261	$	769	$	1,237	$	3,267



	December 31, 2016
Consumer Credit Loans	Residential First Mortgage		Second Mortgage		HELOC		Other Consumer		Total Consumer
	(Dollars in millions)
Grade
Pass	$	2,273	$	87	$	299	$	28	$	2,687
Watch	23		35		11		—		69
Substandard	31		4		7		—		42
Total loans	$	2,327	$	126	$	317	$	28	$	2,798

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements



	December 31, 2015
Commercial Credit Loans	Commercial Real Estate		Commercial and Industrial		Warehouse		Total Commercial
	(Dollars in millions)
Grade
Pass	$	766	$	492	$	1,181	$	2,439
Watch	42		30		155		227
Special mention	2		21		—		23
Substandard	4		9		—		13
Total loans	$	814	$	552	$	1,336	$	2,702



	December 31, 2015
Consumer Credit Loans	Residential First Mortgage		Second Mortgage		HELOC		Other Consumer		Total Consumer
	(Dollars in millions)
Grade
Pass	$	2,993	$	101	$	353	$	31	$	3,478
Watch	49		32		22		—		103
Substandard	58		2		9		—		69
Total loans	$	3,100	$	135	$	384	$	31	$	3,650

Note 5 — Loans with Government Guarantees

Substantially all loans with government guarantees are insured or guaranteed by the FHA and U.S. Department of Veterans Affairs. FHA loans earn interest at a rate based upon the 10 -year U.S. Treasury note rate at the time the underlying loan becomes delinquent, which is not paid by the FHA until claimed. Certain loans within our portfolio may be subject to indemnifications and insurance limits which exposes us to limited credit risk. We have reserved for these risks within other assets and as a component of our ALLL on residential first mortgages.

At December 31, 2016 and December 31, 2015 , respectively, loans with government guarantees totaled $365 million and $485 million .

At December 31, 2016 , repossessed assets and the associated claims recorded in other assets totaled $135 million and at December 31, 2015 repossessed assets and the associated claims were $210 million .

Note 6 — Repossessed Assets

Repossessed assets include the following:



	December 31,
	2016		2015
	(Dollars in millions)
One-to-four family properties	$	11	$	12
Commercial properties	3		5
Total repossessed assets	$	14	$	17

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

The following schedule provides the activity for repossessed assets:



	For the Years Ended December 31,
	2016			2015			2014
	(Dollars in millions)
Beginning balance	$	17		$	19		$	37
Additions, net	19			29			18
Disposals	(19		)	(24		)	(39		)
Net (write down) gain on disposal	(2		)	—			5
Transfers out	(1		)	(7		)	(2		)
Ending balance	$	14		$	17		$	19

Note 7 — Variable Interest Entities

In 2015, we executed clean-up calls of the FSTAR 2005-1and FSTAR 2006-2 long-term debt associated with the HELOC securitization trusts. As a result, the FSTAR 2005-1 and FSTAR 2006-2 HELOC securitization trusts were dissolved and we have no consolidated VIEs as of December 31, 2016 and December 31, 2015 .

We have a continuing involvement, but are not the primary beneficiary for one unconsolidated VIE related to the FSTAR 2007-1 mortgage securitization trust. In accordance with the settlement agreement with MBIA, there is no further recourse to us related to FSTAR 2007-1, unless MBIA fails to meet their obligations. At December 31, 2016 and 2015 , the FSTAR 2007-1 mortgage securitization trust included 2,453 loans and 3,061 loans, respectively, with an aggregate principal balance of $89 million and $117 million , respectively.

Note 8 — Federal Home Loan Bank Stock

Our investment in FHLB stock was $180 million at December 31, 2016 compared to $170 million at December 31, 2015 . As a member of the FHLB, we are required to hold shares of FHLB stock in an amount equal to at least one percent of the aggregate unpaid principal balance of our mortgage loans, home purchase contracts and similar obligations at the beginning of each year or five percent of our total FHLB advances, whichever is greater. We had $10 million , $57 million and zero in required stock purchases during the year ending December 31, 2016 , 2015 and 2014 , respectively. We had zero , $42 million and $54 million redemptions of FHLB stock during the years ended December 31, 2016 , 2015 and 2014 , respectively. Dividends received on the stock equaled $7 million , $6 million and $9 million for the years ended December 31, 2016 , 2015 , and 2014 , respectively. These dividends were recorded in the Consolidated Statements of Operations as other noninterest income.

Note 9 — Premises and Equipment

Premises and equipment balances and estimated useful lives are as follows:



	Estimated Useful Lives	December 31,
	Estimated Useful Lives	2016			2015
		(Dollars in millions)
Land	—	$	59		$	58
Office buildings	15 — 31.5 years	153			149
Computer hardware and software	3 — 7 years	256			214
Furniture, fixtures and equipment	5 — 7 years	61			61
Leased equipment	3 years	4			—
Total		533			482
Less accumulated depreciation		(258		)	(232		)
Premises and equipment, net		$	275		$	250

Depreciation expense amounted to approximately $31 million , $26 million and $26 million , for the years ended December 31, 2016 , 2015 and 2014 , respectively.

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Operating Leases

We conduct a portion of our business from leased facilities. Such leases are considered to be operating leases based on their lease terms. Lease rental expense totaled approximately $5 million , $7 million and $8 million for the years ended December 31, 2016 , 2015 and 2014 , respectively. The following outlines our minimum contractual lease obligations:



	December 31, 2016
	(Dollars in millions)
2017	$	4
2018	3
2019	2
2020	2
2021	1
Thereafter	—
Total	$	12

Note 10 — Mortgage Servicing Rights

We have investments in MSRs that result from the sale of loans to the secondary market for which we retain the servicing. A primary risk associated with MSRs is the potential reduction in fair value as a result of higher than anticipated prepayments due to loan refinancing prompted, in part, by declining interest rates or government intervention. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than anticipated. We utilize derivatives as economic hedges to offset changes in the fair value of the MSRs resulting from the actual or anticipated changes in prepayments stemming from changing interest rate environments. There is also a risk of valuation decline due to higher than expected increases in default rates, which we do not believe can be effectively managed using derivatives. For further information, see Note 11 - Derivative Financial Instruments, regarding the derivative instruments utilized to manage our MSR risks.

Changes in the carrying value of residential first mortgage MSRs, accounted for at fair value, were as follows:



	For the Years Ended December 31,
	2016			2015			2014
	(Dollars in millions)
Balance at beginning of period	$	296		$	258		$	285
Additions from loans sold with servicing retained	228			260			272
Reductions from sales	(84		)	(176		)	(232		)
Changes in fair value due to (1)
Decrease in MSR value due to pay-offs, pay-downs, and runoff	(62		)	(43		)	(31		)
Changes in estimates of fair value (2)	(43		)	(3		)	(36		)
Fair value of MSRs at end of period	$	335		$	296		$	258


(1)	Changes in fair value are included within net (loss) return on MSRs on the Consolidated Statements of Operations.


(2)	Represents estimated MSR value change resulting primarily from market-driven changes.

The following table summarizes the hypothetical effect on the fair value of servicing rights using adverse changes of 10 percent and 20 percent to the weighted-average of certain significant assumptions used in valuing these assets:



	December 31, 2016							December 31, 2015
				Fair value impact due to							Fair value impact due to
	Actual			10% adverse change		20% adverse change		Actual			10% adverse change		20% adverse change
				(Dollars in millions)
Option adjusted spread	7.78		%	$	326	$	318	8.24		%	$	287	$	279
Constant prepayment rate	16.68		%	322		311		12.63		%	285		275
Weighted average cost to service per loan	$	68.18		330		326		$	71.86		292		288

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. To isolate the effect of the specified change, the fair value shock analysis is consistent with the identified adverse change, while holding all other assumptions constant. In practice, a change in one assumption generally impacts other assumptions, which may either magnify or counteract the effect of the change.

For further information, see Note 1 - Description of Business, Basis of Presentation, and Summary of Significant Accounting Standards and Note 22 - Fair Value Measurements.

Contractual servicing and subservicing fees . Contractual servicing and subservicing fees, including late fees and other ancillary income are presented below. Contractual servicing fees are included within net (loss) return on MSRs on the Consolidated Statements of Operations. Contractual subservicing fees including late fees and other ancillary income are included within loan administration income on the Consolidated Statements of Operations. Subservicing fee income is recorded for fees earned, net of third party subservicing costs, for loans subserviced.

The following table summarizes income and fees associated with contractual servicing rights:



	For the Years Ended December 31,
	2016			2015			2014
	(Dollars in millions)
Income on mortgage servicing asset
Servicing fees, ancillary income and late fees (1)	$	81		$	69		$	69
Changes in fair value (2)	(109		)	(44		)	(69		)
Gain (loss) on MSR derivatives (3)	—			5			26
Net transaction costs	2			(2		)	(2		)
Total (loss) return included in net return on mortgage servicing rights	$	(26	)	$	28		$	24


(1)	Servicing fees are recorded on the accrual basis. Ancillary income and late fees are recorded on a cash basis.


(2)	Includes a $4 million loss recorded to a payoff reserve during the year ended December 31, 2016 and $2 million gain related to the sale of MSRs during the year ended December 31, 2015 .


(3)	Changes in the derivatives utilized as economic hedges to offset changes in fair value of the MSRs.

The following table summarizes income and fees associated with our mortgage loans subserviced:



	For the Year Ended December 31,
	2016			2015			2014
	(Dollars in millions)
Income (expenses) on mortgage loans subserviced
Servicing fees, ancillary income and late fees (1)	$	29		$	33		$	28
Other servicing charges	(11		)	(7		)	(4		)
Total income on mortgage loans subserviced, included in loan administration	$	18		$	26		$	24


(1)	Servicing fees are recorded on the accrual basis. Ancillary income and late fees are recorded on cash basis.

Note 11 — Derivative Financial Instruments

Derivative financial instruments are recorded at fair value in other assets and other liabilities on the Consolidated Statements of Financial Condition after taking into account the effects of legally enforceable bilateral collateral and master netting agreements. We are exposed to non-performance risk by the counterparties to our various derivative financial instruments. A majority of our derivatives are centrally cleared through a Central Counterparty Clearing House or consist of residential mortgage interest rate lock commitments further limiting our exposure to non-performance risk. We believe that the non-performance risk inherent in our remaining derivative contracts is minimal based on credit standards and the collateral provisions of the derivative agreements.

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Derivatives not designated as hedging instruments: We maintain a derivative portfolio of interest rate swaps, futures and forward commitments used to manage exposure to changes in interest rates, MSR asset values and to meet the needs of customers. We also enter into interest rate lock commitments, which are commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. Market risk on interest rate lock commitments and mortgage LHFS is managed using corresponding forward sale commitments.

Changes in fair value of derivatives not designated as hedging instruments are recognized in the Consolidated Statements of Income.

Derivatives designated as hedging instruments: We have designated certain interest rate swaps as cash flow hedges of certain interest rate payments of our variable-rate FHLB advances.

Changes in the fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) on the Consolidated Statement of Financial Condition and reclassified into interest expense in the same period in which the hedge transaction is recognized in earnings. At December 31, 2016 , we had $1 million (net-of-tax) recorded of unrealized gains on derivatives classified as cash flow hedges recorded in accumulated other comprehensive income (loss), compared to $3 million of unrealized losses at December 31, 2015 . The estimated amount to be reclassified from other comprehensive income into earnings during the next 12 months represents $4 million of losses (net-of-tax).

Derivatives that are designated in hedging relationships are assessed for effectiveness using regression analysis at inception and throughout the hedge period. All hedge relationships were and are expected to be highly effective as of December 31, 2016 . Cash flows and the profit impact associated with designated hedges are reported in the same category as the underlying hedged item.

The net gain (loss) recognized in income on derivative instruments, net of the impact of offsetting positions, were as follows:



		For the Year Ended December 31,
	Location of Gain/(Loss)	2016			2015			2014
		(Dollars in millions)
Derivatives not designated as hedging instruments:
Futures	Net (loss) return on mortgage servicing rights	$	—		$	6		$	18
Interest rate swaps and swaptions	Net (loss) return on mortgage servicing rights	(5		)	(2		)	—
Mortgage-backed securities forwards	Net (loss) return on mortgage servicing rights	5			1			8
Rate lock commitments and forward agency and loan sales	Net gain on loan sales	26			9			(12		)
Rate lock commitments	Other noninterest income	(2		)	(2		)	—
Interest rate swaps (1)	Other noninterest income	4			2			3
Total derivative (loss) gain		$	28		$	14		$	17


(1)	Includes customer-initiated commercial interest rate swaps.

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

The following tables present information on derivative financial instruments:



	December 31, 2016
	Notional Amount		Fair Value		Expiration Dates
	(Dollars in millions)
Derivatives designated as hedging instruments:
Assets	$	600	$	20	2023-2026
Interest rate swaps on FHLB advances
Liabilities (1)
Interest rate swaps on FHLB advances	$	230	$	1	2025-2026
Derivatives not designated as hedging instruments:
Assets (1)
Futures	$	4,621	$	2	2017-2020
Mortgage-backed securities forwards	3,776		43		2017
Rate lock commitments	3,517		24		2017
Interest rate swaps and swaptions	2,231		35		2017-2033
Total derivative assets	$	14,145	$	104
Liabilities (1)
Futures	$	134	$	—	2017
Mortgage-backed securities forwards	1,893		11		2017
Rate lock commitments	598		6		2017
Interest rate swaps	1,129		37		2017-2047
Total derivative liabilities	$	3,754	$	54

	December 31, 2015
	Notional Amount		Fair Value		Expiration Dates
	(Dollars in millions)
Derivatives designated as hedging instruments:
Liabilities (1)
Interest rate swaps on FHLB advances	$	825	$	4	2023-2025
Derivatives not designated as hedging instruments:
Assets (1)
U.S. Treasury and euro dollar futures	$	1,892	$	—	2016-2019
Mortgage-backed securities forwards	1,931		7		2016
Rate lock commitments	3,593		26		2016
Interest rate swaps and swaptions	1,554		25		2016-2035
Total derivative assets	$	8,970	$	58
Liabilities (1)
U.S. Treasury and euro dollar futures	$	768	$	1	2016-2019
Mortgage-backed securities forwards	2,655		6		2016
Rate lock commitments	168		—		2016
Interest rate swaps	422		7		2016-2025
Total derivative liabilities	$	4,013	$	14


(1)	Derivatives liabilities and assets are included in other assets and liabilities on the Consolidated Statements of Financial Condition.

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

The following tables present the derivatives subject to a master netting arrangement, including the cash pledged as collateral:



							Gross Amounts Not Offset in the Statement of Financial Position
December 31, 2016	Gross Amount		Gross Amounts Offset in the Statement of Financial Position		Net Amount Presented in the Statement of Financial Position		Financial Instruments		Cash Collateral
	(Dollars in millions)
Derivatives designated as hedging instruments:
Assets
Interest Rate Swaps on FHLB advances (1)	$	20	$	1	$	19	$	—	$	—
Liabilities
Interest Rate Swaps on FHLB advances (1)	$	1	$	1	$	—	$	—	$	33

Derivatives not designated as hedging instruments:
Assets
Futures	$	2	$	—	$	2	$	—	$	—
Mortgage-backed securities forwards	$	43	$	—	$	43	$	—	$	44
Interest rate swaps and swaptions (1)	35		—		35		—		30
Total derivative assets	$	80	$	—	$	80	$	—	$	74
Liabilities
Futures	$	—	$	—	$	—	$	—	$	1
Mortgage-backed securities forwards	11		—		11		—		—
Interest rate swaps and swaptions (1)	37		—		37		—		20
Total derivative liabilities	$	48	$	—	$	48	$	—	$	21


(1)	Additional funds are pledged to a Central Counterparty Clearing House in the amount of $15 million as of December 31, 2016 to maintain initial margin requirements. This collateral is in addition to the amount required to be maintained for potential market changes shown in the cash collateral column above.



							Gross Amounts Not Offset in the Statement of Financial Position
December 31, 2015	Gross Amount		Gross Amounts Offset in the Statement of Financial Position		Net Amount Presented in the Statement of Financial Position		Financial Instruments		Cash Collateral
	(Dollars in millions)
Derivatives designated as hedging instruments:
Liabilities
Interest Rate Swaps on FHLB advances	$	4	$	—	$	4	$	—	$	19

Derivatives not designated as hedging instruments:
Assets
Mortgage-backed securities forwards	$	7	$	—	$	7	$	—	$	4
Interest rate swaps and swaptions (1)	25		—		25		—		10
Total derivative assets	$	32	$	—	$	32	$	—	$	14
Liabilities
U.S. Treasury and euro dollar futures	$	1	$	—	$	1	$	—	$	2
Mortgage-backed securities forwards	6		—		6		—		8
Interest rate swaps and swaptions (1)	7		—		7		—		12
Total derivative liabilities	$	14	$	—	$	14	$	—	$	22


(1)	Additional funds are pledged to a Central Counterparty Clearing House in the amount of $7 million as of December 31, 2015 to maintain initial margin requirements. This collateral is in addition to the amount required to be maintained for potential market changes shown in the cash collateral column above.

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

We pledged a total of $54 million of cash collateral to counterparties and had an obligation to return cash of $74 million at December 31, 2016 for derivative activities. We pledged a total of $41 million of cash collateral to counterparties and had an obligation to return cash of $14 million at December 31, 2015 for derivative activities. The net cash pledged is restricted and is included in other assets on the Consolidated Statements of Financial Condition.

Note 12 — Deposit Accounts

The deposit accounts are as follows:



	December 31,
	2016		2015
	(Dollars in millions)
Retail deposits
Branch retail deposits
Demand deposit accounts	$	852	$	797
Savings accounts	3,824		3,717
Money market demand accounts	138		163
Certificates of deposit/CDARS	1,055		811
Total branch retail deposits	5,869		5,488
Commercial deposits
Demand deposit account	282		194
Savings account	63		34
Money market demand accounts	109		104
Certificates of deposit/CDARS	1		14
Total commercial deposits	455		346
Total retail deposits subtotal	6,324		5,834
Government deposits
Demand deposit accounts	250		302
Savings accounts	451		363
Certificates of deposit/CDARS	329		397
Total government deposits	1,030		1,062
Company controlled deposits	1,446		1,039
Total deposits	$	8,800	$	7,935

The following indicates the scheduled maturities for certificates of deposit with a minimum denomination of $250,000 :



	December 31,
	2016		2015
	(Dollars in millions)
Three months or less	$	126	$	97
Over three months to six months	116		72
Over six months to twelve months	146		173
One to two years	34		17
Thereafter	27		37
Total	$	449	$	396

100

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Note 13 — Borrowings

Federal Home Loan Bank Advances

The following is a breakdown of our FHLB advances outstanding:



	December 31, 2016				December 31, 2015				December 31, 2014
	Amount		Rate		Amount		Rate		Amount		Rate
	(Dollars in millions)
Short-term fixed rate term advances	$	1,780	0.62	%	$	2,116	0.32	%	$	214	0.26	%
Total Short-term Federal Home Loan Bank advances	$	1,780			$	2,116			$	214
Long-term LIBOR adjustable advances	1,025		1.12	%	825		0.70	%	—		—	%
Long-term fixed rate advances (1)	175		1.12	%	600		1.37	%	300		1.36	%
Total Long-term Federal Home Loan Bank advances	$	1,200			$	1,425			$	300
Total Federal Home Loan Bank advances	$	2,980			$	3,541			$	514


(1)	Includes the current portion of fixed rate advances of $50 million and $175 million at December 31, 2016 and December 31, 2015 , respectively.

We settled $250 million and $375 million in long-term fixed rate FHLB advances during the fourth quarters of 2016 and 2015 , respectively. During the year ending December 31, 2015 , the settlement resulted in a gain on extinguishment of debt in the amount of $3 million , included in other noninterest income.

We are required to maintain a minimum amount of qualifying collateral. In the event of default, the FHLB advance is similar to a secured borrowing, whereby the FHLB has the right to sell the pledged collateral to settle the fair value of the outstanding advances.

At December 31, 2016 , we had the authority and approval from the FHLB to utilize a line of credit of up to $7 billion and we may access that line to the extent that collateral is provided. At December 31, 2016 , we had $3 billion of advances outstanding and an additional $1.1 billion of collateralized borrowing capacity available at FHLB. The advances can be collateralized by non-delinquent single-family residential first mortgage loans, loans with government guarantees, certain other loans and investment securities.

At December 31, 2016 , $1 billion of the outstanding advances had an adjustable rate based on the three month LIBOR index. Interest rates on these advances reset every three months and the advances may be prepaid without penalty, with notification at scheduled three month intervals after an initial 12 month lockout period. The outstanding advances included $830 million in a cash flow hedge relationship as discussed in Note 11 - Derivative Financial Instruments.

The following table contains detailed information on our FHLB advances and other borrowings:



	For the Years Ended December 31,
	2016			2015			2014
	(Dollars in millions)
Maximum outstanding at any month end	$	3,557		$	3,541		$	1,300
Average outstanding balance	2,833			1,811			939
Average remaining borrowing capacity	1,137			1,611			1,947
Weighted-average interest rate	1.16		%	1.00		%	0.23		%

101

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

The following table outlines the maturity dates of our FHLB advances and other borrowings:



	December 31, 2016
	(Dollars in millions)
2017	$	1,830
2018	125
2019	—
2020	—
Thereafter	1,025
Total	$	2,980

Parent Company Senior Notes and Trust Preferred Securities

The following table presents long-term debt:



	December 31, 2016				December 31, 2015
	(Dollars in millions)
Senior Notes	Amount		Interest Rate		Amount		Interest Rate
Senior notes, matures 2021	$	246	6.125	%	$	—	—	%
Trust Preferred Securities
Floating Three Month LIBOR
Plus 3.25%, matures 2032	$	26	4.25	%	$	26	3.85	%
Plus 3.25%, matures 2033	26		4.13	%	26		3.57	%
Plus 3.25%, matures 2033	26		4.25	%	26		3.85	%
Plus 2.00%, matures 2035	26		2.88	%	26		2.32	%
Plus 2.00%, matures 2035	26		2.88	%	26		2.32	%
Plus 1.75%, matures 2035	51		2.71	%	51		2.26	%
Plus 1.50%, matures 2035	25		2.38	%	25		1.82	%
Plus 1.45%, matures 2037	25		2.41	%	25		1.96	%
Plus 2.50%, matures 2037	16		3.46	%	16		3.01	%
Total Trust Preferred Securities	$	247			$	247
Total long-term debt	$	493			$	247

Senior Notes

On July 11, 2016, we issued $250 million of senior notes ("2021 Senior Notes") which mature on July 15, 2021. The proceeds from these notes were used to bring dividends current and redeem our outstanding Series C Preferred Stock. The notes are unsecured and rank equally and ratably with the unsecured senior indebtedness of Flagstar Bancorp, Inc.

Prior to June 15, 2021, we may redeem some or all of the 2021 Senior Notes at a redemption price equal to the greater of 100 percent of the aggregate principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payments discounted to the redemption date on a semi-annual basis using a discount rate equal to the Treasury Rate plus 0.50 percent , plus, in each case accrued and unpaid interest.

Trust Preferred Securities

We sponsor nine trust subsidiaries, which issued preferred stock to third party investors. We issued trust preferred securities to those trusts, which we have included in long-term debt. The trust preferred securities are the sole assets of those trusts.

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Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

The trust preferred securities are callable by us at any time. Interest is payable quarterly; however, we may defer interest payments for up to 20 quarters without default or penalty. In January 2012, we exercised our contractual rights to defer interest payments. On July 14, 2016, we ended the deferral and made a $34 million payment to bring current our previously deferred interest as of that date.

Note 14 — Representation and Warranty Reserve

At the time a loan is sold, an estimate of the fair value of the guarantee associated with the mortgage loans is recorded in the representation and warranty reserve in the Consolidated Statements of Financial Condition. This reduces the net gain on loan sales in the Consolidated Statements of Operations. Subsequent to the sale, the liability is re-measured on an ongoing basis based on an estimate of probable losses. Changes in the estimate are recorded in the representation and warranty (provision) benefit on the Consolidated Statements of Operations.

The following table shows the activity in the representation and warranty reserve:



	For the Years Ended December 31,
	2016			2015			2014
	(Dollars in millions)
Balance, beginning of period	$	40		$	53		$	54
Provision (benefit)
Gain on sale reduction for representation and warranty liability	5			7			7
Representation and warranty provision (benefit)	(19		)	(19		)	10
Total	(14		)	(12		)	17
(Charge-offs) Recoveries, net	1			(1		)	(18		)
Balance, end of period	$	27		$	40		$	53

Note 15— Warrants

May Investor Warrant

We granted warrants (the "May Investor Warrants") on January 30, 2009 under anti-dilution provisions applicable to certain investors (the "May Investors") in our May 2008 private placement capital raise.

For the year ended December 31, 2016 , 378,334 May Investor Warrants were exercised resulting in the issuance of 236,058 shares of Common Stock. The May Investors held warrants to purchase 237,627 shares at an exercise price of $10.00 at December 31, 2016 .

The May Investor Warrants do not meet the definition of a contract that is indexed to our own stock under U.S. GAAP. Therefore, the May Investor Warrants are classified as a liability which is recorded in other liabilities on the Consolidated Statements of Financial Condition and are measured at fair value. Warrant liabilities are valued using a Black Scholes model and are classified within Level 2 of the valuation hierarchy. Significant observable inputs include share price, expected volatility, a risk free rate and an expected life.

At December 31, 2016 and 2015 , the liability from May Investors Warrants amounted to $4 million and $8 million , respectively. For further information, see Note 22 - Fair Value Measurements.

TARP Warrant

On January 30, 2009, in conjunction with the sale of 266,657 shares of Series C fixed rate cumulative non-convertible perpetual preferred stock ("Series C Preferred Stock") for $267 million , we issued a warrant to purchase up to approximately 645,138 shares of Common Stock at an exercise price of $62.00 per share (the "Warrant").

The Warrant is exercisable through January 30, 2019 and remains outstanding subsequent to the redemption of TARP, which occurred during the third quarter 2016.

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Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Note 16 - Accumulated Other Comprehensive Income (Loss)

The following table sets forth the components in accumulated other comprehensive income (loss):



	For the Years Ended December 31,
	2016			2015			2014
Investment securities
Beginning balance	$	5		$	8		$	(5	)
Unrealized gain (loss)	(10		)	(7		)	24
Less: Tax (benefit) provision	(3		)	(2		)	8
Net unrealized gain (loss)	(7		)	(5		)	16
Reclassifications out of AOCI (1)	(9		)	3			(4		)
Less: Tax (benefit) provision	(3		)	1			(1		)
Net unrealized gain (loss) reclassified out of AOCI	(6		)	2			(3		)
Other comprehensive income/(loss), net of tax	$	(13	)	(3		)	13
Ending balance	$	(8	)	$	5		$	8

Cash Flow Hedges
Beginning balance	$	(3	)	$	—		$	—
Unrealized gain (loss)	(13		)	(6		)	—
Less: Tax (benefit) provision	(5		)	(1		)	—
Net unrealized gain (loss)	(8		)	(5		)	—
Reclassifications out of AOCI (1)	19			2			—
Less: Tax (benefit) provision	7			—			—
Net unrealized gain (loss) reclassified out of AOCI	12			2			—
Other comprehensive income/(loss), net of tax	4			(3		)	—
Ending balance	$	1		$	(3	)	$	—


(1)	Reclassifications are reported in other noninterest income on the Consolidated Statement of Operations.

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Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Note 17 — Earnings (Loss) Per Share

Basic earnings (loss) per share, excluding dilution, is computed by dividing earnings (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock or resulted in the issuance of common stock that could then share in our earnings.

The following table sets forth the computation of basic and diluted earnings (loss) per share of common stock:



	For the Years Ended December 31,
	2016			2015			2014
	(In millions, except share data)
Net income (loss)	$	171		$	158		$	(69	)
Less: preferred stock dividend/accretion	—			—			(1		)
Net income (loss) from continuing operations	171			158			(70		)
Deferred cumulative preferred stock dividends	(18		)	(30		)	(26		)
Net income (loss) applicable to Common Stockholders	$	153		$	128		$	(96	)
Weighted Average Shares
Weighted average common shares outstanding	56,569,307			56,426,977			56,246,528
Effect of dilutive securities
May Investor Warrants	138,314			305,484			—
Stock-based awards	890,046			432,062			—
Weighted average diluted common shares	57,597,667			57,164,523			56,246,528
Earnings (loss) per common share
Basic earnings (loss) per common share	$	2.71		$	2.27		$	(1.72	)
Effect of dilutive securities
May Investor Warrants	(0.01		)	(0.01		)	—
Stock-based awards	(0.04		)	(0.02		)	—
Diluted earnings (loss) per common share	$	2.66		$	2.24		$	(1.72	)

On July 29, 2016, we completed the previously announced $267 million redemption of our Series C Preferred Stock. This transaction reduced stockholders equity by approximately $ 372 million with a $267 million reduction in Preferred Stock and a $105 million reduction related to the payment of deferred dividends.

Under the terms of the Series C Preferred Stock the Company was able to defer payments of preferred stock dividends. We elected to defer dividend payments beginning with the February 2012 dividend. Although, while being deferred, the impact was not included in net income from continuing operations, the deferral did impact net income applicable to common stock for the purpose of calculating earnings per share, as shown above.

Note 18 — Stock-Based Compensation

Our board of directors participates in various stock option plans and incentive compensation plans. Certain key employees, officers, directors and others are eligible to receive stock awards. Awards that may be granted under the plan include stock options, incentive stock options, cash-settled stock appreciation rights, restricted stock units, performance shares and performance units and other awards. Under the current plan, the exercise price of any award granted must be at least equal to the fair market value of common stock on the date of grant. Non-qualified stock options granted to directors expire 5 years from the date of grant. Grants other than non-qualified stock options have term limits set by the board of directors in the applicable agreement. Stock appreciation rights generally expire 7 years from the date of grant. Awards still outstanding under any of the prior plans will continue to be governed by their respective terms.

During the years ended December 31, 2016 , 2015 and 2014 , compensation expense recognized related to stock-based compensation totaled $11 million , $3 million and $4 million , respectively.

105

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Stock Option Plan

The following tables summarize the activity that occurred in the years ended December 31:



	Number of Shares
	2016		2015		2014
Options outstanding, beginning of year	53,284		63,598		82,937
Options canceled, forfeited and expired	(7,493	)	(10,314	)	(19,339	)
Options outstanding, end of year	45,791		53,284		63,598
Options vested or expected to vest, end of year	45,791		53,284		63,598
Options exercisable, end of year	23,576		27,197		32,532



	Weighted Average Exercise Price
	2016		2015		2014
Options outstanding, beginning of year	$	80.00	$	94.33	$	104.26
Options canceled, forfeited and expired	80.00		168.34		136.97
Options outstanding, end of year	$	80.00	$	80.00	$	94.33
Options vested or expected to vest, end of year	$	80.00	$	80.00	$	94.33
Options exercisable, end of year	$	80.00	$	80.00	$	108.01

The total intrinsic value of options exercised during the years ended December 31, 2016 , 2015 and 2014 , was zero . Additionally, there was no aggregate intrinsic value of options outstanding and exercised at December 31, 2016 , 2015 and 2014 .

The following information pertains to the stock options issued pursuant to the Prior Plans, but not exercised at December 31, 2016 :



	Options Outstanding				Options Exercisable
Grant Price	Number of Options Outstanding at December 31, 2016	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable at December 31, 2016	Weighted Average Exercise Price
$80.00	45,791	2.94	$	80.00	23,576	$	80.00
	45,791				23,576



	Options Vested or Expected to Vest
Grant Price	Number of Options Outstanding at December 31, 2016	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price
$80.00	45,791	2.94	$	80.00
	45,791

At December 31, 2016 and 2015 , options available for future grants were 250,824 and 243,331 , respectively.

Restricted Stock Units

We have issued restricted stock units to officers, directors and certain employees. Time based restricted stock generally will vest in 3 increments on each annual anniversary of the date of grant beginning with the first anniversary subject to service and performance conditions. Certain performance based restricted stock will vest in three years from the date of grant subject to service and performance conditions.

On October 20, 2015, our Board approved and adopted the Flagstar Bancorp, Inc. Executive Long-Term Incentive Program ("ExLTIP"). The ExLTIP provides for payouts to certain executives only if our stock achieves and sustains a specified market performance within ten years of the grant date. The ExLTIP awards were made in the form of restricted stock units under and subject to the terms of the 2016 Flagstar Bancorp, Inc. Stock and Incentive Plan, which was approved at the May 24,

106

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

2016 annual shareholder meeting. If vested, the restricted stock units would pay out in five installments, subject to a quality review.

At December 31, 2016 and 2015 , the maximum number of shares of common stock that may be issued were 2,634,070 shares and 437,402 shares, respectively. We incurred expenses of approximately $11 million , $3 million and $3 million with respect to restricted stock units during the years ended December 31, 2016 , 2015 and 2014 , respectively. The total fair value of awards vested during the years ended December 31, 2016 , 2015 , 2014 was $3 million , $2 million , and $5 million , respectively. As of December 31, 2016 , the total unrecognized compensation cost related to non-vested awards was $13 million with a weighted average expense recognition period of 3.5 years .

The following table summarizes restricted stock activity:



	Shares		Weighted — Average Grant-Date Fair Value per Share
Restricted Stock
Non-vested at December 31, 2013	287,926		$	12.01
Granted	279,312		19.27
Vested	(276,548	)	14.47
Canceled and forfeited	(56,999	)	14.37
Non-vested at December 31, 2014	233,691		$	17.21
Granted	1,325,134		16.11
Vested	(152,220	)	15.25
Canceled and forfeited	(106,620	)	18.46
Non-vested at December 31, 2015	1,299,985		$	16.36
Granted	310,209		22.97
Vested	(134,767	)	15.78
Canceled and forfeited	(13,517	)	17.24
Non-vested at December 31, 2016	1,461,910		$	17.68

Incentive Compensation Plans

We had an expense of $33 million , $30 million and $21 million for the years ended December 31, 2016 , 2015 and 2014 , respectively, for annual employee incentive payments and commission based payments.

Note 19— Income Taxes

Components of the provision (benefit) for income taxes consist of the following:



	For the Years Ended December 31,
	2016			2015			2014
Current	(Dollars in millions)
Federal	$	4		$	2		$	2
State	—			—			(1		)
Total current income tax expense	4			2			1
Deferred
Federal	84			82			(35		)
State	(1		)	(2		)	—
Total deferred income tax expense (benefit)	83			80			(35		)
Total income tax expense (benefit)	$	87		$	82		$	(34	)

107

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Our effective tax rate differs from the statutory federal tax rate. The following is a summary of such differences:



	For the Years Ended December 31,
	2016			2015			2014
	(Dollars in millions)
Provision (benefit) at statutory federal income tax rate (35%)	$	90		$	84		$	(37	)
(Decreases) increases resulting from:
Bank Owned Life Insurance	(3		)	(1		)	—
State income tax benefit, net of federal income tax effect (net of valuation allowance release)	(1		)	(2		)	(1		)
Warrant expense (income)	1			1			(2		)
Non-deductible compensation	—			1			1
Litigation settlement	—			—			4
Other	—			(1		)	1
Provision (benefit) for income taxes	$	87		$	82		$	(34	)

During the year ended December 31, 2016 , the effective tax rate was 33.7 percent , compared to an effective tax rate of 34.2 percent during the year ended December 31, 2015 and a benefit of 32.9 percent for the year ended December 31, 2014 .

Temporary differences and carry forwards that give rise to deferred tax assets and liabilities are comprised of the following:



	December 31,
	2016			2015
	(Dollars in millions)
Deferred tax assets
Net operating loss carry forwards (Federal and State)	$	195		$	258
Allowance for loan losses	74			89
Litigation settlement	22			31
Alternative Minimum Tax credit carry forward	18			15
Representation and warranty reserves	10			15
Accrued compensation	5			9
Loan deferred fees and costs	3			—
Non-accrual interest revenue	2			3
Deferred interest	2			3
General business credit	1			1
Other	15			9
Total	347			433
Valuation allowance	(20		)	(22		)
Total (net)	327			411
Deferred tax liabilities
Premises and equipment	(12		)	(3		)
Mortgage loan servicing rights	(11		)	(19		)
Mark-to-market adjustments	(9		)	(17		)
Commercial lease financing	(5		)	(3		)
State and local taxes	(4		)	(5		)
Total	(41		)	(47		)
Net deferred tax asset	$	286		$	364

108

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

We have not provided deferred income taxes for the Bank’s pre-1988 tax bad debt reserve at December 31, 2016 of approximately $4 million because it is not anticipated that this temporary difference will reverse in the foreseeable future. Such reserves would only be taken into taxable income if the Bank, or a successor institution, liquidates, redeems shares, pays dividends in excess of earnings, or ceases to qualify as a bank for tax purposes.

During the years ended December 31, 2016 and 2015 , we had federal net operating loss carry forwards of $480 million and $660 million , respectively. These carry forwards, if unused, expire in calendar years 2028 through 2035 . As a result of a change in control occurring on January 30, 2009, Section 382 of the Internal Revenue Code places an annual limitation on the use of our new operating loss carry forwards that existed at that time. At December 31, 2016 we had $138 million of net operating loss carry forwards subject to certain annual use limitations which expire in calendar years 2028 through 2029 .

We had a total state deferred tax asset before valuation allowance of $32 million and total state net operating loss carryforwards of $611 million at December 31, 2016 . In connection with our ongoing assessment of deferred taxes, we analyzed each state net operating loss by jurisdiction and determined the amount of such net operating loss, which is expected to expire unused and recorded a valuation allowance to reduce the deferred tax asset to the amount which is more likely than not to be realized. At December 31, 2016 , the state deferred tax assets which will more likely than not be realized, was $12 million and we have maintained a valuation allowance of $20 million due to state loss carryover limitations.

We regularly evaluate the need for deferred tax asset valuation allowances based on a more likely than not standard as defined by generally accepted accounting principles. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction.

Our income tax returns are subject to review and examination by federal, state and local government authorities. On an ongoing basis, numerous federal, state and local examinations are in progress and cover multiple tax years. At December 31, 2016 , the Internal Revenue Service had completed an examination of us through the taxable year ended December 31, 2013 . The years open to examination by state and local government authorities vary by jurisdiction.

We recognize interest and penalties related to uncertain tax positions in income tax expense. For the years ended December 31, 2016 , 2015 and 2014 , we did not recognize any interest income, interest expense, or increase or decreases to uncertain income tax positions of greater than $1 million , individually or in aggregate.

Note 20 — Regulatory Matters

Regulatory Capital

We, along with the Bank, must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that could have a material effect on the Consolidated Financial Statements. On January 1, 2015, the Basel III rules became effective. Various aspects of Basel III are subject to multi-year transition periods through December 31, 2018. Basel III will materially change our Tier 1, Tier 1 common and total capital calculations.

To be categorized as "well-capitalized," the Company and the Bank must maintain minimum tangible capital, Tier 1 capital, common equity Tier 1, and total capital ratios as set forth in the table below. We, along with the Bank, are considered "well-capitalized" at both December 31, 2016 and December 31, 2015 . An institution is considered well-capitalized if its ratio of total risk-based capital to risk-weighted assets is 10.0 percent or more, its ratio of Tier 1 capital to risk-weighted assets is 8.0 percent or more, its ratio of common equity tier 1 capital to risk-weighted assets is 6.5 percent or more, and its leverage ratio of Tier 1 capital to total assets is 5.0 percent or more. There have been no conditions or events that management believes have changed our or the Bank’s category.

109

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

The following tables present the regulatory capital ratios as of the dates indicated:



Bancorp	Actual				For Capital Adequacy Purposes				Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in millions)
December 31, 2016
Tangible capital (to tangible assets)	$	1,256	8.88	%	N/A		N/A		N/A		N/A
Tier 1 capital (to adjusted tangible assets)	1,256		8.88	%	$	566	4.0	%	$	707	5.0	%
Common equity Tier 1 capital (to RWA)	1,084		13.06	%	374		4.5	%	540		6.5	%
Tier 1 capital (to RWA)	1,256		15.12	%	498		6.0	%	664		8.0	%
Total capital (to RWA)	1,363		16.41	%	664		8.0	%	830		10.0	%
December 31, 2015
Tangible capital (to tangible assets)	$	1,435	11.51	%	N/A		N/A		N/A		N/A
Tier 1 capital (to adjusted tangible assets)	1,435		11.51	%	$	499	4.0	%	$	624	5.0	%
Common equity Tier 1 capital (to RWA)	1,065		14.09	%	340		4.5	%	491		6.5	%
Tier 1 capital (to RWA)	1,435		18.98	%	454		6.0	%	605		8.0	%
Total capital (to RWA)	1,534		20.28	%	605		8.0	%	756		10.0	%

N/A - Not applicable.



Bank	Actual				For Capital Adequacy Purposes				Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in millions)
December 31, 2016
Tangible capital (to tangible assets)	$	1,491	10.52	%	N/A		N/A		N/A		N/A
Tier 1 capital (to adjusted tangible assets)	1,491		10.52	%	$	567	4.0	%	$	709	5.0	%
Common equity Tier 1 capital (to RWA)	1,491		17.90	%	375		4.5	%	542		6.5	%
Tier 1 capital (to RWA)	1,491		17.90	%	500		6.0	%	667		8.0	%
Total capital (to RWA)	1,598		19.18	%	667		8.0	%	833		10.0	%
December 31, 2015
Tangible capital (to tangible assets)	$	1,472	11.79	%	N/A		N/A		N/A		N/A
Tier 1 capital (to adjusted tangible assets)	1,472		11.79	%	$	500	4.0	%	$	625	5.0	%
Common equity Tier 1 capital (to RWA)	1,472		19.42	%	341		4.5	%	493		6.5	%
Tier 1 capital (to RWA)	1,472		19.42	%	455		6.0	%	607		8.0	%
Total capital (to RWA)	1,570		20.71	%	607		8.0	%	758		10.0	%

N/A - Not applicable.

Consent Orders

On December 19, 2016, the OCC terminated the Consent Order with the Bank which had been in place since October 23, 2012. Since entering into the Consent Order, the Bank implemented and adopted, what we believe are, industry best practices related to, among other things, regulatory compliance, enterprise risk management, capital and liquidity. The lifting of the Consent Order signifies that the OCC has determined that the Bank has met all of the Consent Order requirements.

Supervisory Agreement

The Company remains subject to the Supervisory Agreement, which will remain in effect until terminated, modified, or suspended in writing by the Federal Reserve.

110

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Pursuant to the Supervisory Agreement, the Company submitted a capital plan to the OTS, predecessor in interest to the Federal Reserve. In addition, the Company agreed to request prior non-objection of the Federal Reserve to pay dividends or other capital distributions; purchase, repurchase or redeem certain securities; incur, issue, renew, roll over or increase any debt and enter into certain affiliate transactions; and comply with restrictions on the payment of severance and indemnification payments, director and management changes and employment contracts and compensation arrangements. A copy of the Supervisory Agreement was filed with the SEC as an exhibit to the Company's Current Report on Form 8-K filed on January 28, 2010.

The Company has taken actions which it believes are appropriate to comply with, and intends to maintain compliance with, all of the requirements of the Supervisory Agreement.

Regulatory Developments

The Bank and Bank Holding Company were subject to the capital requirements of the Basel III rules beginning January 1, 2015, which replaces the framework established by the 1988 capital accord ("Basel I") of the Basel Committee on Banking Supervision.

The regulatory capital rules require the Bank and Holding Company to maintain Tier 1 capital of at least

6 percent of risk-weighted assets and off-balance sheet items, total capital (the sum of Tier 1 capital and Tier 2 capital) of at least 8 percent of risk-weighted assets and off-balance sheet items, Tier 1 capital of at least 4 percent of adjusted quarterly average assets and common equity Tier 1 capital of at least 4.5 percent of risk-weighted assets.

Effective January 1, 2016, we became subject to the capital conservation buffer under the Basel III rules, subjecting a banking organization to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer above the minimum risk based capital requirements. The capital conservation buffer for 2016 must be greater than 0.625 percent in order to not be subject to limitations. The Company and the Bank had a capital conservation buffer of 8.4 percent and 11.2 percent, respectively as of December 31, 2016. When fully phased-in on January 1, 2019, the capital conservation buffer must be greater than 2.5 percent.

Under the increased capital standards established by the Dodd-Frank Act, bank holding companies are prohibited from including in their regulatory Tier 1 capital hybrid debt and equity securities, such as trust preferred securities, issued on or after May 19, 2010. The Company continues to include our existing trust preferred securities as Tier 1 capital as they were issued prior to May, 19, 2010.

Note 21 — Legal Proceedings, Contingencies and Commitments

Legal Proceedings

We and our subsidiaries are subject to various pending or threatened legal proceedings arising out of the normal course of business operations. In addition, the Bank is routinely named in civil actions throughout the country by borrowers and former borrowers relating to the origination, purchase, sale, and servicing of mortgage loans. From time to time, governmental agencies also conduct investigations or examinations of various mortgage-related practices of the Bank. In the course of such investigations or examinations, the Bank cooperates with such agencies and provides information as requested.

We assess the liabilities and loss contingencies in connection with such pending or threatened legal and regulatory proceedings on at least a quarterly basis and establish accruals when we believe it is probable that a loss may be incurred and that the amount of such loss can be reasonably estimated. Once established, litigation accruals are adjusted, as appropriate, in light of additional information.

Management does not believe that the amount of any reasonably possible losses in excess of any amounts accrued with respect to ongoing proceedings or any other known claims will be material to our financial statements, or that the ultimate outcome of these actions will have a material adverse effect on our financial condition, results of operations or cash flows.

DOJ litigation settlement

In 2012, the Bank entered into a Settlement Agreement with the DOJ which meets the definition of a financial liability (the "DOJ Liability").

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Notes to the Consolidated Financial Statements

In accordance with the Settlement Agreement, we made an initial payment of $15 million and agreed to make future annual payments totaling $118 million . The Settlement Agreement provides that the Bank will make annual payments in increments of up to $25 million towards the $118 million still due upon meeting all conditions which are evaluated quarterly and include: (a) the reversal of the deferred tax asset valuation allowance, which occurred at the end of 2013; (b) the repayment of the Fixed Rate Cumulative Perpetual Preferred Stock, Series C (the "TARP Preferred"), which occurred in the third quarter of 2016; (c) our Bank’s Tier 1 Leverage Capital Ratio is 11 percent or more. Additionally, if the Bank and Bancorp become party to a business combination in which the Bank or Bancorp represent less than 33.3 percent of the resulting company’s assets, such annual payments must commence twelve months after the date of that business combination.

We elected to account for the DOJ Liability under the fair value option. To determine the fair value, we utilize a discounted cash flow model. Key assumptions for the discounted cash flow model include using a discount rate as of December 31, 2016 of 8.2 percent ; probability weightings of multiple cash flow scenarios and possible outcomes which contemplate the above conditions and estimates of forecasted net income, size of the balance sheet, capital levels, dividends and their impact on the timing of cash payments and the assumptions we believe a market participant would make to assume the liability. The fair value of the DOJ Liability was $60 million and $84 million at December 31, 2016 and December 31, 2015 , respectively.

The lower value resulted from a change in the expectation as to the timing of payments to the DOJ as a result of a $200 million dividend from the Bank to the Bancorp and the issuance of $250 million in Senior Notes, both of which occurred in July 2016, to a) bring current the interest payments on our trust preferred securities, b) become current on our deferred interest and dividends related to our TARP Preferred and c) repay our TARP Preferred. To support the on-going debt service and other Bancorp expenses, we also intend to reduce our Bancorp double leverage and debt to equity ratios to be more consistent with such ratios at other mid-sized banks, which would likely require further dividend payments from the Bank to the Bancorp for the foreseeable future.

Other litigation accruals

At December 31, 2016 and December 31, 2015 , excluding the fair value liability relating to the DOJ litigation settlement, our total accrual for contingent liabilities and settled litigation was $1 million and $2 million , respectively.

Commitments

A summary of the contractual amount of significant commitments is as follows:



	December 31,
	2016		2015
	(Dollars in millions)
Commitments to extend credit
Mortgage loan interest-rate lock commitments	$	4,115	$	3,792
HELOC commitments	179		150
Other consumer commitments	57		22
Warehouse loan commitments	1,670		871
Standby and commercial letters of credit	30		13
Commercial and industrial commitments	424		151
Other commercial commitments	651		497

Commitments to extend credit are agreements to lend. Since many of these commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. Commitments generally have fixed expiration dates or other termination clauses. We evaluate each customer's credit worthiness on a case-by-case basis. The

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Notes to the Consolidated Financial Statements

amount of collateral obtained, if deemed necessary by us, upon extension of credit is based on management's credit evaluation of the counterparties.

These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized on the Consolidated Statements of Financial Condition. Our exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We utilize the same credit policies in making commitments and conditional obligations as we do for balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. The types of credit we extend is as follows:

Mortgage loan interest-rate lock commitments. We enter into mortgage interest-rate lock commitments with our customers. These commitments are considered to be derivative instruments and the fair value of these commitments are recorded in the Consolidated Statements of Financial Condition in other assets. For further information on derivative instruments, see Note 11 - Derivative Financial Instruments.

HELOC commitments. Commitments to extend, originate or purchase credit are primarily lines of credit to consumers and have specified rates and maturity dates. Many of these commitments also have adverse change clauses, which allow us to cancel the commitment due to deterioration in the borrowers’ creditworthiness and due to a decline in the collateral value.

Other consumer commitments. C onditional commitments issued to accommodate the financial needs of customers. The commitments are made under various terms to lend funds to consumers, which include revolving credit agreements, term loan commitments and short-term borrowing agreements.

Warehouse loan commitments. Lines of credit provided to mortgage originators to fund loans they originate and then sell. The proceeds of the sale of the loans are used to repay the draw on the line used to fund the loans.

Standby and commercial letters of credit. Conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party.

Commercial and industrial and other commercial commitments. Conditional commitments issued under various terms to lend funds to business and other entities. These commitments include revolving credit agreements, term loan commitments and short-term borrowing agreements. Many of these loan commitments have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements.

We maintain a reserve for the estimate of probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include unfunded loans with available balances, new commitments to lend that are not yet funded, and standby and commercial letters of credit. The balance of $3 million and $2 million for December 31, 2016 and 2015 , respectively, is reflected in other liabilities on the Consolidated Statements of Financial Condition.

Note 22 — Fair Value Measurements

We utilize fair value measurements to record or disclose the fair value on certain assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability through an orderly transaction between market participants at the measurement date. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation models rely on market-based parameters when available, such as interest rate yield curves or credit spreads. Unobservable inputs may be based on management's judgment, assumptions and estimates related to credit quality, our future earnings, interest rates and other relevant inputs. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.

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Notes to the Consolidated Financial Statements

Valuation Hierarchy

U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The hierarchy is based on the transparency of the inputs used in the valuation process with the highest priority given to quoted prices available in active markets and the lowest priority to unobservable inputs where no active market exists, as discussed below.

Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets in which we can participate as of the measurement date;

Level 2 - Quoted prices for similar instruments 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; and

Level 3 - Unobservable inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the overall fair value measurement. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the financial instruments carried at fair value as of December 31, 2016 and 2015 , by caption on the Consolidated Statements of Financial Condition and by the valuation hierarchy:



	Level 1		Level 2			Level 3			Total Fair Value
	(Dollars in millions)
December 31, 2016
Investment securities available-for-sale
Agency - Commercial	$	—	$	548		$	—		$	548
Agency - Residential	—		898			—			898
Municipal obligations	—		34			—			34
Loans held-for-sale
Residential first mortgage loans	—		3,145			—			3,145
Loans held-for-investment
Residential first mortgage loans	—		7			—			7
Second mortgage loans	—		—			41			41
HELOC loans	—		—			24			24
Mortgage servicing rights	—		—			335			335
Derivative assets
Rate lock commitments (fallout-adjusted)	—		—			24			24
Futures	2		—			—			2
Mortgage-backed securities forwards	—		43			—			43
Interest rate swaps and swaptions	—		35			—			35
Interest rate swaps on FHLB advances (net)	—		19			—			19
Total assets at fair value	$	2	$	4,729		$	424		$	5,155
Derivative liabilities
Rate lock commitments (fallout-adjusted)	—		—			(6		)	(6		)
Mortgage backed securities forwards	—		(11		)	—			(11		)
Interest rate swaps	—		(37		)	—			(37		)
Warrant liabilities	—		(4		)	—			(4		)
DOJ litigation settlement	—		—			(60		)	(60		)
Total liabilities at fair value	$	—	$	(52	)	$	(66	)	$	(118	)

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Notes to the Consolidated Financial Statements



	Level 1			Level 2			Level 3			Total Fair Value
	(Dollars in millions)
December 31, 2015
Investment securities available-for-sale
Agency - Commercial	$	—		$	766		$	—		$	766
Agency - Residential	—			514			—			514
Municipal obligations	—			14			—			14
Loans held-for-sale
Residential first mortgage loans	—			2,541			—			2,541
Loans held-for-investment
Residential first mortgage loans	—			6			—			6
Second mortgage loans	—			—			42			42
HELOC loans	—			—			64			64
Mortgage servicing rights	—			—			296			296
Derivative assets
Rate lock commitments (fallout-adjusted)	—			—			26			26
Mortgage-backed securities forwards	—			7			—			7
Interest rate swaps and swaptions	—			25			—			25
Total assets at fair value	$	—		$	3,873		$	428		$	4,301
Derivative liabilities
U.S. Treasury, swap and euro dollar futures	$	(1	)	$	—		$	—		$	(1	)
Mortgage-backed securities forwards	—			(6		)	—			(6		)
Interest rate swap on FHLB advances (net)	—			(4		)	—			(4		)
Interest rate swaps	—			(7		)	—			(7		)
Warrant liabilities	—			(8		)	—			(8		)
DOJ litigation settlement	—			—			(84		)	(84		)
Total liabilities at fair value	$	(1	)	$	(25	)	$	(84	)	$	(110	)

There were no transfers between Level 1 and Level 2 during the years ended December 31, 2016 and 2015 , and 2014 .

We utilized swaptions futures, forward agency and loan sales and interest rate swaps to manage the risk associated with MSRs and rate lock commitments. Gains and losses for individual lines in the tables do not reflect the effect of our risk management activities related to such level 3 instruments.

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Notes to the Consolidated Financial Statements

Fair Value Measurements Using Significant Unobservable Inputs

The tables below include a roll forward of the Consolidated Statements of Financial Condition amounts (including the change in fair value) for financial instruments classified by us within level 3 of the valuation hierarchy:



	Balance at Beginning of Year			Recorded in Earnings						Recorded in OCI		Purchases / Originations		Sales			Settlement			Transfers In (Out)			Balance at End of Year
				Total Unrealized Gains/ (Losses)			Total Realized Gains/ (Losses)			Total Unrealized Gains/ (Losses)
	(Dollars in millions)
Year Ended December 31, 2016
Assets
Loans held-for-investment
Second mortgage loans (1)	$	42		$	(1	)	$	—		$	—	$	—	$	—		$	(12	)	$	12		$	41
HELOC loans (1)	64			6			—			—		—		—			(34		)	(12		)	24
Mortgage servicing rights	296			(105		)	—			—		228		(84		)	—			—			335
Rate lock commitments (net) (2)	26			25			—			—		325		—			—			(358		)	18
Totals	$	428		$	(75	)	$	—		$	—	$	553	$	(84	)	$	(46	)	$	(358	)	$	418
Liabilities
DOJ litigation settlement	$	(84	)	$	24		$	—		$	—	$	—	$	—		$	—		$	—		$	(60	)
Year Ended December 31, 2015
Assets
Investment securities available-for-sale
Municipal obligation	$	2		$	—		$	—		$	—	$	—	$	—		$	(2	)	$	—		$	—
Loans held-for-investment
Second mortgage loans	53			2			1			—		—		—			(14		)	—			42
HELOC loans	132			(4		)	(1		)	—		—		—			(63		)	—			64
Mortgage servicing rights	258			(46		)	—			—		260		(176		)	—			—			296
Other investments	100			—			—			—		—		—			(100		)	—			—
Rate lock commitments (2)	31			60			—			—		277		—			—			(342		)	26
Totals	$	576		$	12		$	—		$	—	$	537	$	(176	)	$	(179	)	$	(342	)	$	428
Liabilities
Long-term debt	$	(84	)	$	—		$	(3	)	$	—	$	—	$	52		$	35		$	—		$	—
DOJ litigation settlement	(82		)	(2		)	—			—		—		—			—			—			(84		)
Totals	$	(166	)	$	(2	)	$	(3	)	$	—	$	—	$	52		$	35		$	—		$	(84	)
Year Ended December 31, 2014
Assets
Investment securities available-for-sale
Municipal obligation (3)	$	—		$	—		$	—		$	—	$	—	$	—		$	(2	)	$	4		$	2
Loans held-for-investment
Second mortgage loans	65			2			2			—		—		—			(16		)	—			53
HELOC loans	155			(3		)	2			—		1		—			(23		)	—			132
Mortgage servicing rights	285			(67		)	—			—		271		(231		)	—			—			258
Other investments	—			—			—			—		100		—			—			—			100
Rate lock commitments (net) (2)	10			154			—			—		220		—			—			(353		)	31
Totals	$	515		$	86		$	4		$	—	$	592	$	(231	)	$	(41	)	$	(349	)	$	576
Liabilities
Long-term debt	$	(106	)	$	—		$	(7	)	$	—	$	—	$	—		$	29		$	—		$	(84	)
DOJ litigation settlement	(93		)	11			—			—		—		—			—			—			(82		)
Totals	$	(199	)	$	11		$	(7	)	$	—	$	—	$	—		$	29		$	—		$	(166	)


(1)	As HELOC loans reach their balloon payment, their terms may be modified to those of an amortizing second mortgage.


(2)	Rate lock commitments are reported on a fallout adjusted basis. Transfers out of Level 3 represent the settlement value of the commitments that are transferred to loans held for sale, which are classified as Level 2 assets.


(3)	The municipal obligation was historically priced using Level 2 inputs and was transferred into a Level 3 asset due to the obligation not being a readily marketable security.

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Notes to the Consolidated Financial Statements

The following tables present the quantitative information about recurring Level 3 fair value financial instruments and the fair value measurements as of:



	Fair Value			Valuation Technique	Unobservable Input	Range (Weighted Average)
December 31, 2016	(Dollars in millions)
Assets
Second mortgage loans	$	41		Discounted cash flows	Discount rate Constant prepayment rate Constant default rate	8.10%
HELOC loans	$	24		Discounted cash flows	Discount rate	6.0% - 9.0% (7.5%)
Mortgage servicing rights	$	335		Discounted cash flows	Option adjusted spread Constant prepayment rate Weighted average cost to service per loan	6.2% - 9.3% (7.8%) 13.9% - 19.2% (16.7%) $55 - $82 ($68)
Rate lock commitments (net)	$	18		Consensus pricing	Origination pull-through rate	66.9% - 100.0% (83.6%)
Liabilities
DOJ litigation settlement	$	(60	)	Discounted cash flows	Discount rate Asset growth rate	6.6% - 9.8% (8.2%) 4.2% - 11.6% (7.9%)



	Fair Value			Valuation Technique	Unobservable Input	Range (Weighted Average)
December 31, 2015	(Dollars in millions)
Assets
Second mortgage loans	$	42		Discounted cash flows	Discount rate Constant prepayment rate Constant default rate	7.2% - 10.8% (9.0%) 13.5% - 20.2% (16.9%) 2.6% - 4.0% (3.3%)
HELOC loans	$	64		Discounted cash flows	Discount rate	6.8% - 10.1% (8.4%)
Mortgage servicing rights	$	296		Discounted cash flows	Option adjusted spread Constant prepayment rate Weighted average cost to service per loan	6.6% - 9.9% (8.2%) 10.3% - 14.8% (12.6%) $57 - $86 ($72)
Rate lock commitments	$	26		Consensus pricing	Origination pull-through rate	67.6% - 100.0% (84.6%)
Liabilities
DOJ litigation settlement	$	(84	)	Discounted cash flows	Discount rate	4.9% - 9.5% (7.2%)

Recurring Significant Unobservable Inputs

The significant unobservable inputs used in the fair value measurement of the second mortgage loans are discount rates, constant prepayment rates, and default rates. The constant prepayment and default rates are based on a 12 month historical average. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Increases (decreases) in prepay rates in isolation result in a higher (lower) fair value and increases (decreases) in default rates in isolation result in a lower (higher) fair value.

The HELOC loans, formerly included in the FSTAR 2005-1 and FSTAR 2006-1 securitization trusts, are valued utilizing a loan-level discounted cash flow model which projects expected cash flows given three potential outcomes: (1) paid-in-full at scheduled maturity, (2) default at scheduled maturity (foreclosure), and (3) modification at scheduled maturity into an amortizing HELOC. Loans are placed into the potential outcome buckets based on their underlying current delinquency, FICO scores and property CLTV all of which are unobservable inputs. Estimated cash flows are then discounted back using an unobservable discount rate. Loans within the loan portfolios contain FICO scores with a minimum of 426 , maximum of 805 , and a weighted average of 656 . For the loans, increases (decreases) in the discount rate, in isolation, would lower (higher) the fair value measurement.

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Notes to the Consolidated Financial Statements

The significant unobservable inputs used in the fair value measurement of the MSRs are option adjusted spreads, prepayment rates, and cost to service. Significant increases (decreases) in all three assumptions in isolation would result in a significantly lower (higher) fair value measurement. Additionally, the key economic assumptions used in determining the fair value of MSRs capitalized were as follows:



	For the Years Ended December 31,
	2016		2015		2014
Weighted-average life (in years)	7.1		7.9		7.8
Weighted-average constant prepayment rate	13.2	%	11.3	%	12.3	%
Weighted-average option adjusted spread	10.1	%	8.8	%	9.4	%

The key economic assumptions reflected in the overall fair value of the MSRs were as follows:



	December 31,
	2016		2015		2014
Weighted-average life (in years)	6.6		7.3		6.6
Weighted-average constant prepayment rate	16.7	%	12.6	%	15.0	%
Weighted-average option adjusted spread	7.8	%	8.2	%	8.9	%

The significant unobservable input used in the fair value measurement of the DOJ litigation settlement is the discount rate, in addition to those discussed in Note 21 - Legal Proceedings, Contingencies and Commitments. Significant increases (decreases) in the discount rate in isolation could result in a marginally lower (higher) fair value measurement. For further information on the fair value inputs related to the DOJ litigation settlement, see Note 21 - Legal Proceedings, Contingencies and Commitments.

The significant unobservable input used in the fair value measurement of the rate lock commitments is the pull through rate. The pull through rate is a statistical analysis of our actual rate lock fallout history to determine the sensitivity of the residential mortgage loan pipeline compared to interest rate changes and other deterministic values. New market prices are applied based on updated loan characteristics and new fallout ratios (i.e., the inverse of the pull through rate) are applied accordingly. Significant increases (decreases) in the pull through rate in isolation would result in a significantly higher (lower) fair value measurement.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We also have assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These assets are measured at the lower of cost or market and had a fair value below cost at the end of the period as summarized below:



	Total (1)		Level 2		Level 3		Gains/(Losses)
	(Dollars in millions)
December 31, 2016
Loans held-for-sale (2)	$	9	$	9	$	—	$	(2	)
Impaired loans held-for-investment (2)
Residential first mortgage loans	25		—		25		(28		)
Repossessed assets (3)	14		—		14		(2		)
Totals	$	48	$	9	$	39	$	(32	)
December 31, 2015
Loans held-for-sale (2)	$	8	$	8	$	—	$	(2	)
Impaired loans held-for-investment (2)
Residential first mortgage loans	40		—		40		(83		)
Commercial real estate loans	2		—		2		(1		)
Repossessed assets (3)	17		—		17		—
Totals	$	67	$	8	$	59	$	(86	)


(1)	The fair values are determined at various dates during the years ended December 31, 2016 and 2015 , respectively.


(2)	Gains/(losses) reflect fair value adjustments on assets for which we did not elect the fair value option.


(3)	Gains/(losses) reflect write downs of repossessed assets based on the estimated fair value of the specific assets.

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Notes to the Consolidated Financial Statements

The following tables present the quantitative information about nonrecurring Level 3 fair value financial instruments and the fair value measurements:



	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
December 31, 2016	(Dollars in millions)
Impaired loans held-for-investment
Residential first mortgage loans	$	25	Fair value of collateral	Loss severity discount	22% - 40% (29.5%)
Repossessed assets	$	14	Fair value of collateral	Loss severity discount	22% - 100% (69.5%)



	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
December 31, 2015	(Dollars in millions)
Impaired loans held-for-investment
Residential first mortgage loans	$	40	Fair value of collateral	Loss severity discount	35% - 45% (35.2%)
Commercial real estate loans	$	2	Fair value of collateral	Loss severity discount	45% - 55% (50.1%)
Repossessed assets	$	17	Fair value of collateral	Loss severity discount	16% - 100% (48.7%)

Nonrecurring Significant Unobservable Inputs

The significant unobservable inputs used in the fair value measurement of the impaired loans and repossessed assets are appraisals or other third-party price evaluations which incorporate measures such as recent sales prices for comparable properties.

Fair Value of Financial Instruments

The following table presents the carrying amount and estimated fair value of financial instruments that are carried either at fair value, cost, or amortized cost:



	December 31, 2016
				Estimated Fair Value
	Carrying Value			Total			Level 1			Level 2			Level 3
	(Dollars in millions)
Assets
Cash and cash equivalents	$	158		$	158		$	158		$	—		$	—
Investment securities available-for-sale	1,480			1,480			—			1,480			—
Investment securities held-to-maturity	1,093			1,084			—			1,084			—
Loans held-for-sale	3,177			3,178			—			3,178			—
Loans held-for-investment	6,065			5,998			—			7			5,991
Loans with government guarantees	365			354			—			354			—
Repossessed assets	14			14			—			—			14
Federal Home Loan Bank stock	180			180			—			180			—
Mortgage servicing rights	335			335			—			—			335
Bank owned life insurance	271			271			—			271			—
Other assets, foreclosure claims	135			135			—			135			—
Derivative financial instruments, assets	123			123			45			54			24
Liabilities
Retail deposits
Demand deposits and savings accounts	$	(5,268	)	$	(4,956	)	$	—		$	(4,956	)	$	—
Certificates of deposit	(1,056		)	(1,062		)	—			(1,062		)	—
Government deposits	(1,030		)	(1,011		)	—			(1,011		)	—
Company controlled deposits	(1,446		)	(1,371		)	—			(1,371		)	—
Federal Home Loan Bank advances	(2,980		)	(2,964		)	—			(2,964		)	—
Long-term debt	(493		)	(277		)	—			(277		)	—
Warrant liabilities	(4		)	(4		)	—			(4		)	—
DOJ litigation settlement	(60		)	(60		)	—			—			(60		)
Derivative financial instruments, liabilities	(54		)	(54		)	(11		)	(37		)	(6		)

119

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements



	December 31, 2015
				Estimated Fair Value
	Carrying Value			Total			Level 1			Level 2			Level 3
	(Dollars in millions)
Assets
Cash and cash equivalents	$	208		$	208		$	208		$	—		$	—
Investment securities available-for-sale	1,294			1,294			—			1,294			—
Investment securities held-to-maturity	1,268			1,262			—			1,262			—
Loans held-for-sale	2,576			2,578			—			2,578			—
Loans held-for-investment	6,352			6,308			—			6			6,302
Loans with government guarantees	485			469			—			469			—
Repossessed assets	17			17			—			—			17
Federal Home Loan Bank stock	170			170			—			170			—
Mortgage servicing rights	296			296			—			—			296
Bank owned life insurance	178			178			—			178			—
Other assets, foreclosure claims	210			210			—			210			—
Derivative financial instruments, assets	58			58			7			25			26
Liabilities
Retail deposits
Demand deposits and savings accounts	$	(5,008	)	$	(4,744	)	$	—		$	(4,744	)	$	—
Certificates of deposit	(826		)	(833		)	—			(833		)	—
Government deposits	(1,062		)	(1,045		)	—			(1,045		)	—
Company controlled deposits	(1,039		)	(947		)	—			(947		)	—
Federal Home Loan Bank advances	(3,541		)	(3,543		)	—			(3,543		)	—
Long-term debt	(247		)	(89		)	—			(89		)	—
Warrant liabilities	(8		)	(8		)	—			(8		)	—
DOJ litigation settlement	(84		)	(84		)	—			—			(84		)
Derivative financial instruments, liabilities	(18		)	(18		)	(1		)	(17		)	—

The methods and assumptions used by us in estimating fair value of financial instruments which are required for disclosure only, are as follows:

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

Investment securities held-to-maturity. Fair values are generated using market inputs, where possible, including quoted prices (the closing price in an exchange market), bid prices (the price at which a buyer stands ready to purchase), and other market information.

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

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

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

Bank owned life insurance. The fair value of bank owned life insurance policies is based on the cash surrender values of the policies as reported by the insurance companies.

Other assets, foreclosure claims. The fair value of foreclosure claims with government guarantees approximates the carrying amount.

120

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Deposit accounts. The fair value of deposits with no defined maturity is estimated based on a discounted cash flow model that incorporates current market rates for similar products and expected attrition. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for certificates of deposit with similar remaining maturities.

Federal Home Loan Bank advances. Rates currently available for debt with similar terms and remaining maturities are used to estimate the fair value of the existing debt.

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

Fair Value Option

We elected the fair value option for certain items as discussed throughout the Notes to the Consolidated Financial Statements to mitigate a divergence between accounting losses and economic exposure. Interest income on LHFS is accrued on the principal outstanding primarily using the "simple-interest" method.

The following table reflects the change in fair value included in earnings of financial instruments for which the fair value option has been elected:



	For the Years Ended December 31,
	2016		2015			2014
Assets	(Dollars in millions)
Loans held-for-sale
Net gain on loan sales	$	269	$	321		$	401
Other noninterest income	—		—			(2		)
Loans held-for-investment
Other noninterest income	1		40			44
Liabilities
Long-term debt
Other noninterest income	$	—	$	29		$	22
Litigation settlement
Other noninterest income	$	24	$	—		11
Other noninterest (expense)	—		(2		)	—

121

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

The following table reflects the difference between the aggregate fair value and aggregate remaining contractual principal balance outstanding for assets and liabilities for which the fair value option has been elected:



	December 31, 2016									December 31, 2015									December 31, 2014
	(Dollars in millions)
	Unpaid Principal Balance			Fair Value			Fair Value Over/(Under) UPB			Unpaid Principal Balance			Fair Value			Fair Value Over/(Under) UPB			Unpaid Principal Balance			Fair Value			Fair Value Over/(Under) UPB
Assets
Nonaccrual loans
Loans held-for-sale	$	2		$	2		$	—		$	1		$	—		$	(1	)	$	—		$	—		$	—
Loans held-for-investment	19			13			(6		)	21			10			(11		)	11			5			(6		)
Total nonaccrual loans	$	21		$	15		$	(6	)	$	22		$	10		$	(12	)	$	11		$	5		$	(6	)
Other performing loans
Loans held-for-sale	$	3,103		$	3,143		$	40		$	2,451		$	2,541		$	90		$	1,144		$	1,196		$	52
Loans held-for-investment	72			59			(13		)	112			101			(11		)	225			206			(19		)
Total other performing loans	$	3,175		$	3,202		$	27		$	2,563		$	2,642		$	79		$	1,369		$	1,402		$	33
Total loans
Loans held-for-sale	$	3,105		$	3,145		$	40		$	2,452		$	2,541		$	89		$	1,144		$	1,196		$	52
Loans held-for-investment	91			72			(19		)	133			111			(22		)	236			211			(25		)
Total loans	$	3,196		$	3,217		$	21		$	2,585		$	2,652		$	67		$	1,380		$	1,407		$	27
Liabilities
Long-term debt	$	—		$	—		$	—		$	—		$	—		$	—		$	(88	)	$	(84	)	$	4
Litigation settlement (1)	(118		)	(60		)	58			(118		)	(84		)	34			(118		)	(82		)	36


(1)	We are obligated to pay $118 million in installment payments upon meeting certain performance conditions.

Note 23 — Segment Information

Our operations are conducted through four operating segments: Community Banking, Mortgage Originations, Mortgage Servicing, and Other, which includes the remaining reported activities. Operating segments are defined as components of an enterprise that engage in business activity from which revenues are earned and expenses incurred for which discrete financial information is available that is evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. The operating segments have been determined based on the products and services offered and reflect the manner in which financial information is currently evaluated by management. Each segment operates under the same banking charter, but is reported on a segmented basis for this report. Each of the operating segments is complementary to each other and because of the interrelationships of the segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.

Effective January 1, 2016, we reorganized our reportable segments to align with our new management reporting structure and to align with our long-term strategy. Prior period segment financial information has been recast to conform to the current presentation. Prior to the reorganization, representation and warranty reserves were reported in the Mortgage Servicing segment and the MSR asset and associated costs were reported in the Other segment. As a result of this change, representation and warranty reserves, as well as the MSR asset and associated costs are now reported in the Mortgage Originations segment.

The Community Banking segment originates loans, provides deposits and fee based services to consumer, business, and mortgage lending customers through its Branch Banking, Business Banking and Commercial Banking, Government Banking, Warehouse Lending and HFI Portfolio groups. Products offered through these groups include checking accounts, savings accounts, money market accounts, certificates of deposit, consumer loans, commercial loans, home builder finance loans and warehouse lines of credit. Other financial services available to consumer and commercial customers include lines of credit, revolving credit, customized treasury management solutions, equipment leasing, inventory, and accounts receivable lending and capital markets services such as interest rate risk protection products.

The Mortgage Originations segment originates, acquires and sells one-to-four family residential mortgage loans. The origination and acquisition of mortgage loans comprises the majority of the lending activity. Mortgage loans are originated

122

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

through home loan centers, national call centers, the Internet and unaffiliated banks and mortgage banking and brokerage companies, where the net interest income and the gains from sales associated with these loans are recognized in the Mortgage Originations segment.

The Mortgage Servicing segment services and subservices mortgage loans, on a fee basis, for others. Also, the Mortgage Servicing segment services, on a fee basis, residential mortgages HFI held by the Community Banking segment and MSRs held by the Mortgage Originations segment. The Mortgage Servicing segment may also collect ancillary fees, such as late fees, and earns income through the use of noninterest-bearing escrows.

The Other segment includes the treasury functions, funding revenue associated with stockholders' equity, the impact of interest rate risk management, the impact of balance sheet funding activities, and miscellaneous other expenses of a corporate nature. Treasury functions include administering the investment securities portfolios, balance sheet funding, and interest rate risk management. In addition, the Other segment includes revenue and expenses related to treasury and corporate assets and liabilities and equity not directly assigned or allocated to the Mortgage Originations, Mortgage Servicing or Community Banking operating segments.

Revenues are comprised of net interest income (before the provision (benefit) for loan losses) and noninterest income. Noninterest expenses are fully allocated to each operating segment. Allocation methodologies may be subject to periodic adjustment as the internal management accounting system is revised and the business or product lines within the segments change.

The following tables present financial information by business segment for the periods indicated:



	Year Ended December 31, 2016
	Community Banking			Mortgage Origination			Mortgage Servicing			Other			Total
Summary of Operations	(Dollars in millions)
Net interest income	$	206		$	82		$	33		$	2		$	323
Net gain (loss) on loan sales	6			310			—			—			$	316
Representation and warranty benefit	—			19			—			—			$	19
Other noninterest income	28			26			54			44			$	152
Total net interest income and noninterest income	240			437			87			46			810
Benefit (provision) for loan losses	10			—			(2		)	—			8
Asset resolution	—			(1		)	(6		)	—			(7		)
Depreciation and amortization expense	(7		)	(5		)	(4		)	(16		)	(32		)
Other noninterest expense	(173		)	(246		)	(97		)	(5		)	(521		)
Total noninterest expense	(180		)	(252		)	(107		)	(21		)	(560		)
Income (loss) before income taxes	70			185			(22		)	25			258
Provision (benefit) for income taxes	—			—			—			87			87
Net income (loss)	$	70		$	185		$	(22	)	$	(62	)	$	171
Intersegment revenue	$	(3	)	$	1		$	22		$	(20	)	$	—

Average balances
Loans held-for-sale	$	66		$	3,068		$	—		$	—		3,134
Loans with government guarantees	—			—			435			—			435
Loans held-for-investment	5,807			6			—			—			5,813
Total assets	5,906			3,824			639			3,538			13,907
Deposits	7,151			—			1,611			—			8,762

123

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements



	Year Ended December 31, 2015
	Community Banking			Mortgage Origination			Mortgage Servicing			Other			Total
Summary of Operations	(Dollars in millions)
Net interest income	$	171		$	72		$	13		$	31		$	287
Net gain (loss) on loan sales	(15		)	303			—			—			$	288
Representation and warranty benefit	—			19			—			—			$	19
Other noninterest income	25			78			56			4			$	163
Total net interest income and noninterest income	181			472			69			35			757
Benefit for loan losses	19			—			—			—			19
Asset resolution	(1		)	(1		)	(13		)	—			(15		)
Depreciation and amortization expense	(6		)	(3		)	(3		)	(12		)	(24		)
Other noninterest expense	(153		)	(228		)	(107		)	(9		)	(497		)
Total noninterest expense	(160		)	(232		)	(123		)	(21		)	(536		)
Income (loss) before income taxes	40			240			(54		)	14			240
Provision for income taxes	—			—			—			82			82
Net income (loss)	$	40		$	240		$	(54	)	$	(68	)	$	158
Intersegment revenue	$	(15	)	$	10		$	17		$	(12	)	$	—

Average balances
Loans held-for-sale	$	40		$	2,148		$	—		$	—		2,188
Loans with government guarantees	—			—			633			—			633
Loans held-for-investment	4,986			4			—			86			5,076
Total assets	4,972			2,661			944			3,379			11,956
Deposits	6,674			—			1,203			—			7,877



	Year Ended December 31, 2014
	Community Banking			Mortgage Origination			Mortgage Servicing			Other			Total
Summary of Operations	(Dollars in millions)
Net interest income	$	150		$	56		$	20		$	21		$	247
Net gain (loss) on loan sales	(3		)	209			—			—			$	206
Representation and warranty (provision) benefit	—			(10		)	—			—			$	(10	)
Other noninterest income	22			70			58			15			$	165
Total net interest income and noninterest income	169			325			78			36			608
Provision for loan losses	(132		)	—			—			—			(132		)
Asset resolution	(4		)	(3		)	(50		)	—			(57		)
Depreciation and amortization expense	(5		)	(1		)	(6		)	(12		)	(24		)
Other noninterest expense	(158		)	(206		)	(123		)	(11		)	(498		)
Total noninterest expense	(167		)	(210		)	(179		)	(23		)	(579		)
Income (loss) before income taxes	(130		)	115			(101		)	13			(103		)
Benefit for income taxes	—			—			—			(34		)	(34		)
Net income (loss)	$	(130	)	$	115		$	(101	)	$	47		$	(69	)
Intersegment revenue	$	(3	)	$	(2	)	$	18		$	(13	)	$	—

Average balances
Loans held-for-sale	$	62		$	1,472		$	20		$	—		1,554
Loans with government guarantees	—			—			1,216			—			1,216
Loans held-for-investment	3,975			1			—			146			4,122
Total assets	3,943			1,630			1,349			2,964			9,886
Deposits	5,984			—			750			—			6,734

124

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Note 24 — Holding Company Only Financial Statements

The following are the unconsolidated financial statements for the Holding Company on a stand-alone basis. These condensed financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto. The Holding Company's principal sources of funds are cash dividends paid by the Bank to the Holding Company which are these and other subsidiaries, investment income and borrowings. Federal laws and regulations limit the amount of dividends or other capital distributions the Bank may pay the Holding Company.

Flagstar Bancorp, Inc.

Condensed Unconsolidated Statements of Financial Condition

(Dollars in millions)



	December 31,
	2016			2015
Assets
Cash and cash equivalents	$	70		$	37
Investment in subsidiaries (1)	1,728			1,738
Other assets	57			50
Total assets	$	1,855		$	1,825
Liabilities and Stockholders’ Equity
Liabilities
Long term debt	$	493		$	247
Other liabilities	26			49
Total liabilities	519			296
Stockholders’ Equity
Preferred Stock	—			267
Common stock	1			1
Additional paid in capital	1,503			1,486
Accumulated other comprehensive income	(7		)	2
Accumulated deficit	(161		)	(227		)
Total stockholders’ equity	1,336			1,529
Total liabilities and stockholders’ equity	$	1,855		$	1,825


(1)	Includes unconsolidated trusts of $7 million for December 31, 2016 and 2015 .

125

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Flagstar Bancorp, Inc.

Condensed Unconsolidated Statements of Operations

(Dollars in millions)



	For the Years Ended December 31,
	2016			2015			2014
Expenses
Interest	$	16		$	7		$	7
General and administrative	9			13			5
Total	25			20			12
Loss before undistributed loss of subsidiaries	(25		)	(20		)	(12		)
Equity in undistributed income (loss) of subsidiaries	188			172			(63		)
Income (loss) before income taxes	163			152			(75		)
Provision (benefit) for income taxes	8			6			6
Net income (loss)	171			158			(69		)
Preferred stock dividends/accretion	—			—			(1		)
Net income (loss) from continuing operations	171			158			(70		)
Other comprehensive (loss) income (1)	(9		)	(6		)	13
Comprehensive income (loss)	$	162		$	152		$	(57	)


(1)	See Consolidated Statements of Comprehensive Income for other comprehensive income (loss) detail.

Flagstar Bancorp, Inc.

Condensed Unconsolidated Statements of Cash Flows

(Dollars in millions)



	For the Years Ended December 31,
	2016			2015			2014
Net income (loss)	$	171		$	158		$	(69	)
Adjustments to reconcile net loss to net cash provided by operating activities
Equity in (income) loss of subsidiaries net of dividends	12			(172		)	63
Stock-based compensation	10			3			3
Change in other assets	(8		)	(6		)	(3		)
Provision for deferred tax benefit	—			1			—
Change in other liabilities	(22		)	9			4
Change in fair value and other non-cash changes	(4		)	—			—
Net cash used in operating activities	159			(7		)	(2		)
Investing Activities
Net change in investment in subsidiaries	—			(2		)	(2		)
Net cash provided by (used in) investment activities	—			(2		)	(2		)
Financing Activities
Proceeds from the issuance of junior subordinated debentures	245			—			—
Redemption of preferred stock	(267		)	—			—
Dividends paid on preferred stock	(104		)	—			—
Net cash used in financing activities	(126		)	—			—
Net increase (decrease) in cash and cash equivalents	33			(9		)	(4		)
Cash and cash equivalents, beginning of year	37			46			50
Cash and cash equivalents, end of year	$	70		$	37		$	46

126

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements

Note 25 — Quarterly Financial Data (Unaudited)

The following table represents summarized data for each of the quarters in 2016 , 2015 and 2014 :



	2016
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(Dollars in millions, except per share data)
Interest income	$	101		$	99		$	106		$	111
Interest expense	22			22			26			24
Net interest income	79			77			80			87
Provision (benefit) for loan losses	(13		)	(3		)	7			1
Net interest income after provision for loan losses	92			80			73			86
Net gain on loan sales	75			90			94			57
Loan fees and charges	15			19			22			20
Loan administration income	6			4			4			4
Net (loss) on the mortgage servicing rights	(6		)	(4		)	(11		)	(5		)
Representation and warranty benefit	2			4			6			7
Other noninterest income	13			15			41			15
Noninterest expense	137			139			142			142
Income before income tax	60			69			87			42
Provision for income taxes	21			22			30			14
Net income from continuing operations	$	39		$	47		$	57		$	28
Basic income per share	$	0.56		$	0.67		$	0.98		$	0.50
Diluted income per share	$	0.54		$	0.66		$	0.96		$	0.49



	2015
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(Dollars in millions, except per share data)
Interest income	$	79		$	90		$	91		$	95
Interest expense	14			17			18			19
Net interest income	65			73			73			76
Benefit for loan losses	(4		)	(13		)	(1		)	(1		)
Net interest income after provision for loan losses	69			86			74			77
Net gain on loan sales	91			83			68			46
Loan fees and charges	17			19			17			14
Loan administration income	4			7			8			7
Net (loss) return on the mortgage servicing rights	(2		)	9			12			9
Representation and warranty benefit	2			5			6			6
Other noninterest income	7			3			17			15
Noninterest expense	138			138			131			129
Income before income tax	50			74			71			45
Provision (benefit) for income taxes	18			28			24			12
Net income from continuing operations	$	32		$	46		$	47		$	33
Basic income per share	$	0.43		$	0.69		$	0.70		$	0.45
Diluted income per share	$	0.43		$	0.68		$	0.69		$	0.44

127

Flagstar Bancorp, Inc.

Notes to the Consolidated Financial Statements



	2014
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(Dollars in millions, except per share data)
Interest income	$	66		$	72		$	75		$	72
Interest expense	8			9			11			11
Net interest income	58			63			64			61
Provision for loan losses	112			6			8			5
Net interest (expense) income after provision for loan losses	(54		)	57			56			56
Net gain on loan sales	45			55			52			53
Loan administration income	7			6			6			5
Net return on the mortgage servicing rights	16			5			1			2
Representation and warranty (provision) benefit	2			(5		)	(13		)	6
Other noninterest income	5			42			39			32
Noninterest expense	139			122			179			139
(Loss) income before income tax	(118		)	38			(38		)	15
Provision (benefit) for income taxes	(40		)	12			(10		)	4
Net (loss) income	(78		)	26			(28		)	11
Preferred stock dividends/accretion	(1		)	—			—			—
Net (loss) income from continuing operations	$	(79	)	$	26		$	(28	)	$	11
Basic (loss) income per share	$	(1.51	)	$	0.33		$	(0.61	)	$	0.07
Diluted (loss) income per share	$	(1.51	)	$	0.33		$	(0.61	)	$	0.07



ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.



ITEM 9A.	CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 as amended (the Exchange Act), our management, with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness and design of our disclosure controls and procedures (as that term is defined in Rule 13a-15(e) of the Exchange Act). In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving the desired control objectives, and that our management’s duties require it to make its best judgment regarding the design of our disclosure controls and procedures.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2016 .

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes policies and procedures that:


(i)	Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

128


(ii)	Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and


(iii)	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

With the participation of the Chief Executive Officer and Chief Financial Officer, our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016 , based on the framework and criteria established in Internal Control-Integrated Framework (2013) , issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on this assessment, as of December 31, 2016 we assert that we have maintained effective internal control over financial reporting.

The effectiveness of Management's internal control over financial reporting as of December 31, 2016 , has been audited by PricewaterhouseCoopers, LLP, our independent registered public accounting firm, as stated in their report, which is included herein.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.



ITEM 9B.	OTHER INFORMATION

None.

129

PART III



ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE

Except as set forth below, the information required by this Item 10 will be contained in our Proxy Statement relating to the 2017 Annual Meeting of Stockholders and is hereby incorporated by reference .

Our Code of Business Conduct and Ethics, our Corporate Governance Guidelines and charters for our Audit Committee, Compensation Committee, and Nominating Corporate Governance Committee are available at www.flagstar.com or upon written request by stockholders to Flagstar Bancorp, Inc., Attn: James Ciroli, CFO, 5151 Corporate Drive, Troy, MI 48098.

None of the information currently posted, or posted in the future, on our website is incorporated by reference into this Form 10-K.



ITEM 11.	EXECUTIVE COMPENSATION

The information required by this Item 11 will be contained in our Proxy Statement relating to the 2017 Annual Meeting of Stockholders and is hereby incorporated by reference, provided that the Compensation Committee Report shall be deemed to be furnished and not filed.



ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item 12 will be contained in our Proxy Statement relating to the 2017 Annual Meeting of Stockholders and is hereby incorporated by reference. Reference is also made to the information appearing under Item 5 of this Form 10-K, which is incorporated herein by reference.



ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item 13 will be contained in our Proxy Statement relating to the 2017 Annual Meeting of Stockholders and is hereby incorporated by reference.



ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item 14 will be contained in our Proxy Statement relating to the 2017 Annual Meeting of Stockholders and is hereby incorporated by reference.

130

PART IV



ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1) and (2) — Financial Statements and Schedules

The information required by these sections of Item 15 are set forth in the Index to Consolidated Financial Statements under Item 8 of this annual report on Form 10-K.

(3) — Exhibits

The following documents are filed as a part of, or incorporated by reference into, this report:



Exhibit No.		Description
3.1*		Second Amended and Restated Articles of Incorporation of Flagstar Bancorp, Inc. (previously filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K, dated March 16, 2015, and incorporated herein by reference).
3.2*		Sixth Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2 to the Company’s Current Report on Form 10-Q, dated November 7, 2016, and incorporated herein by reference).
4.1*		Indenture, dated July 11, 2016, between Flagstar Bancorp, Inc. as Issuers and Wilmington Trust, National Association, as Trustee and Collateral Agent, including the form of 6.125% senior secured note due 2021 (previously filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated July 11, 2016, and incorporated herein by reference)
4.2*		Registration Rights Agreement, dated as of July 11, 2016, among Flagstar Bancorp, Inc., J.P. Morgan Securities LLC and Sandler O’Neill & Partners, L.P. as representatives of the initial purchasers (previously filed as Exhibit 4.3 to the Company's Current Report on Form 8-K, dated July 11, 2016, and incorporated herein by reference)
4.3*		Form of 6.125% Global Note due 2021 (previously filed as Exhibit 4.3 to the Company's Current Report on Form S-4, dated October 4, 2016, and incorporated herein by reference)
10.1+		Flagstar Bancorp, Inc. 2006 Equity Incentive Plan
10.2		Form of Purchase Agreement, dated as of May 16, 2008, between the Company and the purchasers named therein
10.3		Form of First Amendment to Purchase Agreement, dated as of December 16, 2008, between the Company and the purchasers named therein
10.4		Form of Warrant
10.5		Investment Agreement, dated as of December 17, 2008, between the Company and MP Thrift Investments L.P.
10.6		Closing Agreement, dated as of January 30, 2009, between the Company and MP Thrift Investments L.P.
10.7		Purchase Agreement, dated as of February 17, 2009, between the Company and MP Thrift Investments L.P.
10.8		Second Purchase Agreement, dated as of February 27, 2009, between the Company and MP Thrift Investments L.P.
10.9*		Capital Securities Purchase Agreement, dated as of June 30, 2009, by and between the Company, Flagstar Statutory Trust XI, a Delaware statutory trust and MP Thrift Investments L.P. (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated as of July 1, 2009, and incorporated herein by reference).
10.10*		Form of Warrant (previously filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K, dated March 10, 2016 and incorporated herein by reference)
10.11		Supervisory Agreement, dated as of January 27, 2010, by and between the Company and the Federal Reserve (as successor to the OTS)
10.12		Stipulation and Order of Settlement and Dismissal, dated February 24, 2012, by and among the Company, the Bank and the United States of America

131



Exhibit No.		Description
10.13*+		Employment Agreement, dated as of May 16, 2013, by and between Flagstar Bancorp, Inc., Flagstar Bank, FSB and Alessandro P. DiNello (previously filed as Exhibit 10.43 to the Company's Quarterly Report on Form 10-Q, dated as of June 30, 2013, and incorporated herein by reference).
10.14*+		Amendment to Employment Agreement effective October 22, 2015, by and between Flagstar Bancorp, Inc., Flagstar Bank, FSB and Alessandro DiNello (previously filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated herein by reference).
10.15*+		Employment Agreement, dated as of May 16, 2013, by and between Flagstar Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.44 to the Company's Quarterly Report on Form 10-Q, dated as of June 30, 2013, and incorporated herein by reference).
10.16*+		Amendment to Employment Agreement, dated March 2, 2015, by and between Flagstar Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated herein by reference).
10.17*+		Second Amendment to Employment Agreement, effective October 22, 2015, by and between Flagstar Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated herein by reference).
10.18*+		Flagstar Bancorp, Inc. 2016 Stock Award and Incentive Plan (previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated herein by reference).
10.19*+		Form of Senior Executive Officer Award Agreement under Flagstar Bancorp, Inc. 2016 Stock Award and Incentive Plan (previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated as of May 25, 2016, and incorporated herein by reference).
10.20*+		Form of Executive Long-Term Incentive Program Award Agreement under Flagstar Bancorp, Inc. 2016 Stock Award and Incentive Plan (previously filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated herein by reference).
11		Statement regarding computation of per share earnings incorporated by reference to Note 17 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein.
12		Statement of Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends.
21		List of Subsidiaries of the Company.
23.1		Consent of Baker Tilly Virchow Krause, LLP
23.2		Consent of PricewaterhouseCoopers, LLP
31.1		Section 302 Certification of Chief Executive Officer
31.2		Section 302 Certification of Chief Financial Officer
32.1		Section 906 Certification of Chief Executive Officer
32.2		Section 906 Certification of Chief Financial Officer
101		Financial statements from Annual Report on Form 10-K of the Company for the year ended December 31, 2016, formatted in XBRL: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.



*	Incorporated herein by reference



+	Constitutes a management contract or compensation plan or arrangement

Flagstar Bancorp, Inc. will furnish to any stockholder a copy of any of the exhibits listed above upon written request and upon payment of a specified reasonable fee, which fee shall be equal to the Company’s reasonable expenses in furnishing the exhibit to the stockholder. Requests for exhibits and information regarding the applicable fee should be directed to "David Urban, Director of Investor Relations" at the address of the principal executive offices set forth on the cover of this Annual Report on Form 10-K.

(b) — Exhibits. See Item 15(a)(3) above.

132

ITEM 16. FORM 10-K SUMMARY

Not applicable.

133

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 13, 2017 .



	FLAGSTAR BANCORP, INC.

	By:			/s/ James K. Ciroli
				James K. Ciroli
				Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 13, 2017 .



	SIGNATURE	TITLE

By:	/ S / ALESSANDRO DINELLO Alessandro DiNello	President and Chief Executive Officer (Principal Executive Officer)

By:	/ S / JAMES K. CIROLI James K. Ciroli	Executive Vice President and Chief Financial Officer (Principal Financial Officer)

By:	/ S / BRYAN L. MARX Bryan L. Marx	Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)

By:	/ S / JOHN D. LEWIS John D. Lewis	Chairman

By:	/ S / DAVID J. MATLIN David J. Matlin	Director

By:	/ S / PETER SCHOELS Peter Schoels	Director

By:	/ S / DAVID L. TREADWELL David L. Treadwell	Director

By:	/ S / JAY J. HANSEN Jay J. Hansen	Director

By:	/ S / JAMES A. OVENDEN James A. Ovenden	Director

By:	/ S / BRUCE E. NYBERG Bruce E. Nyberg	Director

By:	/ S / JENNIFER R. WHIP Jennifer Whip	Director

134

EXHIBIT INDEX The following documents are filed as a part of, or incorporated by reference into, this report:



Exhibit No.		Description
3.1*		Second Amended and Restated Articles of Incorporation of Flagstar Bancorp, Inc. (previously filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K, dated March 16, 2015, and incorporated herein by reference).
3.2*		Sixth Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2 to the Company’s Current Report on Form 10-Q, dated November 7, 2016, and incorporated herein by reference).
4.1*		Indenture, dated July 11, 2016, between Flagstar Bancorp, Inc. as Issuers and Wilmington Trust, National Association, as Trustee and Collateral Agent, including the form of 6.125% senior secured note due 2021 (previously filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated July 11, 2016, and incorporated herein by reference)
4.2*		Registration Rights Agreement, dated as of July 11, 2016, among Flagstar Bancorp, Inc., J.P. Morgan Securities LLC and Sandler O’Neill & Partners, L.P. as representatives of the initial purchasers (previously filed as Exhibit 4.3 to the Company's Current Report on Form 8-K, dated July 11, 2016, and incorporated herein by reference)
4.3*		Form of 6.125% Global Note due 2021 (previously filed as Exhibit 4.3 to the Company's Current Report on Form S-4, dated October 4, 2016, and incorporated herein by reference)
10.1+		Flagstar Bancorp, Inc. 2006 Equity Incentive Plan
10.2		Form of Purchase Agreement, dated as of May 16, 2008, between the Company and the purchasers named therein
10.3		Form of First Amendment to Purchase Agreement, dated as of December 16, 2008, between the Company and the purchasers named therein
10.4		Form of Warrant
10.5		Investment Agreement, dated as of December 17, 2008, between the Company and MP Thrift Investments L.P.
10.6		Closing Agreement, dated as of January 30, 2009, between the Company and MP Thrift Investments L.P.
10.7		Purchase Agreement, dated as of February 17, 2009, between the Company and MP Thrift Investments L.P.
10.8		Second Purchase Agreement, dated as of February 27, 2009, between the Company and MP Thrift Investments L.P.
10.9*		Capital Securities Purchase Agreement, dated as of June 30, 2009, by and between the Company, Flagstar Statutory Trust XI, a Delaware statutory trust and MP Thrift Investments L.P. (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated as of July 1, 2009, and incorporated herein by reference).
10.10*		Form of Warrant (previously filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K, dated March 10, 2016 and incorporated herein by reference)
10.11		Supervisory Agreement, dated as of January 27, 2010, by and between the Company and the Federal Reserve (as successor to the OTS)
10.12		Stipulation and Order of Settlement and Dismissal, dated February 24, 2012, by and among the Company, the Bank and the United States of America
10.13*+		Employment Agreement, dated as of May 16, 2013, by and between Flagstar Bancorp, Inc., Flagstar Bank, FSB and Alessandro P. DiNello (previously filed as Exhibit 10.43 to the Company's Quarterly Report on Form 10-Q, dated as of June 30, 2013, and incorporated herein by reference).
10.14*+		Amendment to Employment Agreement effective October 22, 2015, by and between Flagstar Bancorp, Inc., Flagstar Bank, FSB and Alessandro DiNello (previously filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated herein by reference).
10.15*+		Employment Agreement, dated as of May 16, 2013, by and between Flagstar Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.44 to the Company's Quarterly Report on Form 10-Q, dated as of June 30, 2013, and incorporated herein by reference).
10.16*+		Amendment to Employment Agreement, dated March 2, 2015, by and between Flagstar Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated herein by reference).

135



Exhibit No.		Description
10.17*+		Second Amendment to Employment Agreement, effective October 22, 2015, by and between Flagstar Bancorp, Inc., Flagstar Bank, FSB and Lee M. Smith (previously filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated herein by reference).
10.18*+		Flagstar Bancorp, Inc. 2016 Stock Award and Incentive Plan (previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated herein by reference).
10.19*+		Form of Senior Executive Officer Award Agreement under Flagstar Bancorp, Inc. 2016 Stock Award and Incentive Plan (previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated as of May 25, 2016, and incorporated herein by reference).
10.20*+		Form of Executive Long-Term Incentive Program Award Agreement under Flagstar Bancorp, Inc. 2016 Stock Award and Incentive Plan (previously filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, dated as of September 30, 2015, and incorporated herein by reference).
11		Statement regarding computation of per share earnings incorporated by reference to Note 17 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein.
12		Statement of Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends.
21		List of Subsidiaries of the Company.
23.1		Consent of Baker Tilly Virchow Krause, LLP
23.2		Consent of PricewaterhouseCoopers, LLP
31.1		Section 302 Certification of Chief Executive Officer
31.2		Section 302 Certification of Chief Financial Officer
32.1		Section 906 Certification of Chief Executive Officer
32.2		Section 906 Certification of Chief Financial Officer
101		Financial statements from Annual Report on Form 10-K of the Company for the year ended December 31, 2016, formatted in XBRL: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.



*	Incorporated herein by reference



+	Constitutes a management contract or compensation plan or arrangement

136

EXHIBIT 10.1

FLAGSTAR BANCORP, INC.

2006 EQUITY INCENTIVE PLAN

AS AMENDED

ARTICLE I

ESTABLISHMENT AND PURPOSE

Section 1.1. Establishment 1

Section 1.2. Purpose 1

ARTICLE II

DEFINITIONS

Section 2.1. Definitions 1

ARTICLE III

ADMINISTRATION

Section 3.1. General 5

Section 3.2. Committee Meetings 5

Section 3.3. Powers of the Committee 5

Section 3.4. Grants to Committee Members 6

Section 3.5. Committee Decisions and Determinations 6

ARTICLE IV

ELIGIBILITY AND PARTICIPATION

Section 4.1. Eligibility 6

Section 4.2. Participation 6

ARTICLE V

SHARES SUBJECT TO PLAN

Section 5.1. Available Shares 7

Section 5.2. Previously Granted Shares 7

Section 5.3. Incentive Stock Option Restriction 7

Section 5.4. Adjustments 8

Section 5.5. Code Section 409A Limitation 8

ARTICLE VI

GRANTS IN GENERAL

Section 6.1. Agreement 8

Section 6.2. Time of Granting of an Award 9

Section 6.3. Term and Nontransferability of Grants 9

Section 6.4. Termination of Service as Applied to Options and SARs 9

Section 6.5. Termination of Service as Applied to Grants Other Than Options and SARs 9

Section 6.6. Dividends and Distributions 10

Section 6.7. Participation 10

Section 6.8. Section 83(b) Election 10

ARTICLE VII

STOCK OPTIONS

Section 7.1. Grants 10

Section 7.2. Exercise of Options 11

Section 7.3. Term of Options 11

Section 7.4. Special Rules For Incentive Stock Options 11

Section 7.5. Grants to Non-Employee Directors 12

ARTICLE VIII

STOCK APPRECIATION RIGHTS

Section 8.1. Grant 13

Section 8.2. Required Terms and Conditions 13

Section 8.3. Standard Terms and Conditions 13

ARTICLE IX

RESTRICTED STOCK

Section 9.1. General 14

Section 9.2. Required Terms and Conditions 14

Section 9.3. Standard Terms and Conditions 14

Section 9.4. Price 15

ARTICLE X

RESTRICTED STOCK UNITS

Section 10.1. General 15

Section 10.2. Required Terms and Conditions 15

Section 10.3. Standard Terms and Conditions 15

ARTICLE XI

OTHER AWARDS AND PERFORMANCE-BASED GRANTS

Section 11.1. Performance Units 16

Section 11.2. Performance Shares 16

Section 11.3. Other Awards 17

Section 11.4. Incentive Awards 17

Section 11.5. Provisions Relating to Code Section 162(m) 17

ARTICLE XII

MISCELLANEOUS

Section 12.1. Effect of a Change in Control 19

Section 12.2. Rights as a Shareholder 20

Section 12.3. Modification, Extension and Renewal of Grants 20

Section 12.4. Term of Plan 20

Section 12.5. Securities Law Requirements 20

Section 12.6. Amendment of the Plan 21

Section 12.7. Application of Funds 22

Section 12.8. Tax Withholding 22

Section 12.9. No Reload Rights and No Repricings 22

Section 12.10. Notices 22

Section 12.11. Rights to Employment or Other Service 22

Section 12.12. Exculpation and Indemnification 22

Section 12.13. No Fund Created 23

Section 12.14. Additional Arrangements 23

Section 12.15. Code Section 409A Savings Clause 23

Section 12.16. Captions 23

Section 12.17. Governing Law 23

Section 12.18. Execution 24

FLAGSTAR BANCORP, INC.

2006 EQUITY INCENTIVE PLAN

AS AMENDED

ARTICLE I

ESTABLISHMENT AND PURPOSE

Section 1.1. Establishment . Prior to the adoption of this Flagstar Bancorp, Inc. 2006 Equity Incentive Plan, as amended by the 2011 Amendments, as defined below (the "Plan"), the Company maintained the 1997 Incentive Plan, the 1997 Employees and Directors Stock Option Plan and the 2000 Stock Incentive Plan, all as amended from time to time (collectively, the "Prior Plans"). This Plan consolidates, amends and restates the Prior Plans into this single plan document so that as of the Effective Date: (i) the Prior Plans will be merged into this Plan; and (ii) no additional grants will be made under any Prior Plan. Outstanding awards under any Prior Plan will continue to be governed by such Prior Plan according to the terms of that Prior Plan as of the Effective Date.

Section 1.2. Purpose . The Plan is intended to provide incentive to key employees, officers, directors and others expected to provide significant services to the Company and its Affiliates to foster and promote the long-term financial success of the Company and Affiliates and materially increase shareholder value. The Plan is also intended to encourage proprietary interest in the Company, to encourage such key employees to remain in the employ of the Company and its Affiliates, to attract new employees with outstanding qualifications, and to afford additional incentives to others to increase their efforts in providing significant services to the Company and its Affiliates. In furtherance thereof, the Plan permits awards of equity-based and cash incentives to key employees, officers and directors of, and certain other providers of services to, the Company and its Affiliates.

ARTICLE II

DEFINITIONS

Section 2.1. Definitions . The following terms shall have the following meanings when used herein, unless the context clearly indicates otherwise.


(a)	"2011 Amendments" means the amendments to the Plan approved by the stockholders of the Company at the Annual Meeting of Stockholders held May 17, 2011.


(b)	"Act" means the Securities Act of 1933, as amended.


(c)	"Affiliate" means any "parent corporation" or "subsidiary corporation" of the Company as those terms are defined in Code Sections 424(e) and (f), respectively.


(d)	"Agreement" means a written agreement entered into between the Company and the recipient of a Grant which sets forth the terms and conditions of the Grant.


(e)	"Board" means the Board of Directors of the Company.

(f)

"Cause" means, unless otherwise provided in a Participant’s Agreement, (i) engaging in (A) willful or gross misconduct or (B) willful or gross neglect, (ii) repeatedly failing to adhere to the directions of superiors or the Board or the written policies and practices of the Company, (iii) the commission of a felony, a crime of moral turpitude or any crime involving the Company, (iv) fraud, misappropriation, dishonesty or embezzlement, (v) incompetence or a material breach of the Participant’s employment agreement (if any) with the Company (other than a termination of employment by the Participant), or (vi) any unlawful act detrimental to the Company, all as determined in the sole discretion of the Committee.

(g)

"Change in Control" means any one of the following events: (i) a complete dissolution or liquidation of the Company, (ii) a sale of substantially all of the assets of the Company, (iii) a merger or combination involving the Company after which the owners of Common Stock of the Company immediately prior to the merger or combination own less than 50% of the outstanding shares of common stock of the surviving corporation, or (iv) the acquisition of more than 25%

of the outstanding shares of Common Stock of the Company, whether by tender offer or otherwise, by any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company. The decision of the Committee as to whether a Change in Control has occurred shall be conclusive and binding.


(h)	"Code" means the Internal Revenue Code of 1986, as amended, and any related rules, regulations and interpretations.

(i)

"Committee" means the Compensation Committee of the Board; provided that the Committee shall at all times consist solely of at least two persons who each qualify as a "Non-Employee Director" under Rule 16b-3(b)(3)(i) promulgated under the Exchange Act and, to the extent that relief from the limitation of Section 162(m) of the Code is sought, as an "Outside Director" under Section 1.162-27(e)(3)(i) of the Treasury Regulations.


(j)	"Common Stock" means the Company’s Common Stock, par value $0.01, either currently existing or authorized hereafter and any other stock or security resulting from adjustment thereof as described herein, or the Common Stock of any successor to the Company which is designated for the purpose of the Plan.


(k)	"Company" means Flagstar Bancorp, Inc., a Michigan corporation, and any successor or assignee corporation(s) into which the Company may be merged, changed or consolidated; any corporation for whose Securities the Securities of the Company shall be exchanged; and any assignee of or successor to substantially all of the assets of the Company.


(l)	"Disability" means a physical or mental condition, which in the sole and absolute discretion of the Committee is reasonably expected to be of indefinite duration and substantially prevents a Participant from fulfilling his or her duties or responsibilities to the Company or an Affiliate.


(m)	"Effective Date" means the date this Plan is approved by the Company’s shareholders.

(n)

"Eligible Persons" means officers, directors and Employees of the Company and its Affiliates and other persons expected to provide significant services (of a type expressly approved by the Committee as covered services for these purposes) to the Company or its Affiliates. The Committee will determine the eligibility of Employees, officers, directors and others expected to provide significant services to the Company and its Affiliates based on, among other factors, the position and responsibilities of such individuals and the nature and value to the Company or its Affiliates of such individual’s accomplishments and potential contribution to the success of the Company or its Affiliates.

(o)

"Employee" means an individual, including an officer or director of the Company or an Affiliate, who is employed as a common-law employee of the Company or an Affiliate. An "Employee" shall not include any person classified by the Company as an independent contractor even if the individual is subsequently reclassified as a common-law employee by a court, administrative agency or other adjudicatory body. The payment of director’s fees by the Company is not sufficient to constitute "employment" of the director by the Company.


(p)	"Exchange Act" means the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder.


(q)	"Exercise Price" means the price per share of Common Stock, determined by the Board or the Committee, at which an Option or SAR may be exercised.


(r)	"Fair Market Value" means the value of one share of Common Stock, determined as follows:

(i)

If the Common Stock is listed on a national stock exchange, the average of the highest and lowest selling prices on the exchange for the date of determination, but if no sales were reported for the date of determination, the average of the highest and lowest selling prices on the exchange for the last preceding date on which there was a sale of Common Stock on such exchange, as determined by the Committee, or such other reasonable basis determined by the Committee using actual transactions in the Common Stock as reported by such market and consistently applied by the Committee.


(ii)	If the Common Stock is not then listed on a national stock exchange but is traded on an over-the-counter market, the average of the closing bid and asked prices for the Common Stock in such over-the-counter market for the last preceding date on which there was a sale of Common Stock in such market, as determined by the Committee.


(iii)	If neither (i) nor (ii) applies, such value as the Committee in its discretion may in good faith determine. Notwithstanding the foregoing, where the Common Stock is listed or traded, the Committee may make discretionary determinations in good faith where the Common Stock has not been traded for 10 trading days.


(s)	"Grant" means an award of an Incentive Stock Option, Non-qualified Stock Option, SAR, Restricted Stock, Restricted Stock Unit, Performance Unit, Performance Share, Incentive Award, Other Award or any combination thereof to an Eligible Person.


(t)	"Incentive Award" means a right granted a Participant under Section 11.4.


(u)	"Incentive Stock Option" means an Option of the type described in Section 422(b) of the Code awarded to an Employee.


(v)	"Non-qualified Stock Option" means an Option not described in Section 422(b) of the Code awarded to an Eligible Person, the taxation of which is pursuant to Section 83 of the Code.


(w)	"Option" means any option, whether an Incentive Stock Option or a Non-qualified Stock Option, to purchase shares of Common Stock at a price and for the term fixed by the Committee in accordance with Article VII of the Plan and subject to such other limitations and restrictions in the Plan and the applicable Agreement.


(x)	"Other Award" means a right granted a Participant under Section 11.3.


(y)	"Participant" means any Eligible Person to whom a Grant is made, or the Successors of the Participant, as the context so requires.


(z)	"Performance Period" means the period established by the Committee during which any performance goals specified by the Committee with respect to a Grant are to be measured.


(aa)	"Performance Share" means a right granted a Participant under Section 11.2.


(ab)	"Performance Unit" means a right granted a Participant under Section 11.1.


(ac)	"Plan" means the Company’s 2006 Equity Incentive Plan, as set forth herein, and as the same may from time to time be amended.


(ad)	"Purchase Price" means the Exercise Price times the number of shares of Common Stock with respect to which an Option is exercised.


(ae)	"Restricted Stock" means Common Stock granted to a Participant subject to the terms and conditions established by the Committee pursuant to Article IX.


(af)	"Restricted Stock Unit" means a right granted to a Participant under Article X.


(ag)	"Restriction Period" means the period of time during which restrictions established by the Committee shall apply to a Grant.


(ah)	"Retirement" means, unless otherwise provided by the Committee in the Participant’s Agreement, the Termination of Service (other than for Cause) of a Participant:


(i)	on or after the Participant’s attainment of age 65; or


(ii)	on or after the Participant’s attainment of age 55, provided the Participant’s age plus years of service with the Company or an Affiliate, including service in the employer-employee relationship, directorship or both, equals or exceeds 75 years.


(ai)	"Stock Appreciation Right" or "SAR" means a right granted to a Participant under Article VIII.


(aj)	"Successor of the Participant" means the legal representative of the estate of a deceased Participant or the person or persons who acquire the right to exercise an Option or SAR by bequest or inheritance or by reason of the death of the Participant.

(ak)

"Termination of Service" means the time when the employee-employer relationship or directorship or other service relationship (sufficient to constitute service as an Eligible Person) between the Participant and the Company or an Affiliate is terminated for any reason, with or without Cause, including, but not limited to, any termination by resignation, discharge, Disability, death or Retirement; provided, however, Termination of Service shall not include: (i) a termination where there is a simultaneous reemployment of the Participant by the Company or an Affiliate or other continuation of service (sufficient to constitute service as an Eligible Person) for the Company or an Affiliate or (ii) an employee who is on military leave, sick leave or other bona fide leave of absence (to be determined in the discretion of the Committee). The Committee, in its absolute discretion, shall determine the effects of all matters and questions relating to Termination of Service, including but not limited to the question of whether any Termination of Service was for Cause and all questions of whether particular leaves of absence constitute Terminations of Employment.

ARTICLE III

ADMINISTRATION

Section 3.1. General . The Plan shall be administered by the Committee.

Section 3.2. Committee Meetings . The Committee shall meet from time to time as determined by its chairman or by the Chairman or Chief Executive Officer of the Company. A majority of the members of the Committee shall constitute a quorum and the acts of a majority of the members present at any meeting of the Committee at which a quorum is present, or acts approved in writing by a majority of the entire Committee, shall be the acts of the Committee for purposes of the Plan. To the extent applicable, no member of the Committee may act as to matters under the Plan specifically relating to such member.

Section 3.3. Powers of the Committee . Subject to the terms and conditions of the Plan and consistent with the Company’s intention for the Committee to exercise the greatest permissible flexibility under Rule 16b-3 of the Exchange Act in awarding Grants, the Committee shall have the power:


(a)	to determine from time to time the Eligible Persons who are to be awarded Grants and the nature and amount of Grants, and to generally determine the terms, provisions and conditions (which need not be identical) of Grants awarded under the Plan, not inconsistent with the terms of the Plan;

(b)

to construe and interpret the Plan and Grants thereunder and to establish, amend and revoke rules and regulations for administration of the Plan. In this connection, the Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan, in any Agreement or in any related agreements in the manner and to the extent it shall deem necessary or expedient to make the Plan fully effective;


(c)	to amend any outstanding Grant, subject to Sections 8.2(f), 12.3, 12.5 and 12.9, and to accelerate or extend the vesting or exercisability of any Grant, subject to Section 12.3, and to waive conditions or restrictions on any Grants, subject to Section 8.2(f), all to the extent it shall deem appropriate;


(d)	to cancel, with the consent of a Participant or as otherwise permitted by the Plan, outstanding Grants;


(e)	to determine whether, and to what extent and under what circumstances, Grants may be settled in cash, Common Stock, other property or a combination of the foregoing, subject to Section 8.2(f);


(f)	to appoint agents as the Committee deems necessary or desirable to administer the Plan;


(g)	to provide for the forms of Agreements to be utilized in connection with the Plan, which need not be identical for each Participant;


(h)	to establish any "blackout" period the Committee in its sole discretion deems necessary or advisable; and


(i)	generally to exercise such powers and to perform such acts as are deemed necessary or expedient to carry out the terms of the Plan and to promote the best interests of the Company and its Affiliates with respect to the Plan.

Section 3.4. Grants to Committee Members . Notwithstanding Section 3.3, any Grant awarded under the Plan to an Eligible Person who is a member of the Committee shall be made by a majority of the directors of the Company who are not on the Committee; provided that any Grant to such person must satisfy the requirements for exemption under Rule 16b-3 of the Exchange Act and does not cause any member of the Committee to be disqualified as a Non-Employee Director under such Rule.

Section 3.5. Committee Decisions and Determinations . Any determination made by the Committee pursuant to the provisions of the Plan or an Agreement shall be made in its sole discretion in the best interest of the Company and its Affiliates, not as a fiduciary. All decisions made by the Committee pursuant to the provisions of the Plan or an Agreement shall be final and binding on all persons, including the Company, its Affiliates, Participants and Successors of the Participants. Any determination by the Committee shall not be subject to de novo review if challenged in any court or legal forum.

ARTICLE IV

ELIGIBILITY AND PARTICIPATION

Section 4.1. Eligibility . Any Eligible Person may receive Grants under the Plan.

Section 4.2. Participation . Whether an Eligible Person receives a Grant under the Plan will be determined by the Committee, in its sole discretion, as provided in Section 3.3. Except for Incentive Awards, to receive a Grant an Eligible Person must enter into an Agreement evidencing the Grant.

ARTICLE V

SHARES SUBJECT TO PLAN

Section 5.1. Available Shares . Shares hereunder may consist, in whole or in part, of authorized and unissued shares or treasury shares, including shares purchased by the Company on the open market for purposes of the Plan. The certificates for Common Stock issued hereunder may include any legend which the Committee deems appropriate to reflect any restrictions on transfer hereunder or under the Agreement or as the Committee may otherwise deem appropriate.

(a)

Grants . Subject to adjustment pursuant to Section 5.4 and except as provided in subsection (b), the maximum number of shares of Common Stock that may be issued under the Plan as a result of any Grants is: (i) 226,828 shares, which is the total shares attributable to any authorized shares not issued or not subject to outstanding awards under the Company’s 1997 Employees and Directors Stock Option Plan and 2000 Stock Incentive Plan, both as amended, as of the Effective Date, plus (ii) any shares subject to outstanding awards under the Company’s 1997 Employees and Directors Stock Option Plan and 2000 Stock Incentive Plan, both as amended, as of the Effective Date that on or after the Effective Date cease for any reason to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent they are exercised for or settled in vested and nonforfeitable shares), plus (iii) 7,500,000 shares, plus (iv) 15,000,000 shares effective on the date of adoption of the 2011 Amendments.

(b)

Cash-Settled SARs . Grants of SARs under which the Grant Agreement provides they will be settled only in cash shall not be considered in the limit under subsection (a); provided, however, once made, a Grant of a SAR which will be settled in only cash may not later be amended, modified or otherwise changed to be settled in Common Stock or a combination of Common Stock and cash, as provided in Section 8.2(f).

Section 5.2. Previously Granted Shares . Subject to Sections 5.1 and 5.3, the Committee has full authority to determine the number of shares of Common Stock available for Grants. In its discretion, the Committee may include as available for distribution all of the following:


(a)	Common Stock subject to a Grant that has been forfeited;


(b)	Common Stock under a Grant that otherwise terminates, fails to vest, expires or lapses without issuance of Common Stock being made to a Participant; and


(c)	Common Stock subject to any Grant that settles in cash or a form other than Common Stock.

Section 5.3. Incentive Stock Option Restriction . Solely for purposes of determining whether shares are available for the issuance of Incentive Stock Options, and notwithstanding any provision of this Article V to the contrary, the maximum aggregate number of shares that may be issued through Incentive Stock Options under the Plan is 1,500,000. The terms of Section 5.2 apply in determining the number of shares available under this Section for issuance through Incentive Stock Options.

Section 5.4. Adjustments . In the event that the outstanding shares of Common Stock hereafter are changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of merger, consolidation, reorganization, recapitalization, reclassification, combination of shares, stock split-up, or stock dividend, or in the event that there should be any other stock splits, stock dividends or other relevant changes in capitalization occurring after the effective date of this Plan:


(a)	The aggregate number and kind of shares that may be issued under this Plan may be adjusted appropriately; and


(b)	Rights under outstanding Grants made to Eligible Persons hereunder, both as to the number of subject shares and the Exercise Price, may be adjusted appropriately.

Notwithstanding anything herein to the contrary, without affecting the number of shares of Common Stock reserved or available hereunder, the Committee may authorize the issuance or assumption of benefits under this Plan in connection with any merger, consolidation, acquisition of property or stock, or reorganization upon such terms and conditions as it may deem appropriate (including but not limited to a conversion of equity awards in Grants under this Plan in a manner consistent with paragraph 53 of FASB Interpretation No. 44), subject to compliance with the rules under Code Sections 422 and 424, as applicable.

The foregoing adjustments and the manner of application of the foregoing provisions to Grants shall be determined solely by the Committee on a case-by-case basis, applied to similarly situated groups or in any other manner as it deems in its sole discretion. Any adjustment hereunder may provide for the elimination of fractional share interests.

Section 5.5. Code Section 409A Limitation . Any adjustment made pursuant to Section 5.4 to any Grant that is considered "deferred compensation" within the meaning of Section 409A of the Code shall be made in compliance with the requirements of Code Section 409A. Any adjustments made pursuant to Section 5.4 to any Grant that is not considered "deferred compensation" shall be made in a manner to ensure that after such adjustment, the Grant either continues not to be subject to Code Section 409A or complies with the requirements of Code Section 409A.

ARTICLE VI

GRANTS IN GENERAL

Section 6.1. Agreement . Except for Incentive Awards, each Grant hereunder shall be evidenced by a written Agreement as of the date of the Grant and executed by the Company and the Eligible Person. Each Agreement shall set forth the terms and conditions as may be determined by the Committee consistent with the Plan. The Agreement shall state the number of shares of Common Stock to which the Grant pertains and may provide for adjustment in accordance with Section 5.4. As applicable, each Agreement must state the Exercise Price or other consideration to be paid for any Grant.

Section 6.2. Time of Granting of an Award . The award date of a Grant shall, for all purposes, be the date on which the Committee makes the determination awarding such Grant, or such other date as is determined by the Board. Notice of the determination of a Grant shall be given to each Eligible Person to whom a Grant is awarded within a reasonable period of time after the date of such Grant.

Section 6.3. Term and Nontransferability of Grants . No Grant is exercisable except by the Participant or a Successor of the Participant permitted by the Plan. No Grant is assignable or transferable, except by will or the laws of descent and distribution of the state wherein the Participant was domiciled at the time of his or her death; provided, however, that the Committee may permit other transfers where the Committee concludes that such transferability (i) does not result in accelerated taxation, (ii) does not cause any Option intended to be an Incentive Stock Option to fail to be described in Code Section 422(b), (iii) is in no event a transfer for value, and (iv) is otherwise appropriate and desirable.

Section 6.4. Termination of Service as Applied to Options and SARs . Unless otherwise provided in the applicable Agreement or as otherwise determined by the Committee, Options and SARs shall be governed by the following provisions in the event of a Participant’s Termination of Service:

(a)

Termination of Service, Except by Death, Retirement or Disability . Upon any Termination of Service for any reason other than a Participant’s death, Retirement or Disability, the Participant has the right, subject to the restrictions of Section 7.4, to exercise his or her Options or SARs at any time within three months after Termination of Service, but only to the extent that, at the date of Termination of Service, the Participant’s right to exercise such Options or SARs had accrued pursuant to the terms of the Agreement and had not previously been exercised; provided, however, that, unless otherwise provided in the Agreement, if there occurs a Termination of Service for Cause, any Option or SAR not exercised in full prior to such Termination of Service shall be canceled.

(b)

Death of Participant . If the Participant dies while an Eligible Person or within three months after any Termination of Service other than for Cause, his or her Options or SARs may be exercised in full, subject to the restrictions of Section 7.4, at any time within 24 months after the Participant’s death, by the Successor of the Participant, but only to the extent that, at the date of death, the Participant’s right to exercise such Options or SARs had accrued, had not been forfeited pursuant to the terms of the Agreement and had not previously been exercised.

(c)

Disability or Retirement of Participant . Upon Termination of Service for reason of Disability or Retirement, a Participant shall have the right, subject to the restrictions of Section 7.4, to exercise his or her Options or SARs in full at any time within 12 months after Termination of Service, but only to the extent that, at the date of Termination of Service, the Participant’s right to exercise such Options or SARs had accrued pursuant to the terms of the applicable Agreement and had not previously been exercised.

Section 6.5. Termination of Service as Applied to Grants Other Than Options and SARs . Unless otherwise provided in the applicable Agreement or as determined by the Committee, Restricted Stock, Restricted Stock Units, Performance Units, Performance Shares, Incentive Awards and Other Awards shall be governed by the following provisions:

(a)

Termination of Service, Except by Death, Retirement or Disability . In the event of a Participant’s Termination of Service for any reason other than the Participant’s death, Retirement or Disability, the Participant’s Grants of Restricted Stock, Restricted Stock Units, Performance Units, Performance Shares, Incentive Awards and Other Awards shall be forfeited upon the Participant’s Termination of Service.

(b)

Death, Retirement or Disability of Participant . Restricted Stock, Restricted Stock Units and Other Awards shall fully vest on a Participant’s Termination of Service by reason of the Participant’s death, Retirement or Disability. Performance Units, Performance Shares and Incentive Awards or any award tied to performance may be paid out at a target level and paid or distributed at the same time payments are made to other Participants who did not incur such a Termination of Service as determined by the Committee.

Section 6.6. Dividends and Distributions . Participants awarded Grants of Restricted Stock, Restricted Stock Units, Performance Shares or Performance Units may, if the Committee so determines, be credited with dividends paid with respect to the underlying shares or dividend equivalents while the Grants are held in a manner determined by the Committee in its sole discretion. The Committee may apply any restrictions to the dividends or dividend equivalents that the Committee deems appropriate. The Committee, in its sole discretion, may determine the form of payment of dividends or dividend equivalents, including in the form of cash, Common Stock, Restricted Stock, Restricted Stock Units, Performance Shares or Performance Units.

Section 6.7. Participation . There is no guarantee that any Eligible Person will receive a Grant under the Plan or, having received a Grant, that the Participant will receive a future Grant on similar terms or at all. There is no obligation for uniformity of treatment of Eligible Persons with respect to who receives a Grant or the terms and conditions of Participants’ Grants.

Section 6.8. Section 83(b) Election . The Committee may prohibit a Participant from making an election under Section 83(b) of the Code. If the Committee has not prohibited such election, and if the Participant elects to include in such Participant’s gross income in the year of transfer the amounts specified in Section 83(b) of the Code, the Participant shall notify the Company of such election within ten (10) days of filing notice of the election with the Internal Revenue Service, and will provide the required withholding pursuant to Section 12.8, in addition to any filing and notification required pursuant to regulations issued under the authority of Section 83(b) of the Code.

ARTICLE VII

STOCK OPTIONS

Section 7.1. Grants . The Committee may grant Options in accordance with this Article. The Exercise Price for any Option shall not be less than Fair Market Value on the date of Grant. Each Agreement for an Option shall state whether such Option is an Incentive Stock Option or a Nonqualified Stock Option. Incentive Stock Options may not be granted to an Eligible Person who is not an Employee of the Company or an Affiliate. Options may be awarded alone or in addition to other Grants made under the Plan.

Section 7.2. Exercise of Options .


(a)	Options may be exercised in whole or part at any time within the period permitted for the exercise thereof and shall be exercised by written notice of intent to exercise the Option delivered to the Secretary of the Company at its principal executive offices.

(b)

Except as may otherwise be provided below, the Purchase Price for each Option granted to an Eligible Person shall be payable in full in United States dollars upon the exercise of the Option. In the event the Company determines that it is required to withhold taxes as a result of the exercise of an Option, as a condition to the exercise thereof, an Employee may be required to make arrangements satisfactory to the Company to enable it to satisfy such withholding requirements in accordance with Section 12.8 hereof. If the applicable Agreement so provides, and the Committee otherwise so permits, the Purchase Price may be paid in one or a combination of the following:


(i)	by a certified or bank cashier’s check;


(ii)	by the surrender of shares of Common Stock in good form for transfer, owned by the person exercising the Option and having a Fair Market Value on the date of exercise equal to the Purchase Price, or in any combination of cash and shares of Common Stock, as long as the sum of the cash so paid and the Fair Market Value of the shares of Common Stock so surrendered equals the Purchase Price;


(iii)	by cancellation of indebtedness owed by the Company to the Participant; or


(iv)	by any combination of such methods of payment or any other method acceptable to the Committee in its discretion.

Except in the case of exercised Options paid for by certified or bank cashier’s check, the Committee may impose limitations and prohibitions on the exercise of Options as it deems appropriate, including, without limitation, any limitation or prohibition designed to avoid accounting consequences which may result from the use of Common Stock as payment upon exercise of an Option. Any fractional shares of Common Stock resulting from a Participant’s election that are accepted by the Company will be paid in cash or forfeited in the discretion of the Committee.

Section 7.3. Term of Options . The period during which any Option may be exercised shall not exceed ten (10) years from the Grant Date. No Option shall be exercisable until such time as set forth in the applicable Agreement (but in no event after the expiration of such Option).

Section 7.4. Special Rules For Incentive Stock Options .

(a)

Aggregate Fair Market Value . In the case of Incentive Stock Options granted hereunder, the aggregate Fair Market Value (determined as of the date of the Grant thereof) of the Common Stock with respect to which Incentive Stock Options become exercisable by any Participant for the first time during any calendar year (under the Plan and all other plans maintained by the Company or its Affiliates) shall not exceed $100,000.

(b)

Rules Applicable to Certain Owners . In the case of an individual described in Section 422(b)(6) of the Code (relating to certain 10% owners), the Exercise Price with respect to an Incentive Stock Option shall not be less than 110% of the Fair Market Value of a share of Common Stock on the day the Option is granted and the term of an Incentive Stock Option shall be no more than five years from the date of grant.

(c)

Disqualifying Disposition . If shares of Common Stock acquired upon exercise of an Incentive Stock Option are disposed of in a disqualifying disposition within the meaning of Section 422 of the Code by a Participant prior to the expiration of either two years from the date of grant of such Option or one year from the transfer of such shares to the Participant pursuant to the exercise of such Option, or in any other disqualifying disposition within the meaning of Section 422 of the Code, such Participant shall notify the Company in writing as soon as practicable thereafter of the date and terms of such disposition and, if the Company thereupon has a tax-withholding obligation, shall pay to the Company an amount equal to any withholding tax the Company is required to pay as a result of the disqualifying disposition.

(d)

Disability . Solely for purposes of the provisions of the Plan as applied to Incentive Stock Options and notwithstanding any other provision of the Plan, "Disability" means a Participant’s inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

Section 7.5. Grants to Non-Employee Directors . Notwithstanding any other provision of the Plan to the contrary, this Section shall govern Grants to directors who are not Employees.


(a)	Grants . Each director who is not an Employee on the date he or she takes office as a director on or after the Effective Date shall receive a Grant of 1,000 Non-qualified Stock Options as of such date. Each director is entitled to such other Grants (excluding Incentive Stock Options) as the Board may award at any time and from time to time.


(b)	Exercise Price . The Exercise Price of Non-qualified Stock Options granted to a director equals the Fair Market Value of the Common Stock on such date.

(c)

Term . Non-qualified Stock Options granted to directors hereunder shall have a term of five years; provided that Grants of Non-qualified Stock Options expire one year after the date of which a director terminates his or her service as a director, but in no event later than the date on which such Non-qualified Stock Options would otherwise expire. Grants other than Non-qualified Stock Options shall have such terms as set by the Board in the applicable Agreement.

(d)

Exercise and Expiration . Unless provided otherwise by the Board in an Agreement, Options and SARs granted to a director hereunder are fully (100%) exercisable on the one-year anniversary of the date of grant. Directors may exercise Non-qualified Stock Options in the manner set forth in Section 7.2. Grants to directors pursuant to this Section 7.5 shall be governed by the same provisions for termination in the event of the director’s death as contained in Sections 6.4(b) and 6.5(b) and in the event of the director’s Disability as contained in Sections 6.4(c) and 6.5(b).

ARTICLE VIII

STOCK APPRECIATION RIGHTS

Section 8.1. Grant . The Committee has authority to grant Stock Appreciation Rights ("SARs") under the Plan at any time or from time to time. A SAR shall entitle the Participant to receive Common Stock or cash upon exercise of such SAR equal in value to the excess of the Fair Market Value per share of Common Stock over the exercise price per share of Common Stock specified in the related Agreement, multiplied by the number of shares in respect of which the SAR is exercised, less any amount retained to cover tax withholdings, if necessary. The aggregate Fair Market Value per share of Common Stock shall be determined as of the date of exercise of such SAR. Settlement of a SAR shall be subject to the Participant’s satisfaction in full of any conditions, restrictions or limitations imposed in accordance with the Plan or any Agreement. SARs may be awarded

alone or in addition to other Grants made under the Plan.

Section 8.2. Required Terms and Conditions . SARs shall be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee deems desirable.


(a)	Price . The grant price of a SAR may not be less than 100% of the Fair Market Value per share of Common Stock on the date of grant, and the exercise price of a SAR may not be less than 100% of the Fair Market Value per share of Common Stock on the date of exercise.


(b)	Term and Exercisability . The term and exercisability of a SAR shall be no longer than ten (10) years after the Grant Date. The Committee may provide in a SAR Agreement or thereafter for an accelerated exercise of all or part of a SAR upon such events or standards that it may determine, including one or more performance measures.


(c)	Method of Exercise . A Participant shall exercise a SAR by giving written notice of exercise to the Company specifying in whole shares the portion of the SAR to be exercised and if the Participant has more than one Grant of SARs which could be exercised, designating the particular Grant to be exercised.


(d)	No Deferral Features . To the extent necessary to comply with Code Section 409A, the SAR Agreement shall not include any features allowing the Participant to defer recognition of income past the date of exercise.


(e)	Modification . Notwithstanding any provision of the Plan to the contrary, the Committee shall not amend or otherwise modify a Grant of a SAR, which explicitly requires settlement only in cash, after the date of grant to permit settlement in Common Stock or a combination of Common Stock and cash.

Section 8.3. Standard Terms and Conditions . Unless the Committee specifies otherwise in the SAR Agreement, the terms set forth in this Section 8.4 shall apply to all SARs granted under the Plan. An SAR Agreement that incorporates the terms of the Plan by reference shall be deemed to have incorporated the terms set forth in this Section.


(a)	Term . The standard term of a SAR shall be seven (7) years beginning on the Grant Date.


(b)	Exercisability . The standard rate at which a SAR shall be exercisable shall be 25 percent of the Grant on each of the first four annual anniversaries of the Grant Date.


(c)	Nontransferability of Stock Appreciation Rights . The standard SAR Agreement shall provide that no SAR shall be sold, assigned, margined, transferred, encumbered, conveyed, gifted, alienated, hypothecated, pledged or otherwise disposed of, other than by will or the laws of descent and distribution, and all SARs shall be exercisable during the Participant’s lifetime only by the Participant.

ARTICLE IX

RESTRICTED STOCK

Section 9.1. General . The Committee has authority to grant Restricted Stock under the Plan at any time or from time to time. The Committee shall determine the number of shares of Restricted Stock to be awarded to any Eligible Person, the Restriction Period within which such Grants may be subject to forfeiture and any other terms and conditions of the Grants, including without limitation providing for either grant or vesting upon the achievement of performance goals. To the extent the Company desires to avoid the deduction limit of Code Section 162(m) as applied to Restricted Stock, Grants of Restricted Stock must comply with Section 11.5.

Section 9.2. Required Terms and Conditions . Restricted Stock shall be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee deems desirable:


(a)	Restrictions . The Committee may condition the grant or vesting of the Restricted Stock on the performance of services for the Company or the attainment of performance goals, or both.

(b)

Delivery . The Company shall issue the shares of Restricted Stock to each recipient who is awarded a Grant of Restricted Stock either in certificate form or in book entry form, registered in the name of the recipient, with legends or notations, as applicable, referring to the terms, conditions and restrictions applicable to any such Grant and record the transfer on the Company’s official shareholder records; provided that the Company may require that any stock certificates evidencing Restricted Stock granted hereunder be held in the custody of the Company until the restrictions thereon shall have lapsed, and that as a condition of any Grant of Restricted Stock, the Participant shall have delivered a stock power, endorsed in blank, relating to the Common Stock covered by such Grant.

Section 9.3. Standard Terms and Conditions . Unless the Committee specifies otherwise in the Restricted Stock Agreement, the terms set forth in this Section 9.3 shall apply to all Restricted Stock granted under the Plan. A Restricted Stock Agreement that incorporates the terms of the Plan by reference shall be deemed to have incorporated the terms set forth in this Section.


(a)	Restriction Period . Standard Grants of Restricted Stock will vest in 50% increments on each annual anniversary of the date of grant beginning with the first anniversary.


(b)	Restrictions . The standard restrictions applicable to Restricted Stock are continued service of the Participant for the Company during the Restriction Period.


(c)	Rights . The standard terms of a Restricted Stock Agreement shall provide that the Participant shall have, with respect to the Restricted Stock, all of the rights of a shareholder of the Company holding the class of Common Stock that is the subject of the Restricted Stock, including, if applicable, the right to vote the shares and the right to receive any cash dividends, subject to Section 6.3.

Section 9.4. Price . The Committee may require a Participant to pay a stipulated purchase price for each share of Restricted Stock.

ARTICLE X

RESTRICTED STOCK UNITS

Section 10.1. General . The Committee has authority to grant Restricted Stock Units under the Plan at any time or from time to time. A Restricted Stock Unit is a bookkeeping entry of a grant of Common Stock that will be settled either by delivery of Common Stock or the payment of cash based upon the Fair Market Value of a specified number of Common Stock. The Committee shall determine the number of Restricted Stock Units to be awarded to any Participant, the Restriction Period within which such Grants may be subject to forfeiture and any other terms and conditions of the Grants, including, without limitation, providing for either grant or vesting upon the achievement of performance goals. To the extent the Company desires to avoid the deduction limit of Code Section 162(m) as applied to Restricted Stock Units, Grants of Restricted Stock Units must comply with Section 11.5. The Grant of a Restricted Stock Unit shall occur as of the grant date determined by the Committee. Restricted Stock Units may be awarded alone or in addition to other Grants made under the Plan.

Section 10.2. Required Terms and Conditions . Restricted Stock Units shall be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee deems desirable:


(a)	Restrictions . The Committee may condition the grant or vesting of the Restricted Stock Units on the performance of services for the Company, the attainment of performance goals, or both. To the extent tied to performance, the Company will comply with Section 11.5 if it desires to obtain a deduction.


(b)	Rights . The Committee shall be entitled to specify in a Restricted Stock Unit Agreement the extent to which and on what terms and conditions the applicable Participant shall be entitled to receive payments corresponding to the dividends payable on the Common Stock.

Section 10.3. Standard Terms and Conditions . Unless the Committee specifies otherwise in the Restricted Stock Unit Agreement, the terms set forth in this Section 10.3 shall apply to all Restricted Stock Units granted under the Plan. A Restricted Stock Unit Agreement that incorporates the terms of the Plan by reference shall be deemed to have incorporated the terms set forth in this Section:


(a)	Restriction Period . The standard Restriction Period shall be one year from the Grant Date.


(b)	Restrictions . The standard restrictions applicable to a Restricted Stock Unit are continued service of the Participant for the Company during the Restriction Period.


(c)	Rights . The standard terms of the Restricted Stock Units shall provide that the Participant is entitled to receive current payments corresponding to the dividends payable on the Common Stock.

ARTICLE XI

OTHER AWARDS AND PERFORMANCE-BASED GRANTS

Section 11.1. Performance Units . The Committee has authority to grant Performance Units under the Plan at any time or from time to time. A Performance Unit consists of the right to receive cash upon achievement of a performance goal or goals (as the case may be) and satisfaction of such other terms and conditions as the Committee determines. The Committee shall have complete discretion to determine the number of Performance Units granted to each Participant and any applicable conditions. An award of Performance Units shall be earned in accordance with the Agreement over a specified period of performance, as determined by the Committee. Unless expressly waived in the Agreement, an award of Performance Units must vest solely on the attainment of one or more performance goals. Performance Units may be granted alone or in addition to other Awards made under the Plan. The Committee, in its discretion, may substitute actual shares of Common Stock for the cash payment otherwise required to be made to a Participant pursuant to a Performance Unit. To the extent the Company desires to avoid the application of the deduction limit of Code Section 162(m) as applied to Performance Units, Grants of Performance Units will comply with the provisions of Section 11.5.

Section 11.2. Performance Shares . The Committee has authority to grant Performance Shares under the Plan at any time or from time to time. A Performance Share consists of the right to receive shares of Common Stock upon achievement of a performance goal or goals (as the case may be) and satisfaction of such other terms and conditions as the Committee determines. The Committee shall have complete discretion to determine the number of Performance Shares granted to each Participant and any applicable conditions. An award of Performance Shares shall be earned in accordance with the Agreement over a specified period of performance, as determined by the Committee. Unless expressly waived in the Agreement, an award of Performance Shares must vest solely on the attainment of one or more performance goals. Performance Shares may be granted alone or in addition to other Awards made under the Plan. The Committee, in its discretion, may make a cash payment equal to the Fair Market Value of the Common Stock otherwise required to be issued to a Participant pursuant to a Performance Share. To the extent the Company desires to avoid the application of the deduction limit of Code Section 162(m) as applied to Performance Shares, Grants of Performance Shares will comply with the provisions of Section 11.5.

Section 11.3. Other Awards . The Committee has authority to grant Other Awards under the Plan at any time and from time to time. An Other Award is a Grant not otherwise specifically provided for under the terms of the Plan that is valued in whole or in part by reference to, or is otherwise based upon or settled in, Common Stock. The Grant of an Other Award shall be evidenced by an Agreement, setting forth the terms and conditions of the Grant as the Committee, in its sole discretion within the terms of the Plan, deems desirable. Other Awards may be awarded alone or in addition to other Grants made under the Plan.

Section 11.4. Incentive Awards . The Committee has authority to grant Incentive Awards, which are annual cash payments to select officers and Employees based on the attainment of one or more performance goals as the Committee may determine. Incentive Awards must comply with the requirements of Section 11.5.

Section 11.5. Provisions Relating to Code Section 162(m) . Unless expressly waived (either with respect to an individual Participant or a class of individual Participants) in writing by the Committee, it is the intent of the Company that Grants made to persons who are (or may become) "Covered Employees" (within the meaning of Section 162(m) of the Code) shall constitute "qualified performance-based compensation" satisfying the relevant requirements of Code Section 162(m) and the guidance thereunder. Accordingly, the Plan shall be administered and the provisions of the Plan shall be interpreted in a manner consistent with Code Section 162(m). If any provision of the Plan or any Agreement relating to such a Grant does not comply or is inconsistent with the requirements of Code Section 162(m), unless expressly waived as described above, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements. In addition, the following provisions shall apply to the Plan or a Grant to the extent necessary to obtain a tax deduction for the Company or an Affiliate:


(a)	Awards subject to this Section must vest (or may be granted or vest) solely on the attainment of one or more objective performance goals unrelated to term of employment. Grants will also be subject to the general vesting provisions provided in the Agreement and this Plan.

(b)

Within the first 90 days of the year, but in no event later than completion of 25% of the Performance Period or such earlier date as required under Section 162(m), the Committee must establish performance goals (in accordance with subsection (e) below) in writing (including but not limited to Committee minutes) for Covered Employees who will receive Grants that are intended as qualified performance-based compensation. The outcome of the goal must be substantially uncertain at the time the Committee actually establishes the goal.


(c)	The performance goal must state, in terms of an objective formula or standard, the method for computing the Grant payable to the Participant if the goal is attained.


(d)	The terms of the objective formula or standard must prevent any discretion being exercised by the Committee to later increase the amount payable that otherwise would be due upon attainment of the goal, but may allow discretion to decrease the amount payable.

(e)

The material terms of the performance goal must be disclosed to and subsequently approved in a separate vote by the stockholders before the payout is executed, unless they conform to one or any combination of the following goals/targets, each determined in accordance with generally accepted accounting principles or similar objective standards (and/or each as may appear in the annual report to stockholders, Form 10K or Form 10Q) as applied to the Company’s activities or performance or relative to comparison companies and as applied to the Company as a whole or business units or divisions: revenue; revenue growth; earnings (including earnings per share, earnings before interest, taxes, depreciation and amortization, earnings before interest and taxes, and earnings before or after taxes); operating income; gross profit; net income; profit margins; earnings per share; return on assets; return on equity; return on invested capital; economic value-added; efficiency ratio (other expenses as a percentage of other income plus net interest income); stock price; gross dollar volume; cost containment or reduction; total shareholder return; market share; asset growth; deposit growth; book value; expense deposit ratios; management; cash flow; customer satisfaction; regulatory compliance metrics; CAMELS rating; and loan originations.

The foregoing criteria may relate to the Company or its Affiliates, one or more of their divisions or units, or any combination of the foregoing, and may be applied on an absolute basis and/or be relative to one or more peer group companies or indices, or any combination thereof, all as the Committee shall determine.


(f)	A combination of the above performance goals may be used with a particular Agreement evidencing a Grant.

(g)

The Committee in its sole discretion in setting the goals/targets in the time prescribed above may provide for the making of equitable adjustments (singularly or in combination) to the goals/targets in recognition of unusual or nonrecurring events for the following qualifying objective items: asset impairments under Statement of Financial Accounting Standards No. 121, as amended or superseded; acquisition-related charges; accruals for restructuring and/or reorganization program charges; merger integration costs; merger transaction costs; any profit or loss attributable to the business operations of any entity or entities acquired during the period of service to which the performance goal relates; tax settlements; any extraordinary, unusual-in-nature, infrequent-in-occurrence or other nonrecurring items (not otherwise listed) as described in Accounting Principles Board Opinion No. 30; any extraordinary, unusual-in-nature, infrequent-in-occurrence or other nonrecurring items (not otherwise listed) in management’s discussion and analysis of financial condition results of operations, selected financial data, financial statements and/or in the footnotes, each as appearing in the annual report to stockholders; unrealized gains or losses on investments; charges related to derivative transactions contemplated by Statement of Financial Accounting Standards No. 133, as amended or superseded; and compensation charges related to FAS 123 (Revised) or its successor provision.

(h)

The Committee must certify in writing prior to payout that the performance goals and any other material terms were in fact satisfied. In the manner required by Section 162(m) of the Code, the Committee shall, promptly after the date on which the necessary financial and other information for a particular Performance Period becomes available, certify the extent to which performance goals have been achieved with respect to any Grant intended to qualify as "performance-based compensation" under Section 162(m) of the Code. In addition, the Committee may, in its discretion, reduce or eliminate the amount of any Grant payable to any Participant, based on such factors as the Committee may deem relevant.


(i)	Limitation on Grants .


(i)	If a Grant is canceled, the canceled Grant continues to be counted against the maximum number of shares for which Grants may be awarded to the Participant under the Plan, but not towards the total number of shares reserved and available under the Plan pursuant to Section 5.1.


(ii)	During any fiscal year, the maximum aggregate number of shares of Common Stock for which Options and Stock Appreciation Rights may be granted to any Covered Employee shall not exceed 5,000,000 shares.


(iii)	During any fiscal year, the maximum aggregate numbers of shares of Common Stock for which Restricted Stock, Restricted Stock Units, Performance Units, Performance Shares and Other Awards may be granted to any Covered Employee shall not exceed 5,000,000 shares.


(iv)	During any fiscal year, the maximum cash payment hereunder for performance-based compensation purposes under Code Section 162(m) to any Covered Employee shall not exceed $6,000,000.


(v)	In the case of an outstanding Grant intended to qualify for the performance-based compensation exception under Section 162(m), the Committee shall not, without approval of a majority of the shareholders of the Company, amend the Plan or the Grant in a manner that would adversely affect the Grant’s continued qualification for the performance-based exception.

(vi)

Effective for any Performance Period beginning after January 1, 2009, notwithstanding any provision of the Plan to contrary, a Covered Employee whose employment with the Company terminates mid-Performance Period, other than a termination because of death or Disability, shall not be entitled to a payout of a performance-based Grant in any amount greater than the amount payable based on actual performance during the Performance Period, prorated based on the number of days during the Performance Period the Covered Employee was in employment with the Company.

ARTICLE XII

MISCELLANEOUS

Section 12.1. Effect of a Change in Control . Notwithstanding any other provision of this Plan to the contrary, all unvested, unexercisable or restricted Grants shall automatically vest, become exercisable and become unrestricted without further action by the Board or Committee upon a Change in Control, unless provisions are made in connection with the transaction resulting in the Change in Control for the assumption of Grants theretofore awarded, or the substitution for such Grants of new grants, by the successor entity or parent thereof, with appropriate adjustment as to the number and kind of shares and the per share exercise prices, as provided in Section 5.4.

Section 12.2. Rights as a Shareholder . Other than certain voting rights permitted by the Plan or an Agreement, no person shall have any rights of a shareholder as to Common Stock subject to a Grant until, after proper transfer of the Common Stock subject to a Grant or other required action, such shares have been recorded on the Company’s official shareholder records as having been issued and transferred. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date such shares are recorded as issued and transferred in the Company’s official shareholder records.

Section 12.3. Modification, Extension and Renewal of Grants .

(a)

Ability . Within the limitations of the Plan, including the limits of Sections 8.2(f) and 12.9, the Committee may modify, extend or renew outstanding Grants, accept the cancellation of outstanding Grants (to the extent not previously exercised) to make new Grants in substitution therefor, accelerate vesting and waive any restrictions, forfeiture provisions or other terms and conditions on Grants, unless such action would not satisfy any applicable requirements of Rule 16b-3 of the Exchange Act; provided, however, no such action shall result in an adjustment to the performance goals of any Grant intended to be exempt under Code Section 162(m) if the action results in such Grant not being deductible or increases the amount of compensation otherwise payable to a Participant. The foregoing notwithstanding, no such action shall apply to a Grant without the consent of the Participant if it would alter or impair any rights or obligations under any Grant previously made.

(b)

Code Section 409A Limitation . Any action taken under subsection (a) hereunder to any Grant that is considered "deferred compensation" within the meaning of Section 409A of the Code shall be made in compliance with the requirements of Code Section 409A. Any action taken under subsection (a) hereunder to any Grant that is not considered "deferred compensation" within the meaning of Code Section 409A shall be made in a manner to ensure that after such action, the Grant either continues not to be subject to Code Section 409A or complies with the requirements of Code Section 409A.

Section 12.4. Term of Plan . Grants may be made pursuant to the Plan until the expiration of ten (10) years from the Effective Date of the Plan, unless the Company sooner terminates the Plan under Section 12.6.

Section 12.5. Securities Law Requirements .


(a)	Legality of Issuance . The issuance of any Common Stock in connection with a Grant shall be contingent upon the following:


(i)	the obligation of the Company to sell Common Stock with respect to Grants shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee;


(ii)	the Committee may make such changes to the Plan as may be necessary or appropriate to comply with the rules and regulations of any government authority or to obtain tax benefits; and

(iii)

each Grant is subject to the requirement that if at any time the Committee determines, in its discretion, that the listing, registration or qualification of Common Stock issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the Grant or the issuance of Common Stock, no Grants shall be granted or payment made or Common Stock issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions in a manner acceptable to the Committee.

(b)

Restrictions on Transfer . Regardless of whether the offering and sale of Common Stock under the Plan has been registered under the Act or has been registered or qualified under the securities laws of any state, the Company may impose restrictions on the sale, pledge or other transfer of shares of Common Stock (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company and its counsel, such restrictions are necessary or desirable in order to achieve compliance with the provisions of the Act, the securities laws of any state or any other law. In the event that the sale of Common Stock under the Plan is not registered under the Act but an exemption is available which requires an investment representation or other representation, each Participant shall be required to represent that such shares of Common Stock are being acquired for investment, and not with a view to the sale or distribution thereof, and to make such other representations as are deemed necessary or appropriate by the Company and its counsel. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section shall be conclusive and binding on all persons.


(c)	Registration or Qualification of Securities . The Company may, but shall not be obligated to, register or qualify the issuance of Grants and/or the sale of Common Stock under the Act or any other applicable law. The Company shall not be obligated to take any affirmative action in order to cause the issuance of Grants or the sale of Common Stock under the Plan to comply with any law.


(d)	Exchange of Certificates . If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing Common Stock sold under the Plan is no longer required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of shares of Common Stock but lacking such legend.

Section 12.6. Amendment of the Plan . The Board may from time to time, with respect to any Common Stock at the time not subject to Grants, suspend or discontinue the Plan or revise or amend it in any respect whatsoever. The Board may amend the Plan as it shall deem advisable, except that no amendment may adversely affect a Participant with respect to Grants previously made without the written consent of the Participant holding such Grant and unless such amendments are in connection with compliance with applicable laws (including Code Section 409A), stock exchange rules or accounting rules; provided that the Board may not make any amendment in the Plan, including the repricing, replacement or regranting through cancellation of Options or SARs, that would, if such amendment were not approved by the holders of the Common Stock, cause the Plan to fail to comply with any requirement or applicable law or regulation, unless and until the approval of the holders of such Common Stock is obtained.

Section 12.7. Application of Funds . The proceeds received by the Company from the sale of Common Stock pursuant to the exercise of an Option will be used for general corporate purposes.

Section 12.8. Tax Withholding . Each recipient of a Grant shall, no later than the date as of which the value of any Grant first becomes includable in the gross income of the recipient for federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Company regarding payment of any federal, state or local taxes of any kind that are required by law to be withheld with respect to such income. A Participant may elect to have such tax withholding satisfied, in

whole or in part, by (i) authorizing the Company to withhold a number of shares of Common Stock to be issued pursuant to a Grant equal to the Fair Market Value as of the date withholding is effected that would satisfy the withholding amount due, (ii) transferring to the Company shares of Common Stock owned by the Participant with a Fair Market Value equal to the amount of the required withholding tax, or (iii) in the case of a Participant who is an Employee of the Company at the time such withholding is effected, by withholding from the Participant’s cash compensation. Notwithstanding anything contained in the Plan to the contrary, the Participant’s satisfaction of any tax-withholding requirements imposed by the Committee shall be a condition precedent to the Company’s obligation as may otherwise be provided hereunder to provide shares of Common Stock to the Participant, and the failure of the Participant to satisfy such requirements with respect to the exercise of an Option shall cause such Option to be forfeited. Any Participant who surrenders previously owned shares of Common Stock to satisfy withholding obligations incurred in connection with a Grant must comply with the applicable provisions of Rule 16b-3 of the Exchange Act, if applicable.

Section 12.9. No Reload Rights and No Repricings . Options and SARs shall not contain any provisions entitling a Participant to an automatic grant of additional Options or SARs in connection with any exercise of the original Option or SAR. In no event will the Committee be permitted to reprice any Grant unless approved pursuant to a vote of the shareholders.

Section 12.10. Notices . All notices under the Plan shall be in writing and if to the Company, shall be delivered personally to the Secretary of the Company or mailed to its principal office, addressed to the attention of the Secretary, and if to a Participant or recipient of a Grant, shall be delivered personally or mailed to the Participant or recipient of a Grant at the address appearing in the records of the Company. Such addresses may be changed at any time by written notice to the other party given in accordance with this Section.

Section 12.11. Rights to Employment or Other Service . Nothing in the Plan or in any Option or Grant granted pursuant to the Plan shall confer on any individual any right to continue in the employ or other service of the Company (if applicable) or interfere in any way with the right of the Company and its shareholders to terminate the individual’s employment or other service at any time.

Section 12.12. Exculpation and Indemnification . To the maximum extent permitted by law, the Company shall indemnify and hold harmless the members of the Board and the members of the Committee from and against any and all liabilities, costs and expenses incurred by such persons as a result of any act or omission to act in connection with the performance of such person’s duties, responsibilities and obligations under the Plan, other than such liabilities, costs and expenses as may result from the gross negligence, bad faith, willful misconduct or criminal acts of such persons.

Section 12.13. No Fund Created . Any and all payments hereunder to recipients of Grants hereunder shall be made from the general funds of the Company (or, if applicable, a Participating Company), and no special or separate fund shall be established or other segregation of assets made to assure such payments; provided that bookkeeping reserves may be established in connection with the satisfaction of payment obligations hereunder. The obligations of the Company under the Plan are unsecured and constitute a mere promise by the Company to make benefit payments in the future, and to the extent that any person acquires a right to receive payments under the Plan from the Company (or, if applicable, a Participating Company), such right shall be no greater than the right of a general unsecured creditor of the Company (or, if applicable, a Participating Company).

Section 12.14. Additional Arrangements . Nothing contained herein precludes any Participating Company from adopting other or additional compensation or benefit arrangements.

Section 12.15. Code Section 409A Savings Clause .


(a)	It is the intention of the Company that no Grant shall be "deferred compensation" subject to Section 409A of the Code, unless and to the extent that the Committee specifically determines otherwise as provided below, and the Plan and the terms and conditions of all Grants shall be interpreted accordingly.

(b)

The terms and conditions governing any Grants that the Committee determines will be subject to Section 409A of the Code, including any rules for elective or mandatory deferral of the delivery of cash or Common Stock pursuant thereto and any rules regarding treatment of such Grants in the event of a Change in Control, shall be set forth in the applicable Agreement and shall comply in all respects with Section 409A of the Code.


(c)	Following a Change in Control, no action shall be taken under the Plan that will cause any Grant that the Committee has previously determined is subject to Section 409A of the Code to fail to comply in any respect with Section 409A of the Code without the written consent of the Participant.

Section 12.16. Captions . The use of captions in the Plan is for convenience. The captions are not intended to provide substantive rights and shall not be used in construing the terms of the Plan.

Section 12.17. Governing Law . The laws of Michigan shall govern the plan, without reference to principles of conflict of laws.

Section 12.18. Execution . The Company has caused the Plan to be executed in the name and on behalf of the Company by an officer of the Company thereunto duly authorized as of this 17th day of May, 2011.



	FLAGSTAR BANCORP, INC., a Michigan corporation

	By:	/s/ Joseph P. Campanelli
		Name & Title: Joseph P. Campanelli, Chairman, President and Chief Executive Officer

EXHIBIT 10.2

PURCHASE AGREEMENT

THIS PURCHASE AGREEMENT (this " Agreement" ) is made as of the 15th day of May 2008, by and between Flagstar Bancorp, Inc. (the " Company" ), a corporation organized under the laws of the State of Michigan, with its principal offices at 5151 Corporate Drive, Troy, Michigan 48098-2639 and the purchaser whose name and address is set forth on the signature page hereof (the " Purchaser" ).

IN CONSIDERATION of the mutual covenants contained in this Agreement, the Company and the Purchaser agree as follows:

SECTION 1.

Authorization of Sale of the Shares . Subject to the terms and conditions of this Agreement, the Company has authorized the issuance and sale of up to (i) 11,365,000 shares of the Company’s Common Stock, $0.01 par value (the " Common Stock" ) and (ii) 47,982 shares of the Company’s Mandatory Convertible Non-Cumulative Perpetual Preferred Stock, par value $0.01 and $1,000 liquidation preference per share (the " Preferred Stock ," the Common Stock and the Preferred Stock together are referred to as the " Shares" ), which Preferred Stock shall convert into shares of Common Stock automatically upon Stockholder Approval (as defined below), as more fully described in the Certificate of Designations of the Preferred Stock (the " Certificate of Designations" ), the form of which is attached to this Agreement as Exhibit A (the " Conversion Shares ," the Shares and the Conversion Shares together are referred to as the " Securities" ).

SECTION 2.

Agreement to Sell and Purchase the Shares . At the Closing (as defined in Section 3), the Company will, subject to the terms and conditions of this Agreement, issue and sell to each Purchaser and each Purchaser, severally and not jointly, will buy from the Company, upon the terms and conditions hereinafter set forth, the respective number of shares of Common Stock at $4.25 per share (the " Common Stock Purchase Price" ) and Preferred Stock at $1,000 per share (the " Preferred Stock Purchase Price" and, together with the Common Stock Purchase Price, the " Purchase Price" ) as are set forth opposite each Purchaser’s name in Schedule 1 to this Agreement. At the Closing (as defined below), the Company will enter into this same form of purchase agreement with certain other investors (the " Other Purchasers" ) and complete sales of Shares to them. The Purchaser and the Other Purchasers are hereinafter sometimes collectively referred to as the " Purchasers ," and this Agreement and the purchase agreements executed by the Other Purchasers are hereinafter sometimes collectively referred to as the " Agreements ." The term " Placement Agent" shall mean Lehman Brothers Inc.

SECTION 3.

Delivery of the Shares at the Closing . The completion of the purchase and sale of the Shares (the " Closing" ) shall occur at the offices of Morrison & Foerster LLP, 1290 Avenue of the Americas, New York, New York 10104 as soon as practicable and as agreed to by the parties hereto, within three business days following the execution of the Agreements, or on such later date or at such different location as the parties shall agree in writing, but not prior to the date that the conditions for Closing set forth below have been satisfied or waived by the appropriate party (the " Closing Date" ).

At the Closing, the Purchaser shall deliver, in immediately available funds, the full amount of the Purchase Price for the Shares being purchased hereunder by wire transfer to an account designated by the Company and the Company shall deliver to the Purchaser one or more stock certificates registered in the name of the Purchaser, or in such nominee name(s) as designated by the Purchaser in writing, representing the number of Shares set forth in Schedule 1 and bearing an appropriate legend referring to the fact that the Shares were sold in reliance upon the exemption from registration under the Securities Act of 1933, as amended (the " Securities Act" ), provided by Section 4(2) thereof and Rule 506 thereunder. The Company will promptly substitute one or more replacement certificates without the legend at such time as the Securities are sold pursuant to the Registration Statement (as defined herein) or the Securities may be sold pursuant to Rule 144 under the Securities Act without any restriction as to the number of securities as of a particular date that can be immediately sold. The name(s) in which the stock certificates are to be registered are set forth in the Stock Certificate Questionnaire attached hereto as part of Appendix I .

The Company’s obligation to complete the purchase and sale of the Shares and deliver such stock certificate(s) to the Purchaser at the Closing shall be subject to the following conditions, any one or more of which may be waived by the Company: (a) receipt by the Company of same-day funds in the full amount of the Purchase Price for the Shares being purchased hereunder; (b) completion of the purchases and sales under the Agreements with the Other Purchasers; and (c) the accuracy of the representations and warranties made by the

Purchasers (as if such representations and warranties were made on the Closing Date) and the fulfillment of those undertakings of the Purchasers to be fulfilled prior to the Closing. The Purchaser’s obligation to accept delivery of such stock certificate(s) and to pay for the Shares evidenced thereby shall be subject to the following conditions: (a) the Company shall have filed the Certificate of Designation with the Secretary of State of the State of Michigan; (b) each of the representations and warranties of the Company made herein shall be accurate as of the Closing Date; (c) the delivery to the Purchaser by counsel to the Company of a legal opinion in a form reasonably satisfactory to counsel to the Placement Agent and the Purchaser; (d) receipt by the Purchaser of a certificate executed by the chief executive officer and the chief financial or accounting officer of the Company, dated as of the Closing Date, to the effect that the representations and warranties of the Company set forth herein are true and correct as of the date of this Agreement and as of such Closing Date and that the Company has complied with all the agreements and satisfied all the conditions herein on its part to be performed or satisfied on or prior to such Closing Date; (e) the receipt by the Purchasers of voting agreements from stockholders holding at least 45% of the outstanding Common Stock of the Company prior to the date hereof pursuant to which such stockholders will agree to vote their shares for the Stockholders Approval (as defined below); (f) the Company having received gross proceeds of at least $100,000,000 from the sale of the Shares; (g) the approval of the Supplemental Listing Application by the New York Stock Exchange (the " NYSE" ) for the Common Stock and Conversion Shares; and (h) the fulfillment in all material respects of those undertakings of the Company to be fulfilled prior to the Closing.


SECTION 4.	Representations, Warranties and Covenants of the Company. The Company hereby represents and warrants to, and covenants with, the Purchaser as follows:

4.1 Organization and Qualification .

(a)

The Company is, and at the Closing Date will be, a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan. The Company is a savings and loan holding company under the Home Owners’ Loan Act of 1933, as amended (" HOLA" ). The Company has, and at the Closing Date will have, the power and authority (corporate, governmental, regulatory and otherwise) and has or will have all necessary approvals, orders, licenses, certificates, permits and other governmental authorizations (collectively, the " Authorizations" ) to own or lease all of the assets owned or leased by it and to conduct its business as described in the confidential Private Placement Memorandum dated May 7, 2008 prepared by the Company (including all exhibits, supplements and amendments thereto, the " Private Placement Memorandum" ), except where the failure to have any Authorization would not have a material adverse effect on the condition (financial or otherwise), assets, business, properties, prospects or results of operations of the Company and its Subsidiaries (as defined herein), taken as a whole (a " Material Adverse Effect" ). The Company is, and at the Closing Date will be, duly licensed or qualified to do business and in good standing as a foreign corporation in all jurisdictions (i) in which the nature of the activities conducted by the Company requires such qualification and (ii) in which the Company owns or leases real property, except where the failure to be so licensed or qualified would not have a Material Adverse Effect. The Amended and Restated Articles of Incorporation of the Company comply in all material respects with applicable law. A complete and correct copy of the Amended and Restated Articles of Incorporation of the Company, as amended and as currently in effect, has been delivered or made available to you or your counsel. The Company’s subsidiaries (each a " Subsidiary" and collectively the " Subsidiaries" ) are listed on Schedule I to this Agreement.

(b)

Flagstar Bank, FSB (the " Bank" ) is a Subsidiary of the Company and is a federally chartered stock savings bank duly organized, validly existing and in good standing under HOLA. The deposit accounts of the Bank are insured up to applicable limits by the Deposit Insurance Fund (" DIF" ), which is administered by the Federal Deposit Insurance Corporation (the " FDIC" ), and no proceedings for the termination or revocation of such insurance are pending or, to the knowledge of the Company, threatened. The Bank has the power and authority (corporate, governmental, regulatory and otherwise) and has or will have all necessary Authorizations to own or lease all of the assets owned or leased by it and to conduct its business as described in the Private Placement Memorandum, except where the failure to have any Authorization would not have a Material Adverse Effect. The Bank is duly licensed or qualified to do business and in good standing in all jurisdictions (i) in which the nature of the activities conducted by the Bank requires such qualification and (ii) in which the Bank owns or leases real property, except where

the failure to be so licensed or qualified would not have a Material Adverse Effect. The Federal Stock Savings Bank Charter (" Bank Charter" ) of the Bank complies in all material respects with applicable law. A complete and correct copy of the Bank Charter, as amended and as currently in effect, has been delivered or made available to you or your counsel.

(c)

Each of the Subsidiaries is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Each such Subsidiary has the power and authority (corporate, governmental, regulatory and otherwise) and has or will have all necessary Authorizations to own or lease all of the assets owned or leased by it and to conduct its business as described in the Private Placement Memorandum, except where the failure to have any Authorization would not have a Material Adverse Effect. Each such Subsidiary is duly licensed or qualified to do business and in good standing as a foreign corporation in all jurisdictions (i) in which the nature of the activities conducted by such Subsidiary requires such qualification and (ii) in which such Subsidiary owns or leases real property, except where the failure to be so licensed or qualified would not have a Material Adverse Effect. The articles or certificate of incorporation or certificate of trust of each Subsidiary comply in all material respects with applicable law. A complete and correct copy of the articles or certificate of incorporation or certificate of trust of each Subsidiary, as amended and as currently in effect, has been delivered or made available to you or your counsel.

4.2 Reporting Company; Form S‑3 . The Company is not an "ineligible issuer" (as defined in Rule 405 promulgated under the Securities Act) and is eligible to register the Common Stock and Conversion Shares for resale by the Purchaser on a registration statement on Form S‑3 (the " Registration Statement" ) under the Securities Act. The Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the " Exchange Act" ), and has filed all reports required thereby. Provided none of the Purchasers is deemed to be an underwriter with respect to any shares, to the Company’s knowledge, there exist no facts or circumstances (including without limitation any required approvals or waivers or any circumstances that may delay or prevent the obtaining of accountant’s consents) that reasonably could be expected to prohibit or delay (other than customary review by the Securities and Exchange Commission (the " SEC" )) the preparation and filing of the Registration Statement that will be available for the resale of the Common Stock and Conversion Shares by the Purchaser.

4.3 Authorized Capital Stock . The Company had duly authorized and validly issued outstanding capitalization as set forth under the heading "Capitalization" in the Private Placement Memorandum prepared by the Company as of the date set forth therein; the issued and outstanding shares of Preferred Stock and Common Stock have been duly authorized and validly issued, are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and conform in all material respects to the description thereof contained in the Private Placement Memorandum. Except for options issued in connection with the Company’s executive compensation plans as previously disclosed in the Company’s documents filed with the SEC, the Company does not have outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. With respect to each of the Subsidiaries, (i) all the issued and outstanding shares of such Subsidiary’s capital stock have been duly authorized and validly issued, are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and (ii) there are no outstanding options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of such Subsidiary’s capital stock or any such options, rights, convertible securities or obligations.

4.4 Issuance, Sale and Delivery of the Shares . The shares of Preferred Stock have been duly authorized and, when issued, delivered and paid for in the manner set forth in this Agreement, will be validly issued, fully paid and nonassessable, and will conform in all material respects to the description thereof set forth in the Private Placement Memorandum. The shares of Common Stock have been duly authorized and, when issued, delivered and paid for in the manner set forth in this Agreement, will be validly issued, fully paid and nonassessable, and will conform in all material respects to the description thereof set forth in the Private Placement Memorandum. The Company shall at all times reserve and keep available, out of its authorized but unissued Common Stock, solely for the purpose of effecting the conversion or redemption of the Shares, the

full number of shares of Common Stock issuable upon the conversion or redemption of all the Shares from time to time outstanding. The shares of Common Stock that may be issued upon conversion or redemption of the Shares have been duly authorized, and upon such issuance will be validly issued, fully paid and nonassessable and no preemptive rights or other rights to subscribe for or purchase any shares of Common Stock of the Company exist with respect to the issuance of such shares. No preemptive rights or other rights to subscribe for or purchase any shares of Common Stock or Preferred Stock of the Company exist with respect to the issuance and sale of the Shares by the Company pursuant to this Agreement or the Conversion Shares pursuant to the Certificate of Designations which have not been waived or complied with. No stockholder of the Company has any right (which has not been waived or has not expired by reason of lapse of time following notification of the Company’s intention to file the Registration Statement) to require the Company to register the sale of any capital stock owned by such stockholder under the Registration Statement. No further approval or authority of the stockholders or the Board of Directors of the Company will be required for the issuance and sale of the Shares to be sold by the Company as contemplated herein, except for the Stockholder Approval described in Section 4.5 below.

4.5 Stockholder Approval . The Company shall provide each stockholder entitled to vote at a special meeting of stockholders of the Company (the " Stockholder Meeting" ), which shall be promptly called and held not later than 90 days following the Closing Date (the " Stockholder Meeting Deadline" ), a proxy statement, soliciting each such stockholder’s affirmative vote at the Stockholder Meeting for approval of resolutions providing for the conversion of the Preferred Stock into Common Stock as described in this Agreement in accordance with applicable law and the rules and regulations of the NYSE (such affirmative approval being referred to herein as the " Stockholder Approval" ), and the Company shall use its best efforts to solicit its stockholders’ approval of such resolutions and to cause the Board of Directors of the Company to recommend to the stockholders that they approve such resolutions. The Company shall be obligated to seek to obtain the Stockholder Approval by the Stockholder Meeting Deadline; provided, if the Company is unable to obtain the approval of such shareholders within 90 days of the closing date, the Company will undertake to obtain such approval at (i) the next annual meeting of our shareholders (and each annual meeting thereafter) and (ii) a special meeting of our shareholders to be held every 180 days following our annual meeting in each year until such approval is obtained.

4.6 Due Execution, Delivery and Performance of the Agreements . The Company has full legal right, corporate power and authority to enter into this Agreement, the Certificate of Rights and Designations and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company. This Agreement constitutes a legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting the enforcement of creditors’ rights and the application of equitable principles relating to the availability of remedies, subject to 12 U.S.C. §1818(b)(6)(D) (or any successor statute) and similar bank regulatory powers and to the application of principles of public policy, and except as rights to indemnity or contribution, including but not limited to, indemnification provisions set forth in Section 7.4 of this Agreement may be limited by federal or state securities law or the public policy underlying such laws and general equitable principles relating to the availability of remedies. The execution and performance of this Agreement by the Company and the consummation of the transactions herein contemplated will not violate any provision of the Amended and Restated Articles of Incorporation or Fourth Amended and Restated Bylaws of the Company or the organizational documents of any Subsidiary and will not result in the creation of any lien, charge, security interest or encumbrance upon any assets of the Company or any Subsidiary pursuant to the terms or provisions of, or will not conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which any of the Company or any Subsidiary is a party or by which any of the Company or any Subsidiary or their respective properties may be bound or affected and in each case that would have a Material Adverse Effect or any statute or any authorization, judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental agency or body applicable to the Company or any Subsidiary or any of their respective properties. No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental agency or body is required for the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement, except for compliance with the Blue Sky laws and federal securities laws applicable to the offering of the Shares. As of the Closing Date, the Certificate of Designations will have been filed with the Secretary of State of the state of Michigan and will be in full force and effect and enforceable against the Company in accordance with its terms.

4.7 Accountants . Virchow, Krause & Company, LLP, who has expressed its opinion with respect to the consolidated financial statements contained in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2007, which is attached as an exhibit to, and made a part of, the Private Placement Memorandum, are registered independent public accountants, within the meaning of the Code of Professional Conduct of the American Institute of Certified Public Accountants, as required by the Securities Act and the rules and regulations promulgated thereunder (the " 1933 Act Rules and Regulations" ) and by the rules of the Public Accounting Oversight Board.

4.8 No Defaults or Consents . Neither the execution, delivery and performance of this Agreement by the Company nor the consummation of any of the transactions contemplated hereby (including, without limitation, the issuance and sale by the Company of the Securities) will give rise to a right to terminate or accelerate the due date of any payment due under, or conflict with or result in the breach of any term or provision of, or constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, except such defaults that individually or in the aggregate would not cause a Material Adverse Effect, or require any consent or waiver under, or result in the execution or imposition of any lien, charge or encumbrance upon any properties or assets of the Company or any Subsidiary pursuant to the terms of, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party or by which either the Company or any Subsidiary or any of their properties or businesses is bound, or any franchise, license, permit, judgment, decree, order, statute, rule or regulation applicable to the Company or any of its subsidiaries or violate any provision of the charter or bylaws of the Company or any of its subsidiaries, except for such consents or waivers which have already been obtained and are in full force and effect.

4.9 Contracts . The Material Contracts to which the Company or any Subsidiary is a party have been previously disclosed in the Company’s documents filed with the SEC or in the Private Placement Memorandum and have been duly and validly authorized, executed and delivered by the Company or any Subsidiary and constitute the legal, valid and binding agreements of the Company or any Subsidiary, enforceable by and against the Company or any Subsidiary, as applicable, in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to enforcement of creditors’ rights generally, and general equitable principles relating to the availability of remedies, subject to 12 U.S.C. §1818(b)(6)(D) (or any successor statute) and similar bank regulatory powers and to the application of principles of public policy, and except as rights to indemnity or contribution may be limited by federal or state securities laws and the public policy underlying such laws. Material Contract shall mean: (1) any contract or agreement which is a "material contract" within the meaning of Item 601(b)(10) of Regulation S-K to be performed in whole or in part after the date of this Agreement; (2) any contract or agreement which limits the freedom of the Company or any Subsidiary to compete in any line of business; (3) any material contract or agreement with a labor union or guild (including any collective bargaining agreement); (4) any contract or agreement which grants any person a right of first refusal, right of first offer or similar right with respect to any material properties, assets or businesses of the Company or any Subsidiary; and (5) any contract relating to the acquisition or disposition of any material business or material assets (whether by merger, sale of stock or assets or otherwise), which acquisition or disposition is not yet complete or where such contract contains continuing material obligations, including continuing material indemnity obligations, of the Company or any Subsidiary.

4.10 No Actions .

(d)

There are no legal or governmental actions, suits or proceedings pending or, to the Company’s knowledge, threatened against the Company or any Subsidiary before or by any court, regulatory body or administrative agency or any other governmental agency or body, domestic, or foreign, which actions, suits or proceedings, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect; and no labor disturbance by the employees of the Company exists or, to the Company’s knowledge, is imminent, that would reasonably be expected to have a Material Adverse Effect.

(e)

Neither the Company nor any Subsidiary is in violation of any rule or regulation of the SEC, the Office of Thrift Supervision (the "OTS") or the FDIC, which would have a Material Adverse Effect on the condition (financial or otherwise), operations, business, assets or properties of the Company and the Bank, taken as a whole. Neither the Company nor any Subsidiary is subject to any directive from the OTS or the FDIC to make any change in the method of conducting its

business or affairs, and the Company and any Subsidiary has conducted its business in compliance with all applicable statutes and regulations (including, without limitation, all regulations, decisions, directives and orders of the OTS and the FDIC), except where the failure to so comply would not have a Material Adverse Effect.

4.11 No Restrictions on Subsidiaries . No Subsidiary is currently prohibited, directly or indirectly, under any order of the OTS (other than orders applicable to savings and loan holding companies and their subsidiaries generally), or any agreement or other instrument to which it is a party or is subject, from paying any dividends to the Company, from making any other distribution on such Subsidiary's capital stock, from repaying to the Company any loans or advances to such Subsidiary from the Company or from transferring any of such Subsidiary's properties or assets to the Company or any other Subsidiary of the Company, provided, however, that the Bank must seek prior approval from the OTS at least 30 days before making any capital distribution to the Company.

4.12 Properties . The Company and each Subsidiary has valid title to all the properties and assets described as owned by it in the consolidated financial statements included in the Private Placement Memorandum, free and clear of all liens, mortgages, pledges, or encumbrances of any kind except (i) those, if any, reflected in such consolidated financial statements, or (ii) those that would not reasonably be expected to have a Material Adverse Effect. The Company and any Subsidiary owns or leases all such material properties as are necessary to its operations as now conducted.

4.13 No Material Adverse Change .

(a)

There has been no material adverse change in the condition (financial or otherwise), assets, business, properties, prospects or results of operations of the Company and its Subsidiaries, taken as a whole, since March 31, 2008. The capitalization, assets, properties and business of the Company conform in all material respects to the descriptions thereof contained or incorporated by reference in the Private Placement Memorandum as of the date specified. Subsequent to the respective dates as of which information is given in the Private Placement Memorandum, except as otherwise may be indicated therein, neither the Company nor the Bank has issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, except borrowings in the ordinary course of business, or entered into any other transaction not in the ordinary course of business, which is material in light of the businesses and properties of the Company and the Bank, taken as a whole. Neither the Company nor any of its Subsidiaries has any material contingent liabilities of any kind, except as set forth in the Private Placement Memorandum.

(b)

Except as set forth in the Private Placement Memorandum, no material default (or event which, with notice or lapse of time, or both, would constitute a material default) exists on the part of either the Company or the Bank or, to their knowledge, on the part of any other party, in the due performance and observance of any term, covenant or condition of any agreement to which the Company or the Bank is a party and which is material to the condition (financial or otherwise) of the Company and the Bank, taken as a whole. Such agreements are in full force and effect, and no other party to any such agreement has instituted or, to the knowledge of the Company or the Bank, threatened any action or proceeding wherein the Company or the Bank is or would be alleged to be in default thereunder, under circumstances where such action or proceeding, if determined adversely to the Company or the Bank, would have a Material Adverse Effect.

4.14 Intellectual Property . The Company and its Subsidiaries own or possess all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets, applications and other unpatented or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names (collectively, " Proprietary Rights" ) used in or necessary for the conduct of the business of the Company as now conducted and as proposed to be conducted as described in the Private Placement Memorandum, except where the failure to own such Proprietary Rights would not have a Material Adverse Effect. The Company and its Subsidiaries have the right to use all Proprietary Rights used in or necessary for the conduct of their respective businesses without infringing the rights of any person or violating the terms of any licensing or other agreement to which the Company or any Subsidiary is a party and, to the Company's knowledge, no person is infringing upon any of the Proprietary Rights, except where the infringement of or lack of a right to use such Proprietary Rights would not have a Material Adverse Effect. Except as disclosed in

the Private Placement Memorandum, no charges, claims or litigation have been asserted or, to the Company's knowledge, threatened against the Company or any Subsidiary contesting the right of the Company or any Subsidiary to use, or the validity of, any of the Proprietary Rights or challenging or questioning the validity or effectiveness of any license or agreement pertaining thereto or asserting the misuse thereof, and, to the Company's knowledge, no valid basis exists for the assertion of any such charge, claim or litigation. All licenses and other agreements to which the Company or any Subsidiary is a party relating to Proprietary Rights are in full force and effect and constitute valid, binding and enforceable obligations of the Company or such Subsidiary, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles, as the case may be, and there have not been and there currently are not any defaults (or any event which, with notice or lapse of time, or both, would constitute a default) by the Company or any Subsidiary under any license or other agreement affecting Proprietary Rights used in or necessary for the conduct of the business of the Company or any Subsidiary, except for defaults, if any, which would not have a Material Adverse Effect. The validity, continuation and effectiveness of all licenses and other agreements relating to the Proprietary Rights and the current terms thereof will not be affected by the transactions contemplated by this Agreement.

4.15 Compliance .

(a)

None of the Company nor its Subsidiaries has been advised, nor do any of them have any reason to believe, that it is not conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, including, without limitation, all applicable local, state and federal environmental laws and regulations, except where failure to be so in compliance would not have a Material Adverse Effect.

(b)

Neither the Company nor the Bank is in violation of its respective Amended and Restated Articles of Incorporation or Bank Charter, as the case may be, in each case as amended as of the date hereof, or is in default, in any material respect, in the performance of any material obligations, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness by which it is bound.

(c)

The Company and its Subsidiaries have, and at the Closing Date will have, complied in all material respects, except as described or incorporated by reference in the Private Placement Memorandum, with all laws, regulations, ordinances and orders relating to public health, safety or the environment (including without limitation all laws, regulations, ordinances and orders relating to releases, discharges, emissions or disposals to air, water, land or groundwater, to the withdrawal or use of groundwater, to the use, handling or disposal of polychlorinated biphenyls, asbestos or urea formaldehyde, to the treatment, storage, disposal or management of hazardous substances, pollutants or contaminants, or to exposure to toxic, hazardous or other controlled, prohibited or regulated substances), the violation of which would or might have a Material Adverse Effect on the consummation of the transactions contemplated by this Agreement. In addition, and irrespective of such compliance, neither the Company nor any of its Subsidiaries is subject to any liability for environmental remediation or clean-up, including any liability or class of liability of the lessee under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or the Resource Conservation and Recovery Act of 1976, as amended, which liability would or might have a Material Adverse Effect on the consummation of the transactions contemplated by this Agreement.

4.16 Taxes . Except as publicly disclosed, the Company and each Subsidiary has filed on a timely basis (giving effect to extensions) all required federal, state and foreign income and franchise tax returns and has paid or accrued all taxes shown as due thereon, and none of the Company or any subsidiary has knowledge of a tax deficiency that has been or might be asserted or threatened against it that could have a Material Adverse Effect. All tax liabilities accrued through March 31, 2008 have been adequately provided for on the books of the Company.

4.17 Transfer Taxes . On the Closing Date, all stock transfer or other taxes (other than income taxes) that are required to be paid in connection with the sale and transfer of the Shares to be sold to the Purchaser hereunder will have been, fully paid or provided for by the Company and all laws imposing such taxes will have been fully complied with.

4.18 Investment Company . The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof, will not be an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for an investment company, as such term is defined in the Investment Company Act of 1940, as amended, and the rules and regulations of the SEC promulgated thereunder.

4.19 Offering Materials . Each of the Company, its directors and officers has not distributed and will not distribute prior to the Closing Date any offering material, including any "free writing prospectus" (as defined in Rule 405 promulgated under the Securities Act), in connection with the offering and sale of the Shares other than the Private Placement Memorandum or any amendment or supplement thereto and filings made by the Company under the Exchange Act. The Company has not in the past nor will it hereafter take any action independent of the Placement Agent to sell, offer for sale or solicit offers to buy any securities of the Company that could result in the initial sale of the Shares not being exempt from the registration requirements of Section 5 of the Securities Act.

4.20 Insurance . The Company maintains insurance underwritten by insurers of recognized financial responsibility, of the types and in the amounts that the Company reasonably believes is adequate for its business, including, but not limited to, insurance covering all real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, with such deductibles as are customary for companies in the same or similar business, all of which insurance is in full force and effect.

4.21 Additional Information . The information contained in the following documents, which the Placement Agent has furnished to the Purchaser (it being understood that all documents publicly filed with or publicly furnished to the SEC shall be deemed "furnished" for purposes of this Section 4.21), or will furnish prior to the Closing, as of the dates thereof, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading:


(a)	the Company’s Annual Report on Form 10‑K for the fiscal year ended December 31, 2007;


(b)	the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008;


(c)	the Company’s Definitive Proxy Statement for Annual Meeting of stockholders to be held May 23, 2008;


(d)	the Private Placement Memorandum, including all addenda and exhibits thereto, other than this Agreement and appendices and exhibits hereto; and


(e)	all other documents, if any, filed by the Company with the SEC since December 31, 2007, pursuant to the reporting requirements of the Exchange Act.

The documents incorporated by reference in the Private Placement Memorandum or attached as exhibits thereto, at the time they became effective or were filed with the SEC, as the case may be, complied in all material respects with the requirements of the Exchange Act, as applicable, and the rules and regulations of the SEC thereunder (the " 1934 Act Rules and Regulations" and, together with the 1933 Act Rule and Regulations, the " Rules and Regulations" ). In the past 12 calendar months, the Company has filed all documents required to be filed by it prior to the date hereof with the SEC pursuant to the reporting requirements of the Exchange Act.

4.22 Price of Common Stock . The Company has not taken, and will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or that might reasonably be expected to constitute, the stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Securities.

4.23 Use of Proceeds . The Company shall use the proceeds from the sale of the Shares as described under "Use of Proceeds" in the Private Placement Memorandum.

4.24 Non-Public Information . Except as set forth in Section 9, the Company has not disclosed to the Purchaser, whether in the Private Placement Memorandum or otherwise, information that would constitute material non-public information as of the Closing Date other than the existence of the transaction contemplated hereby.

4.25 Use of Purchaser Name . Except as otherwise required by applicable law or regulation, the Company shall not use the Purchaser’s name or the name of any of its affiliates in any advertisement, announcement, press release or other similar public communication unless it has received the prior written consent of the Purchaser for the specific use contemplated which consent shall not be unreasonably withheld, conditioned or delayed.

4.26 Related Party Transactions . No transaction has occurred between or among the Company, on the one hand, and its affiliates, officers or directors on the other hand, that is required to have been described under applicable securities laws in its Exchange Act filings and is not so described in such filings.

4.27 Off-Balance Sheet Arrangements . There is no transaction, arrangement or other relationship between the Company and an unconsolidated or other off-balance sheet entity that is required to be disclosed by the Company in its Exchange Act filings and is not so disclosed or that otherwise would be reasonably likely to have a Material Adverse Effect. There are no such transactions, arrangements or other relationships with the Company that may create contingencies or liabilities that are not otherwise disclosed by the Company in its Exchange Act filings.

4.28 Governmental Permits, Etc . Neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any permit that, if the subject of an unfavorable decision, ruling or finding, could reasonably be expected to have a Material Adverse Effect.

4.29 Financial Statements . The consolidated financial statements of the Company and the related notes and schedules thereto included in its Exchange Act filings fairly present the financial position, results of operations, stockholders’ equity and cash flows of the Company and its consolidated Subsidiaries at the dates and for the periods specified therein. Such financial statements and the related notes and schedules thereto have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise noted therein) and all adjustments necessary for a fair presentation of results for such periods have been made; provided, however, that the unaudited financial statements are subject to normal year-end audit adjustments (which are not expected to be material) and do not contain all footnotes required under generally accepted accounting principles.

4.30 Listing Compliance . The Company is in compliance with the requirements of the NYSE for continued listing of the Common Stock thereon. The Company has taken no action designed to, or, to its knowledge, likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or the listing of the Common Stock on the NYSE, nor has the Company received any notification that the SEC or the NYSE is contemplating terminating such registration or listing. The transactions contemplated by this Agreement will not contravene the rules and regulations of the NYSE. The Company will comply with all requirements of the NYSE with respect to the issuance of the Conversion Shares and shall cause the Common Stock and Conversion Shares to be listed on the NYSE.

4.31 Internal Accounting Controls . The Company (i) keeps books, records and accounts that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company and the Bank, and (ii) maintains a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization, (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (C) access to assets is permitted only in accordance with management's general or specific authorization and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company has disclosure controls and procedures (as defined in Rules 13a‑14 and 15d‑14 under the Exchange Act) that are designed to ensure that material information relating to the Company is made known to the Company’s principal executive officer and the Company’s principal financial officer or persons performing similar functions. The Company is otherwise in compliance in all material respects with all applicable provisions of the Sarbanes-Oxley Act of 2002, as amended and the rules and regulations promulgated thereunder.

4.32 Foreign Corrupt Practices . Neither the Company, nor any Subsidiary, nor, to the knowledge of the Company, any director, officer, agent, employee or other Person acting on behalf of the Company or any Subsidiary has, in the course of its actions for, or on behalf of, the Company (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.

4.33 Employee Relations . Neither the Company nor any Subsidiary is a party to any collective bargaining agreement. The Company and each Subsidiary believe that their relations with their employees are good. No executive officer of the Company (as defined in Rule 501(f) promulgated under the Securities Act) has notified the Company that such officer intends to leave the Company or otherwise terminate such officer’s employment with the Company. No executive officer of the Company is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non-competition agreement, or any other agreement or any restrictive covenant, and the continued employment of each such executive officer does not subject the Company or any Subsidiary to any liability with respect to any of the foregoing matters.

4.34 ERISA . The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder (herein called " ERISA" ); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan"; or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the " Code" ); and each "Pension Plan" for which the Company would have liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification.

4.35 Environmental Matters . There has been no storage, disposal, generation, manufacture, transportation, handling or treatment of toxic wastes, hazardous wastes or hazardous substances by the Company or to its knowledge, any Subsidiary (or, to the knowledge of the Company, any of their predecessors in interest) at, upon or from any of the property now or previously owned or leased by the Company or any Subsidiary in violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit or that would require remedial action under any applicable law, ordinance, rule, regulation, order, judgment, decree or permit; there has been no material spill, discharge, leak, emission, injection, escape, dumping or release of any kind into such property or into the environment surrounding such property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous substances due to or caused by the Company or any Subsidiary or with respect to which the Company or any Subsidiary have knowledge; the terms "hazardous wastes", "toxic wastes", "hazardous substances", and "medical wastes" shall have the meanings specified in any applicable local, state, federal and foreign laws or regulations with respect to environmental protection.

4.36 Integration; Other Issuances of Shares . Neither the Company nor any Subsidiary or any affiliates, nor any Person acting on its or their behalf, has issued any shares of Preferred Stock or Common Stock or shares of any other series of preferred stock, or other securities or instruments convertible into, exchangeable for or otherwise entitling the holder thereof to acquire shares of Common Stock or Preferred Stock which would be integrated with the sale of the Shares to such Purchaser for purposes of the Securities Act or of any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the securities of the Company are listed or designated, nor will the Company or its subsidiaries or affiliates take any action or steps that would require registration of any of the Shares under the Securities Act or cause the offering of the Shares to be integrated with other offerings. Assuming the accuracy of the representations and warranties of Purchasers, the initial offer and sale of the Shares by the Company to the Purchasers pursuant to this Agreement will be exempt from the registration requirements of the Securities Act.

4.37 Filing of Form 8-K . Prior to 8:30 a.m. New York City time on the first business day after the date hereof, the Company shall issue a press release announcing the execution of this Agreement and the Company

shall file a Current Report on Form 8-K (the " 8-K Filing" ) describing the material terms of the transactions contemplated by the Agreements (for clarification purposes only and without implication to the contrary, the transactions contemplated by this Agreement include only the transaction between the Company and the Purchaser and do not include any other transaction between the Company and any other third party purchaser of the Company’s securities), and attaching as an exhibit to such Form 8-K a form of this Agreement. Except as set forth in Section 9, following the 8-K Filing, the Purchasers shall no longer be in possession of material non-public information. The Company shall not, and shall cause each of its Subsidiaries and its and each of their respective officers, directors, employees and agents, not to, provide any Purchaser with any material, nonpublic information regarding the Company or any of its Subsidiaries from and after the filing of the 8-K Filing with the SEC without the express written consent of such Purchaser.

4.38 Risk Management Instruments . All material derivative instruments, including, swaps, caps, floors and option agreements, whether entered into for the Company’s own account, or for the account of one or more of the Subsidiaries or their customers, were entered into (1) only in the ordinary course of business, (2) in accordance with prudent practices and in all material respects with all applicable laws, rules, regulations and regulatory policies and (3) with counterparties believed to be financially responsible at the time; and each of them constitutes the valid and legally binding obligation of the Company or one of the Subsidiaries, enforceable in accordance with its terms. Neither the Company nor the Subsidiaries, nor, to the knowledge of the Company, any other party thereto, is in breach of any of its material obligations under any such agreement or arrangement.

4.39 Mortgage Banking Business . Except as has not had and would not reasonably be expected to have a Material Adverse Effect:

(1)

The Company and each Subsidiary has complied with, and all documentation in connection with the origination, processing, underwriting and credit approval of any mortgage loan originated, purchased or serviced by the Company or any Subsidiary satisfied, (A) all applicable federal, state and local laws, rules and regulations with respect to the origination, insuring, purchase, sale, pooling, servicing, subservicing, or filing of claims in connection with mortgage loans, including all laws relating to real estate settlement procedures, consumer credit protection, truth in lending laws, usury limitations, fair housing, transfers of servicing, collection practices, equal credit opportunity and adjustable rate mortgages, (B) the responsibilities and obligations relating to mortgage loans set forth in any agreement between the Company or any Subsidiary and any Agency, Loan Investor or Insurer, (C) the applicable rules, regulations, guidelines, handbooks and other requirements of any Agency, Loan Investor or Insurer and (D) the terms and provisions of any mortgage or other collateral documents and other loan documents with respect to each mortgage loan; and

(2)

No Agency, Loan investor or Insurer has (A) claimed in writing that the Company or any Subsidiary has violated or has not complied with the applicable underwriting standards with respect to mortgage loans sold by the Company or any Subsidiary to a Loan Investor or Agency, or with respect to any sale of mortgage servicing rights to a Loan Investor, (B) imposed in writing restrictions on the activities (including commitment authority) of the Company or any Subsidiary or (B) indicated in writing to the Company or any Subsidiary that it has terminated or intends to terminate its relationship with the Company or any Subsidiary for poor performance, poor loan quality or concern with respect to the Company’s or any Subsidiary’s compliance with laws.


(3)	For purposes of this Section 4.39:

(A)

"Agency" shall mean the Federal Housing Administration, the Federal Home Loan Mortgage Corporation, the Farmers Home Administration (now known as Rural Housing and Community Development Services), the Federal National Mortgage Association, the Federal National Mortgage Association, the United States Department of Veterans’ Affairs, the Rural Housing Service of the U.S. Department of Agriculture or any other federal or state agency with authority to (i) authority to determine any investment, origination, lending or servicing requirements with regard to mortgage loans originated, purchased or serviced by the Company or any Subsidiary or (ii) originate,

purchase, or service mortgage loans, or otherwise promote mortgage lending, including without limitation state and local housing finance authorities.


(B)	"Loan Investor" shall mean any person (including an Agency) having a beneficial interest in any mortgage loan originated, purchased or serviced by the Company or any Subsidiary or a security backed by or representing an interest in any such mortgage loan; and

(C)

"Insurer" means a person who insures or guarantees for the benefit of the mortgagee all or any portion of the risk of loss upon borrower default on any of the mortgage loans originated, purchased or serviced by the Company or any Subsidiary, including, the Federal Housing Administration, the United States Department of Veterans’ Affairs, the Rural Housing Service of the U.S. Department of Agriculture and any private mortgage insurer, and providers of hazard, title or other insurance with respect to such mortgage loans or the related collateral.

4.40 U.S. Real Property Holding Corporation Status . The Company is not, nor has ever been, a U.S. real property holding corporation within the meaning of Section 897 of the Internal Revenue Code of 1986, as amended.

4.41 Shell Company Status . The Company is not, nor has ever been, an issuer of the type described in Rule 144(i)(l) under the Securities Act.

4.42 Solvency . The Company and each of its Subsidiaries does and will after giving effect to the to the transactions contemplated hereby to occur at the Closing and the sale of securities to the Other Purchasers (a) own assets the fair saleable value of which are (i) greater than the total amount of its liabilities (including known contingent liabilities) and (ii) greater than the amount that will be required to pay the probable liabilities of its existing debts as they become absolute and matured considering the financing alternatives reasonably available to it and (b) not have capital that will be unreasonably small in relation to its business as presently conducted or any contemplated. The Company has no knowledge of any facts or circumstances which lead it to believe that it or any of its Subsidiaries will be required to file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction, and has no present intent to so file.


SECTION 5.	Representations, Warranties and Covenants of the Purchaser . The Purchaser represents and warrants to, and covenants with, the Company that:

5.1 Experience . (i) The Purchaser is knowledgeable, sophisticated and experienced in financial and business matters, in making, and is qualified to make, decisions with respect to investments in shares representing an investment decision like that involved in the purchase of the Securities, including investments in securities issued by the Company and comparable entities, has the ability to bear the economic risks of an investment in the Securities and has reviewed carefully the Private Placement Memorandum and has requested, received, reviewed and considered all information it deems relevant in making an informed decision to purchase the Securities; (ii) the Purchaser is acquiring the number of Shares set forth in Section 2 above in the ordinary course of its business and for its own account for investment only and with no present intention of distributing any of the Securities or any arrangement or understanding with any other persons regarding the distribution of such Securities (this representation and warranty not limiting the Purchaser’s right to sell pursuant to the Registration Statement or in compliance with the Securities Act and the Rules and Regulations, or, other than with respect to any claims arising out of a breach of this representation and warranty, the Purchaser’s right to indemnification under Section 7.4); (iii) the Purchaser will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Securities, nor will the Purchaser engage in any short sale that results in a disposition of any of the Securities by the Purchaser, except in compliance with the Securities Act and the Rules and Regulations and any applicable state securities laws; (iv) the Purchaser has completed or caused to be completed the Registration Statement Questionnaire attached hereto as part of Appendix I , for use in preparation of the Registration Statement, and the answers thereto are true and correct as of the date hereof and will be true and correct as of the effective date of the Registration Statement and the Purchaser will notify the Company immediately of any material change in any such information provided in the Registration Statement Questionnaire until such time as the Purchaser has sold all of its Securities or until the Company is no longer required to keep the Registration Statement effective; (v) the Purchaser has, in connection with its decision to

purchase the number of Shares set forth in Section 2 above, relied solely upon the Private Placement Memorandum and the representations and warranties of the Company contained herein; (vi) the Purchaser has had an opportunity to discuss this investment with representatives of the Company and ask questions of them and (vii) the Purchaser is an "accredited investor" within the meaning of Rule 501(a) of Regulation D promulgated under the Securities Act.

5.2 Reliance on Exemptions . The Purchaser understands that the Shares are being offered and sold to it in reliance upon specific exemptions from the registration requirements of the Securities Act, the Rules and Regulations and state securities laws and that the Company is relying upon the truth and accuracy of, and the Purchaser’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of the Purchaser to acquire the Shares.

5.3 Confidentiality . For the benefit of the Company, the Purchaser previously agreed with the Placement Agent to keep confidential all information concerning this private placement. The Purchaser understands that the information contained in the Private Placement Memorandum is strictly confidential and proprietary to the Company and has been prepared from the Company’s publicly available documents and other information and is being submitted to the Purchaser solely for such Purchaser’s confidential use. The Purchaser agrees to use the information contained in the Private Placement Memorandum for the sole purpose of evaluating a possible investment in the Securities and the Purchaser acknowledges that it is prohibited from reproducing or distributing the Private Placement Memorandum, this Agreement, or any other offering materials or other information provided by the Company in connection with the Purchaser’s consideration of its investment in the Company, in whole or in part, or divulging or discussing any of their contents, except to its financial, investment or legal advisors in connection with its proposed investment in the Securities. Further, the Purchaser understands that the existence and nature of all conversations and presentations, if any, regarding the Company and this offering must be kept strictly confidential. The Purchaser understands that the federal securities laws impose restrictions on trading based on information regarding this offering. In addition, the Purchaser hereby acknowledges that unauthorized disclosure of information regarding this offering may result in a violation of Regulation FD. The obligations set forth in this Section 5.3 will terminate upon the filing by the Company of the press release and the filing of a Form 8-K with the SEC. The foregoing agreements shall not apply to any information that is or becomes publicly available through no fault of the Purchaser, or that the Purchaser is legally required to disclose; provided, however, that if the Purchaser is requested or ordered to disclose any such information pursuant to any court or other government order or any other applicable legal procedure, it shall provide the Company with prompt notice of any such request or order in time sufficient to enable the Company to seek an appropriate protective order.

Notwithstanding anything to the contrary in this Agreement, nothing in this Agreement should be considered to impose on the Purchaser any limitation on disclosure of the tax treatment or tax structure of the transactions or matters described herein.

5.4 Investment Decision . The Purchaser understands that nothing in the Agreement or any other materials presented to the Purchaser in connection with the purchase and sale of the Shares, including the Private Placement Memorandum, constitutes legal, tax or investment advice. The Purchaser has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of the Shares.

5.5 Risk of Loss . The Purchaser understands that its investment in the Securities involves a significant degree of risk, including a risk of total loss of the Purchaser’s investment, and the Purchaser has full cognizance of and understands all of the risk factors related to the Purchaser’s purchase of the Securities, including, but not limited to, those set forth as "Risk Factors" in the Private Placement Memorandum. The Purchaser understands that the market price of the Common Stock has been volatile, that there is no existing market for the Preferred Stock and that no representation is being made as to the future value of the Securities.

5.6 Legend . The Purchaser understands that, until such time as the Registration Statement has been declared effective or the Securities may be sold pursuant to Rule 144 under the Securities Act without any restriction as to the number of securities as of a particular date that can then be immediately sold, the Securities will bear a restrictive legend in substantially the following form:

"THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE " SECURITIES ACT" ) OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. THE SHARES MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OR (2) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE STATE SECURITIES LAWS AND THE SECURITIES LAWS OF OTHER JURISDICTIONS, AND IN THE CASE OF A TRANSACTION EXEMPT FROM REGISTRATION, UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION UNDER THE SECURITIES ACT AND SUCH OTHER APPLICABLE LAWS."

5.7 Transfer Restrictions. Consistent with the legend set forth in Section 5.6, the Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Securities other than pursuant to the Registration Statement, the Company may require the transferor to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of the transferred Securities under the Securities Act. As a condition of such transfer (unless effected pursuant to the Registration Statement or under Rule 144), any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of a Purchaser under this Agreement. The certificates representing the Shares and the Conversion Shares may be subject to a stop transfer order for the purpose of enforcing the foregoing provisions, and the Company will instruct the transfer agent to transfer Securities to a transferee if the foregoing provisions are complied with and if, in the case of a transfer pursuant to the Registration Statement, the transferor causes the Prospectus (as defined in Section 5.9) to be delivered to the transferee. At such time as the Securities are no longer required to bear a restrictive legend, the Company agrees that it will, no later than three business days after delivery by the Purchaser to the Company or its transfer agent of a certificate (in the case of a transfer, in the proper form for transfer) representing Securities issued with the foregoing restrictive legend, deliver or cause to be delivered to the Purchaser a certificate representing such Securities that is free from all restrictive and other legends. The Company shall not make any notation on its records or give instructions to its transfer agent that enlarge the restrictions on transfer set forth in this Section.

5.8 Residency . The Purchaser’s principal executive offices are in the jurisdiction set forth immediately below the Purchaser’s name on the signature pages hereto.

5.9 Public Sale or Distribution . The Purchaser hereby covenants with the Company not to make any sale of the Securities under the Registration Statement without complying with the provisions of this Agreement and without effectively causing the prospectus delivery requirement under the Securities Act to be satisfied (whether physically or through compliance with Rule 172 under the Securities Act or any similar rule), and the Purchaser acknowledges and agrees that such Securities are not transferable on the books of the Company unless the certificate submitted to the transfer agent evidencing the Securities is accompanied by a separate Purchaser’s Certificate of Subsequent Sale: (i) in the form of Appendix II hereto, (ii) executed by an officer of, or other authorized person designated by, the Purchaser, and (iii) to the effect that (A) the Securities have been sold in accordance with the Registration Statement, the Securities Act and any applicable state securities or Blue Sky laws and (B) the prospectus delivery requirement effectively has been satisfied. The Purchaser acknowledges that there may occasionally be times when the Company must suspend the use of the prospectus (the " Prospectus" ) forming a part of the Registration Statement (a " Suspension" ) until such time as an amendment to the Registration Statement has been filed by the Company and declared effective by the SEC, or until such time as the Company has filed an appropriate report with the SEC pursuant to the Exchange Act. Without the Company’s prior written consent, which consent shall not unreasonably be withheld or delayed, the Purchaser shall not use any written materials to offer the Securities for resale other than the Prospectus, including any "free writing prospectus" as defined in Rule 405 under the Securities Act. The Purchaser covenants that it will not sell any Securities pursuant to said Prospectus during the period commencing at the time when Company gives the Purchaser written notice of the suspension of the use of said Prospectus and ending at the time when the Company gives the Purchaser written notice that the Purchaser may thereafter effect sales pursuant to said Prospectus. Notwithstanding the foregoing, the Company agrees that no Suspension shall be for a period of longer than 45 consecutive days, and no Suspension shall be for a period longer than 60 days in the aggregate in any 365 day period and may not be used by the Company more than

three times during any 365 day period. The Purchaser further covenants to notify the Company promptly of the sale of all of its Securities.

5.10 Organization; Validity; Enforcements . The Purchaser further represents and warrants to, and covenants with, the Company that (i) the Purchaser has full right, power, authority and capacity to enter into this Agreement and to consummate the transactions contemplated hereby and has taken all necessary action to authorize the execution, delivery and performance of this Agreement, (ii) the making and performance of this Agreement by the Purchaser and the consummation of the transactions herein contemplated will not violate any provision of the organizational documents of the Purchaser or conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any material agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which the Purchaser is a party or, any statute or any authorization, judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental agency or body applicable to the Purchaser, (iii) no consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental agency or body is required on the part of the Purchaser for the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement, (iv) upon the execution and delivery of this Agreement, this Agreement shall constitute a legal, valid and binding obligation of the Purchaser, enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or the enforcement of creditor’s rights and the application of equitable principles relating to the availability of remedies, and except as rights to indemnity or contribution, including, but not limited to, the indemnification provisions set forth in Section 7.4 of this Agreement, may be limited by federal or state securities laws or the public policy underlying such laws and (v) there is not in effect any order enjoining or restraining the Purchaser from entering into or engaging in any of the transactions contemplated by this Agreement.

5.11 Short Sales . After the date the Purchaser entered into a confidentiality undertaking with the Placement Agent with respect to the transactions contemplated hereby, the Purchaser has not taken, and prior to the public announcement of the transaction, the Purchaser shall not take, any action that has caused or will cause the Purchaser to have, directly or indirectly, sold or agreed to sell any shares of Common Stock, effected any short sale of Common Stock, whether or not against the box, established any "put equivalent position" (as defined in Rule 16a-1(h) under the Exchange Act) with respect to the Common Stock, granted any other right (including, without limitation, any put or call option) with respect to the Common Stock or with respect to any security that includes, relates to or derived any significant part of its value from the Common Stock.

SECTION 6.

Survival of Agreements; Non-Survival of Company Representations and Warranties. Notwithstanding any investigation made by any party to this Agreement or by the Placement Agent, all covenants and agreements made by the Company and the Purchaser herein and in the certificates for the Shares delivered pursuant hereto shall survive the execution of this Agreement, the delivery to the Purchaser of the Shares being purchased and the payment therefor. All representations and warranties, made by the Company and the Purchaser herein and in the certificates for the Shares delivered pursuant hereto shall survive for a period of two years following the later of the execution of this Agreement, the delivery to the Purchaser of the Shares being purchased and the payment therefor.


SECTION 7.	Registration of the Common Stock and Conversion Shares; Compliance with the Securities Act.

7.1 Registration Procedures and Expenses . The Company shall:

(a)

as soon as practicable, but in no event later than thirty days following the Closing Date (the " Filing Deadline" ), prepare and file with the SEC the Registration Statement relating to the resale of the Common Stock and or Conversion Shares (including shares of Common Stock issuable as a result of an anti-dilution adjustment to the Conversion Price (as defined in the Articles of Amendment) and any capital stock of the Company issued with respect to the Shares or the Conversion Shares as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise (collectively, the " Registrable Securities" ) by the Purchaser and the Other Purchasers from time to time on the NYSE, or the facilities of any national securities exchange on which the Common Stock is then traded or in privately-negotiated transactions;

(b)

use its best efforts, subject to receipt of necessary information from the Purchasers, to cause the SEC to declare the Registration Statement effective within 45 days or, if the Registration Statement is selected for review by the SEC, 120 days after the Closing Date, and in any event no later than five business days following notification from the SEC that the Registration Statement will not be subject to review or that the SEC has no further comments to the Registration Statement (the " Effective Deadline" );

(c)

promptly prepare and file with the SEC such amendments and supplements to the Registration Statement and the Prospectus used in connection therewith as may be necessary to keep the Registration Statement effective until the earliest of (i) one year after the effective date of the Registration Statement or (ii) such time as Registrable Securities become eligible for resale by each of the Purchasers without any volume limitations or other restrictions pursuant to Rule 144 under the Securities Act or any other rule of similar effect; provided that, for the avoidance of doubt, in no event shall the Company have any obligation to keep the Registration Statement effective after such time as all of the Registrable Securities have been sold pursuant to the Registration Statement or Rule 144;

(d)

furnish to the Purchaser with respect to the Registrable Securities registered under the Registration Statement (and to each underwriter, if any, of such Registrable Securities) such number of copies of prospectuses and such other documents as the Purchaser may reasonably request, in order to facilitate the public sale or other disposition of all or any of the Registrable Securities by the Purchaser;


(e)	file documents required of the Company for normal Blue Sky clearance in states specified in writing by the Purchaser; provided , however , that the Company shall not be required to qualify to do business or consent to service of process in any jurisdiction in which it is not now so qualified or has not so consented;

(f)

bear all expenses in connection with the procedures in paragraphs (a) through (e) of this Section 7.1 and the registration of the Registrable Securities pursuant to the Registration Statement, other than fees and expenses, if any, of counsel or other advisers to the Purchaser or the Other Purchasers or underwriting discounts, brokerage fees and commissions incurred by the Purchaser or the Other Purchasers, if any in connection with the offering of the Registrable Securities pursuant to the Registration Statement;


(g)	file a Form D with respect to the Shares as required under Regulation D and to provide a copy thereof to the Purchaser promptly after filing;


(h)	issue a press release describing the transactions contemplated by this Agreement on the Closing Date;

(i)

in order to enable the Purchasers to sell the Registrable Securities under Rule 144 to the Securities Act, for a period of one year from Closing, use its reasonable best efforts to comply with the requirements of Rule 144, including without limitation, use its reasonable best efforts to comply with the requirements of Rule 144(c)(1) with respect to public information about the Company and to timely file all reports required to be filed by the Company under the Exchange Act.


(j)	ensure that the Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein (in the case of prospectuses, in the light of the circumstances in which they were made) not misleading;

(k)

notify the Purchaser in writing of the happening of any event, as promptly as practicable after becoming aware of such event, as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (provided that the Company

shall endeavor that such notice not contain any material, nonpublic information), and, promptly prepare a supplement or amendment to such Registration Statement to correct such untrue statement or omission;

(l)

use its reasonable best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the prompt withdrawal of such order or suspension and to notify each Purchaser who holds Registrable Securities being sold of the issuance of such order and the resolution thereof or its receipt of actual written notice of the initiation or written threat of any proceeding for such purpose; and


(m)	include in the "plan of distribution" section of the Registration Statement disclosure substantially to the effect that: "The selling stockholders may enter into derivative transactions with third parties, or sell securities not covered by this prospectus to third parties in privately negotiated transactions."


(n)	refrain from preparing and filing with the SEC other Registration Statements until the Registration Statement relating to the Registrable Securities is effective.

The Company understands that the Purchaser disclaims being an underwriter, but the Purchaser being deemed an underwriter shall not relieve the Company of any obligations it has hereunder. If the SEC requires that the Purchaser be named as an underwriter in the Registration Statement, the Purchaser may (and the Company will use its best efforts to allow) withdraw its Securities from the Registration Statement. A draft of the proposed form of the Registration Statement Questionnaire related to the Registration Statement to be completed by the Purchaser is attached hereto as Appendix I .

7.2 Additional Registration Statements. If for any reason, the SEC does not permit all Registrable Securities to be included in the Registration Statement (such that the Registration Statement may be used for resales in a manner that does not constitute, in the SEC’s view, an offering by the Company and that permits the continuous resale at the market by the Purchasers participating therein without being named therein as "underwriters"), then:

(a)

The Company shall (i) first, exclude the shares held by any officer or director of the Company or any Affiliate of any such officer or director and (ii) second, reduce the number of Registrable Securities to be included in such Registration Statement by the Purchaser and all Other Purchasers until such time as the SEC shall so permit such Registration Statement to become effective and be used for resales in a manner that does not constitute an offering by the Company and that permits the continuous resale at the market by the Purchasers participating therein without being named therein as "underwriters." In making such reduction, the Company shall reduce the number of shares to be included by all such Purchasers on a pro rata basis (based upon the number of Registrable Securities otherwise required to be included for each such Purchaser). In no event shall a Purchaser be required to be named as an "underwriter" in a Registration Statement without such Purchaser’s prior written consent; and

(b)

The Company shall prepare and file with the SEC one or more separate Registration Statements that meet the criteria set forth in the first sentence of this Section 7.2 with respect to any such Registrable Securities not included in the previous Registration Statement. The Company will then use its best efforts at the first opportunity that is permitted by the SEC, but in no event later than the later of 60 days from the date substantially all of the Registrable Securities registered under the Registration Statement have been sold by the Purchasers or six (6) months from the date the initial Registration Statement referred to in Section 7.1 was declared effective, to register for resale the Registrable Securities that have been excluded from being registered (provided such Registration Statement meets the criteria set forth in the first sentence of this Section 7.2). The Company shall use its best efforts to cause any such Registration Statement to be declared effective within 90 days following the filing thereof or, in the event of a review of the registration statement by the SEC, within 120 days following the filing thereof (and in any event no later than five business days following notification from the SEC that the Registration Statement will not

be subject to review or that the SEC has no further comments to the Registration Statement) and to remain continuously effective for the Registration Period. In the event the SEC raises objections to any such subsequent Registration Statement, the procedures set forth in this Section 7.2 shall again be followed.

7.3 Transfer of Securities After Registration . The Purchaser agrees that it will not effect any disposition of the Securities or its right to purchase the Securities that would constitute a sale within the meaning of the Securities Act or pursuant to any applicable state securities laws, except as contemplated by a Registration Statement referred to in Section 7.1 or Section 7.2 or as otherwise permitted by law, and that it will promptly notify the Company of any changes in the information set forth in the Registration Statement regarding the Purchaser or its plan of distribution.

7.4 Indemnification . For the purpose of this Section 7.4:


(i)	the term " Purchaser/Affiliate" shall mean any affiliate of the Purchaser, including a transferee who is an affiliate of the Purchaser, and any person who controls the Purchaser or any affiliate of the Purchaser within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act; and


(ii)	the term " Registration Statement" shall include any preliminary prospectus, final prospectus, free writing prospectus, exhibit, supplement or amendment included in or relating to, and any document incorporated by reference in, the Registration Statement referred to in Section 7.1 or Section 7.2.

(a)

The Company agrees to indemnify and hold harmless the Purchaser and each Purchaser/Affiliate, against any losses, claims, damages, liabilities or expenses, joint or several, to which the Purchaser or Purchaser/Affiliates may become subject, under the Securities Act, the Exchange Act, or any other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the consent of the Company, which consent shall not be unreasonably withheld), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any breach of the representations, warranties or covenants of the Company set forth herein or are based on any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, including the Prospectus, financial statements and schedules, and all other documents filed as a part thereof, as amended at the time of effectiveness of the Registration Statement, including any information deemed to be a part thereof as of the time of effectiveness pursuant to paragraph (b) of Rule 430A, or pursuant to Rules 430B, 430C or 434, of the Rules and Regulations, or the Prospectus, in the form first filed with the SEC pursuant to Rule 424(b) of the Rules and Regulations, or filed as part of the Registration Statement at the time of effectiveness if no Rule 424(b) filing is required or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state in any of them a material fact required to be stated therein or necessary to make the statements in the Registration Statement or any amendment or supplement thereto not misleading or in the Prospectus or any amendment or supplement thereto not misleading in light of the circumstances under which they were made, or arise out of or are based in whole or in part on any inaccuracy in the representations or warranties of the Company contained in this Agreement, or any failure of the Company to perform its obligations hereunder or under law, and will promptly reimburse each Purchaser and each Purchaser/Affiliate for any reasonable legal and other expenses as such expenses are incurred by such Purchaser or such Purchaser/Affiliate in connection with investigating, defending or preparing to defend, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided , however , that the Company will not be liable for amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, and the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon (i) an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Purchaser expressly for use therein, (ii) the failure of such Purchaser to comply with the covenants and

agreements contained in Sections 5.9 or 7.3 hereof respecting the sale of the Securities, (iii) the inaccuracy of any representation or warranty made by such Purchaser herein, or (iv) any statement or omission in any Prospectus that is corrected in any subsequent Prospectus that was delivered to the Purchaser prior to the pertinent sale or sales by the Purchaser.

(b)

The Purchaser will indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, claims, damages, liabilities or expenses to which the Company, each of its directors, each of its officers who signed the Registration Statement or controlling person may become subject, under the Securities Act, the Exchange Act, or any other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, but only if such settlement is effected with the consent of such Purchaser, which consent shall not be unreasonably withheld) insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon (i) any failure to comply with the covenants and agreements contained in Sections 5.9 or 7.3 hereof respecting the sale of the Shares, (ii) the inaccuracy of any representation or warranty made by such Purchaser herein, or (iii) any untrue or alleged untrue statement of any material fact contained in the Registration Statement, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements in the Registration Statement or any amendment or supplement thereto not misleading or in the Prospectus or any amendment or supplement thereto not misleading in the light of the circumstances under which they were made, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, the Prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Purchaser expressly for use therein; and will reimburse the Company, each of its directors, each of its officers who signed the Registration Statement or controlling person for any reasonable legal and other expense incurred by the Company, each of its directors, each of its officers who signed the Registration Statement or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that (x) the Purchaser will not be liable for amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Purchaser, which consent shall not be unreasonably withheld and (y) the Purchaser’s aggregate liability under this Section 7 shall not exceed the amount of proceeds received by the Purchaser on the sale of the Shares pursuant to the Registration Statement with respect to which the claim for indemnification hereunder is being made.

(c)

Promptly after receipt by an indemnified party under this Section 7.4 of notice of the threat or commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 7.4 promptly notify the indemnifying party in writing thereof, but the omission to notify the indemnifying party will not relieve it from any liability that it may have to any indemnified party for contribution or otherwise under the indemnity agreement contained in this Section 7.4 to the extent it is not prejudiced as a result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with all other indemnifying parties similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided , however , if the defendants in any such action include both the indemnified party, and the indemnifying party and the indemnified party shall have reasonably concluded, based on the written advice of counsel, which counsel is reasonably satisfactory to the indemnifying party, that there may be a conflict of interest between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties that are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of

its election to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 7.4 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso to the preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel, reasonably satisfactory to such indemnifying party, representing all of the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of action, in each of which cases the reasonable fees and expenses of counsel shall be at the expense of the indemnifying party. The indemnifying party shall not be liable for any settlement of any action without its consent, which consent shall not be unreasonably withheld. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved in writing the terms of such settlement; provided that such consent shall not be unreasonably withheld. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is a party unless such settlement includes a complete release of the indemnified party from all liability on claims that are the subject matter of such proceeding.

7.5 Termination of Conditions and Obligations . The restrictions imposed by Section 5.10 or Section 7.3 upon the transferability of the Registrable Securities shall cease and terminate as to any particular number of the Registrable Securities upon the earlier of (i) the passage of one year from the effective date of the Registration Statement covering such Registrable Securities and (ii) at such time as an opinion of counsel satisfactory in form and substance to the Company shall have been rendered to the effect that such conditions are not necessary in order to comply with the Securities Act.

7.6 Information Available . The Company, upon the reasonable request of the Purchaser, shall make available for inspection by each Purchaser, any underwriter participating in any disposition pursuant to the Registration Statement and any attorney, accountant or other agent retained by the Purchaser or any such underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company’s officers, employees and independent accountants to supply all information reasonably requested by the Purchaser or any such underwriter, attorney, accountant or agent in connection with the Registration Statement.

7.7 Delay in Filing or Effectiveness of Registration Statement . If the Registration Statement is not filed by the Company with the SEC on or prior to the Filing Deadline, then for each day following the Filing Deadline, until but excluding the date the Registration Statement is filed, or if the Registration Statement is not declared effective by the SEC by the Effective Deadline, then for each day following the Effective Deadline, until but excluding the date the SEC declares the Registration Statement effective, the Company shall, for each such day, pay the Purchaser with respect to any such failure, as liquidated damages and not as a penalty, an amount per 30‑day period equal to 1.0% of the Purchase Price paid by such Purchaser for its Shares pursuant to this Agreement; and for any such 30-day period, such payment shall be made no later than three business days following such 30-day period. If the Purchaser shall be prohibited from selling Conversion Shares under the Registration Statement as a result of a Suspension of more than sixty (60) days or Suspensions in the aggregate of more than ninety (90) days each in any 365 day period, then for each day on which a Suspension is in effect that exceeds the maximum allowed period for a Suspension or Suspensions, but not including any day on which a Suspension is lifted, the Company shall pay the Purchaser, as liquidated damages and not as a penalty, an amount per 30-day period equal to 1.0% of the Purchase Price paid by such Purchaser for its Shares pursuant to this Agreement for each such day, and such payment shall be made no later than the first business day of the calendar month next succeeding the month in which such day occurs. For purposes of this Section 7.7, a Suspension shall be deemed lifted on the date that notice that the Suspension has been lifted is delivered to the Purchaser pursuant to Section 5.9 of this Agreement. Any payments made pursuant to this Section 7.7 shall not constitute the Purchaser’s exclusive remedy for such events. Notwithstanding the foregoing provisions, in no event shall the Company be obligated to pay any liquidated damages pursuant to this Section 7.7 (i) to more than one Purchaser in respect of the same Shares for the same period of time or (ii) in an aggregate amount that exceeds 10% of the Purchase Price paid by the

Purchasers for the Shares pursuant to the Agreements. Such payments shall be made to the Purchasers in cash.

SECTION 8.

Anti-Dilution Protection for the Common Stock . If the Company issues within twelve (12) months of the Closing Date common stock or securities convertible into common stock at a price per share less than the Common Stock Purchase Price, then upon the occurrence of such issuance, the Company shall, subject to Sections 8(a), (b), (c) and (d) below, pay to the Purchaser an amount equal to the difference between (X) the Common Stock Purchase Price per share minus (Y) the greater of (i) the per share cash consideration paid in the transaction giving rise to the adjustment in this Section 8, and (ii) $2.50, multiplied by (Z) (i) the total number of shares of Common Stock (assuming the conversion of the Preferred Shares at then applicable Conversion Rate) purchased by the Purchaser hereunder less (ii) any shares of Company common stock sold by the Purchaser after the Closing Date.


(a)	In the case of the issuance of Company common stock for a consideration in whole or in part in cash, the consideration other than cash will be deemed to be the fair value thereof as determined in good faith by a majority of the Board of Directors irrespective of accounting treatment.


(b)	No adjustment will be made pursuant to this Section 8:


(1)	if shares of common stock are issued or are issuable pursuant to a stock option plan, restricted stock plan, agreements or other incentive stock arrangements approved by the stockholders and a majority of the Board of Directors of the Company; or

(2)

in the event the Company should at any time or from time to time after the Closing Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of common stock or the determination of holders of common stock entitled to receive a dividend or other distribution payable in additional shares of common stock or other securities or rights convertible into, exchangeable for, or entitling the holder thereof to receive directly or indirectly, additional shares of common stock (the " Common Stock Equivalents" ) without payment of any consideration by such holder for the additional shares of common stock or the Common Stock Equivalents (including the additional shares of common stock issuable upon conversion or exercise thereof).


(c)	In the event a dilutive event under this Section 8 occurs, the Purchaser must provide the Company with an Officer’s Certificate certifying to how many shares of Company common stock the Purchaser has sold since the Closing Date.

SECTION 9.

Purchasers That May Receive Non-Public Information . Notwithstanding anything contained herein to the contrary, the Purchaser may have elected to receive (and therefore received) certain information that may be deemed to be material non-public information (the "Confidential Information"). If so, the Purchaser hereby agrees (i) not to use the Confidential Information for any purpose other than in connection with its evaluation of a possible investment in the Shares, (ii) to keep all Confidential Information confidential and not to disclose or reveal in any manner whatsoever any Confidential Information to any person other than such Purchaser’s representatives who are actively and directly participating in the evaluation of a possible investment in the Shares or otherwise need to know the Confidential Information for such purpose and who have been advised by such Purchaser of, and have agreed to be bound by, the restrictions contained in this Section 8, and (iii) not to affect any transaction in (other than as contemplated by this Agreement) any securities of the Company until the earlier of (A) six months from the date of the Confidentiality Agreement signed by the Purchaser, (B) such time as the Company in its reasonable opinion determines that the Confidential Information is no longer considered material non-public information, or (C) or the filing of the Company's 10Q for the fiscal quarter ended June 30, 2008.

SECTION 10.

Broker’s Fee . The Purchaser acknowledges that the Company intends to pay to the Placement Agent a fee in respect of the sale of the Shares to the Purchaser. The Purchaser and the Company agree that the Purchaser shall not be responsible for such fee and that the Company will indemnify and hold harmless the Purchaser and each Purchaser/Affiliate against any losses, claims, damages, liabilities or expenses, joint or several, to which such Purchaser or Purchaser/Affiliate may become subject with respect to such fee. Each of the parties hereto represents that, on the basis of any actions and agreements by it, there are no other brokers or finders entitled to compensation in connection with the sale of the Shares to the Purchaser.

SECTION 11.

Independent Nature of Purchasers’ Obligations and Rights . The obligations of the Purchaser under this Agreement are several and not joint with the obligations of any Other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any Other Purchaser under the Agreements. The decision of each Purchaser to purchase the Shares pursuant to the Agreements has been made by such Purchaser independently of any other Purchaser. Nothing contained in the Agreements, and no action taken by any Purchaser pursuant thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Agreements. Each Purchaser acknowledges that no other Purchaser has acted as agent for such Purchaser in connection with making its investment hereunder and that no Purchaser will be acting as agent of such Purchaser in connection with monitoring its investment in the Shares or enforcing its rights under this Agreement. Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose.


SECTION 12.	Notices . All notices, requests, consents and other communications hereunder shall be in writing, shall be mailed by first-class registered or certified airmail, e-mail, confirmed facsimile or nationally recognized overnight express courier postage prepaid, and shall be deemed given when so mailed and shall be delivered as addressed as follows:

(a) if to the Company, to:

Flagstar Bancorp, Inc.

5151 Corporate Drive,

Troy, Michigan 48098-2639

Attention: Mr. Paul Borja

Facsimile: (248) 312-6833

E-mail: paul.borja@flagstar.com

with a copy to:

Kutak Rock LLP

1101 Connecticut Avenue, N.W.

Suite 1000

Washington, DC 20036-4374

Attention: Jeremy Johnson, Esq.

Facsimile: (202) 828-2488

E-mail: jeremy.johnson@KutakRock.com

or to such other person at such other place as the Company shall designate to the Purchaser in writing; and


(b)	if to the Purchaser, at its address as set forth at the end of this Agreement, or at such other address or addresses as may have been furnished to the Company in writing.


SECTION 13.	Changes . This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Company and the Purchaser. Any amendment or waiver effected in accordance with this Section 13 shall be binding upon each holder of any Securities purchased under this Agreement at the time outstanding, each future holder of all such Securities, and the Company.


SECTION 14.	Headings . The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement.


SECTION 15.	Severability . In case any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.


SECTION 16.	Governing Law; Venue . This Agreement is to be construed in accordance with and governed by the federal law of the United States of America and the internal laws of the State of New York without giving effect to any

choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of New York to the rights and duties of the parties. Each of the Company and the Purchaser submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Agreement and the transactions contemplated hereby. Each of the Company and the Purchaser irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum.


SECTION 17.	Counterparts . This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. Facsimile signatures shall be deemed original signatures.

SECTION 18.

Entire Agreement . This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Purchaser makes any representation, warranty, covenant or undertaking with respect to such matters. Each party expressly represents and warrants that it is not relying on any oral or written representations, warranties, covenants or agreements outside of this Agreement.


SECTION 19.	Fees and Expenses . Except as set forth herein, each of the Company and the Purchaser shall pay its respective fees and expenses related to the transactions contemplated by this Agreement.

SECTION 20.

Parties . This Agreement is made solely for the benefit of and is binding upon the Purchaser and the Company and to the extent provided in Section 7.4, any person controlling the Company or the Purchaser, the officers and directors of the Company, and their respective executors, administrators, successors and assigns and subject to the provisions of Section 7.4, no other person shall acquire or have any right under or by virtue of this Agreement. The term "successor and assigns" shall include any subsequent purchaser, as such purchaser, of the Shares sold to the Purchaser pursuant to this Agreement.


SECTION 21.	Further Assurances . Each party agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and to give such further written assurance as may be reasonably requested by any other party to evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement.

[Remainder of Page Left Intentionally Blank]

Signature Page to Purchase Agreement

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written.



Flagstar Bancorp, Inc.
By:
	Name:
	Title:

Print or Type:

Name of Purchaser

(Individual or Institution)

Jurisdiction of Purchaser’s Executive Offices

Name of Individual representing

Purchaser (if an Institution)

Title of Individual representing

Purchaser (if an Institution)

Signature by:

Individual Purchaser or Individual

representing Purchaser:

_________________________________

Address:___________________________

Telephone:___________________________

Facsimile:___________________________

E-mail:___________________________

Schedule I



Number of Common Stock Shares to Be Purchased	Price Per Share In Dollars	Number of Preferred Stock Shares to _Be Purchased_	Price Per Share In Dollars	Aggregate Price
	$		$	$

EXHIBIT A



Name of Subsidiary	State or Other Jurisdiction of Incorporation/Organization

Douglas Insurance Agency, Inc.	Michigan
Flagstar Bank, FSB	United States of America
Flagstar Commercial Corporation	Michigan
Flagstar Investment Group, Inc.	Michigan
Flagstar Reinsurance Company	Vermont
Flagstar Statutory Trust II	Connecticut
Flagstar Statutory Trust III	Delaware
Flagstar Statutory Trust IV	Delaware
Flagstar Statutory Trust V	Delaware
Flagstar Statutory Trust VI	Delaware
Flagstar Statutory Trust VII	Delaware
Flagstar Statutory Trust VIII	Delaware
Flagstar Statutory Trust IX	Delaware
Flagstar Statutory Trust X	Delaware
Flagstar Title Insurance Agency, Inc.	Michigan
Paperless Office Solutions, Inc.	Michigan

APPENDIX I

SUMMARY INSTRUCTION SHEET FOR PURCHASER

(to be read in conjunction with the entire

Purchase Agreement which follows)

A. Complete the following items on BOTH Purchase Agreements (Sign two originals):

1. Signature Page:


(i)	Name of Purchaser (Individual or Institution)


(ii)	Name of Individual representing Purchaser (if an Institution)


(iii)	Title of Individual representing Purchaser (if an Institution)


(iv)	Signature of Individual Purchaser or Individual representing Purchaser


2.	Appendix I - Stock Certificate Questionnaire/Registration Statement Questionnaire:

Provide the information requested by the Stock Certificate Questionnaire and the Registration Statement Questionnaire.


3.	Return BOTH properly completed and signed Purchase Agreements including the properly completed Appendix I to (initially by facsimile with original by overnight delivery):

Lehman Brothers Inc.

745 Seventh Avenue, 5 ^th Floor

New York, NY 10019

Attention: Keith Canton

Facsimile: 212-520-9328


B.	Instructions regarding the transfer of funds for the purchase of Shares will be sent by facsimile to the Purchaser by the Placement Agent at a later date.


C.	Upon the resale of the Securities by the Purchasers after the Registration Statement covering the Securities is effective, as described in the Purchase Agreement, the Purchaser:


(i)	must deliver a current prospectus of the Company to the buyer (prospectuses must be obtained from the Company at the Purchaser’s request); and


(ii)	must send a letter in the form of Appendix II to the Company so that the Securities may be properly transferred.

Flagstar Bancorp, Inc.

STOCK CERTIFICATE QUESTIONNAIRE

Pursuant to Section 3 of the Agreement, please provide us with the following information:



1.	The exact name that your Securities are to be registered in (this is the name that will appear on your stock certificate(s)). You may use a nominee name if appropriate:	_____________________________
2.	The relationship between the Purchaser of the Shares and the Registered Holder listed in response to item 1 above:	_____________________________
3.	The mailing address of the Registered Holder listed in response to item 1 above:	_____________________________ _____________________________ _____________________________ _____________________________
4.	The Social Security Number or Tax Identification Number of the Registered Holder listed in response to item 1 above:	_____________________________

Flagstar Bancorp, Inc.

REGISTRATION STATEMENT QUESTIONNAIRE

In connection with the preparation of the Registration Statement, please provide us with the following information:


SECTION 22.	Pursuant to the "Selling Stockholder" section of the Registration Statement, please state your or your organization’s name exactly as it should appear in the Registration Statement:

SECTION 23.

Please provide the number of shares of Common Stock that you or your organization own or Preferred Stock that you or your organization own that will convert into Common Stock after Closing. Please also provide the number of Shares of common stock that you or your organization purchased through other transactions and provide the number of Shares that you have or your organization has the right to acquire within 60 days of Closing:

Shares of Common Stock: ______

Shares of Common Stock into which Preferred Stock is convertible: _____

Other shares of common stock held: _____

Total shares of Common Stock held: _____


SECTION 24.	Have you or your organization had any position, office or other material relationship within the past three years with the Company or its affiliates?

_____ Yes _____ No

If yes, please indicate the nature of any such relationships below:

SECTION 25.

Are you (i) a FINRA Member (see definition), (ii) a Controlling (see definition) shareholder of a FINRA Member, (iii) a Person Associated with a Member of the FINRA (see definition), or (iv) an Underwriter or a Related Person (see definition) with respect to the proposed offering; or (b) do you own any shares or other securities of any FINRA Member not purchased in the open market; or (c) have you made any outstanding subordinated loans to any FINRA Member?

Answer: [ ] Yes [ ] No If "yes," please describe below

Control . The term "control" (including the terms "controlling," "controlled by" and "under common control with") means the possession, direct or indirect, of the power, either individually or with others, to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. (Rule 405 under the Securities Act of 1933, as amended)

FINRA Member . The term "FINRA member" means either any broker or dealer admitted to membership in the Financial Industry Regulatory Authority, Inc. (" FINRA" ). (NASD Manual, Article I, Definitions)

Person Associated with a member of the FINRA . The term "person associated with a member of the FINRA" means every sole proprietor, partner, officer, director, branch manager or executive representative of any FINRA Member, or any natural person occupying a similar status or performing similar functions, or any natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a FINRA Member, whether or not such person is registered or exempt from registration with the FINRA pursuant to its bylaws. (NASD Manual, Article I, Definitions)

Underwriter or a Related Person . The term "underwriter or a related person" means, with respect to a proposed offering, underwriters, underwriters’ counsel, financial consultants and advisors, finders, members of the selling or distribution group, and any and all other persons associated with or related to any of such persons. (FINRA Interpretation)

***No Trailer - DO NOT delete***

APPENDIX II

[Transfer Agent]

[Address]

Attention:

PURCHASER’S CERTIFICATE OF SUBSEQUENT SALE

The undersigned, [an officer of, or other person duly authorized by]

_____________________________________________________________ hereby certifies

[fill in official name of individual or institution]

that he/she [said institution] is the Purchaser of the shares evidenced by the attached certificate,

and as such, sold such shares on _______________ in accordance with the terms of the

[date]

Purchase Agreement and in accordance with Registration Statement

number _________________________________________________________ or otherwise in accordance with

[fill in the number of or otherwise identify Registration Statement]

the Securities Act of 1933, as amended, and, in the case of a transfer pursuant to the Registration

Statement, the requirement of delivering a current prospectus by the Company has been

complied with in connection with such sale.

Print or Type:



Name of Purchaser (Individual or Institution):

Name of Individual representing Purchaser (if an Institution)

Title of Individual representing Purchaser (if an Institution):
Signature by:
Individual Purchaser or Individual repre- senting Purchaser:

CERTIFICATE OF DESIGNATIONS

MANDATORY CONVERTIBLE NON-CUMULATIVE

PERPETUAL PREFERRED STOCK, SERIES A

FLAGSTAR BANCORP, INC.

Pursuant to Chapter 450 of the

General Corporation Law of the State of Michigan

Flagstar Bancorp, Inc., a corporation organized and existing under the General Corporation Law of the State of Michigan (the " Corporation" ), does hereby certify that at a meeting duly convened and held on May 13, 2008, the Board of Directors of the Corporation (the " Board" ) duly adopted the following resolution authorizing the issuance and sale by the Corporation of ________ shares of the Corporation’s preferred stock designated "Mandatory Convertible Non-Cumulative Perpetual Preferred Stock, Series A."

"RESOLVED , that the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the Corporation’s Mandatory Convertible Non-Cumulative Perpetual Preferred Stock, Series A, including those established by the Board and the number of authorized shares and dividend rate established hereby, are authorized and approved as set forth in the Certificate of Designations attached hereto as Exhibit A , which is incorporated herein and made a part of these resolutions by reference."

IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf of the Corporation by its duly authorized officer this ___ day of May, 2008.

FLAGSTAR BANCORP, INC.

Name: Mary Kay Ruedisueli

Title: Secretary

EXHIBIT A

CERTIFICATE OF DESIGNATIONS

MANDATORY CONVERTIBLE NON-CUMULATIVE

PERPETUAL PREFERRED STOCK, SERIES A

FLAGSTAR BANCORP, INC.

Section 1.

Designation . The designation of the series of preferred stock shall be "Mandatory Convertible Non-Cumulative Perpetual Preferred Stock, Series A" (the " Preferred Stock" ). Each share of Preferred Stock shall be identical in all respects to every other share of Preferred Stock. The Preferred Stock will rank equally with Parity Stock, if any, will rank senior to Junior Stock and will rank junior to Senior Stock, if any, with respect to the payment of dividends and the distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Section 2.

Number of Shares . The number of authorized shares of Preferred Stock shall be [________]. That number from time to time may be increased (but not in excess of the total number of authorized shares of preferred stock) or decreased (but not below the number of shares of Preferred Stock then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon conversion of any other outstanding securities issued by the Corporation that are convertible into or exercisable for the Preferred Stock) by further resolution duly adopted by the Board or any other duly authorized committee of the Board and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Michigan stating that such increase or reduction, as the case may be, has been so authorized. The Corporation shall not have the authority to issue fractional shares of Preferred Stock.


Section 3.	Definitions . As used herein with respect to Preferred Stock:

"Board" means the board of directors of the Corporation or, with respect to any action to be taken by such board of directors, any committee of the board of directors duly authorized to take such action.

"Business Day" means any day other than a Saturday or Sunday or any other day on which commercial banks in the City of New York or in the State of Michigan are authorized or required by law, regulation or executive order to close.

"Closing Date" shall have the meaning set forth in Section 4(a) hereof.

"Closing Price" of the Common Stock on any determination date means the closing sale price or, if no closing sale price is reported, the last reported sale price of the shares of the Common Stock on the New York Stock Exchange (the " NYSE" ) on such date. If the Common Stock is not traded on the NYSE on any determination date, the Closing Price of the Common Stock on such determination date means the closing sale price as reported in the composite transactions for the principal U.S. national or regional securities exchange on which the Common Stock is so listed or quoted, or, if no closing sale price is reported, the last reported sale price on the principal U.S. national or regional securities exchange on which the Common Stock is so listed or quoted, or if the Common Stock is not so listed or quoted on a U.S. national or regional securities exchange, the last quoted bid price for the Common Stock in the over-the-counter market as reported by Pink Sheets LLC or a similar organization, or, if that bid price is not available, the market price of the Common Stock on that date as determined by a nationally recognized independent investment banking firm retained by the Corporation for this purpose.

For purposes of this Certificate of Designations, all references herein to the "Closing Price" and "last reported sale price" of the Common Stock on the NYSE shall be such closing sale price and last reported sale price as reflected on the website of the NYSE (http://www.nyse.com) and as reported by Bloomberg Professional Service; provided that in the event that there is a discrepancy between the closing sale price or last reported

sale price as reflected on the website of the NYSE and as reported by Bloomberg Professional Service, the closing sale price and last reported sale price on the website of the NYSE will govern.

"Common Stock" means the common stock, $0.01 par value, of the Corporation.

"Common Stock Dividend Equivalent" shall have the meaning set forth in Section 4(a) hereof.

"Conversion Agent" shall mean Registrar and Transfer Company collectively acting in their capacity as conversion agent for the Preferred Stock, and their respective successors and assigns.

"Conversion Price" is equal to $4.25 per share of Common Stock (subject to adjustment from time to time in a manner consistent with the provisions of Section 9), provided that in the event the Company does not pay any Dividend when due, such Conversion Price shall be adjusted every 180 days following the Closing Date such that the price then in effect shall immediately decrease by $0.50 (subject to adjustment from time to time in a manner consistent with provisions of Section 9) but not below $2.50 (subject to adjustment from time to time in a manner consistent with the provisions of Section 9) until the Mandatory Conversion Date.

"Conversion Rate" shall have the meaning set forth in Section 4(a) hereof.

"Dividend Payment Date" shall have the meaning set forth in Section 4(a) hereof.

"Dividend Period" shall have the meaning set forth in Section 4(a) hereof.

"Exchange Property" has the meaning set forth in Section 10(a) hereof.

" Holder" means the Person in whose name the shares of Preferred Stock are registered, which may be treated by the Corporation, Transfer Agent, Registrar, and Conversion Agent as the absolute owner of the shares of Preferred Stock for the purpose of making payment and settling conversions and for all other purposes.

"Junior Stock" means any of the Corporation’s stock that is not Parity Stock or Senior Stock.

"Mandatory Conversion Date" has the meaning set forth in Section 5(b) hereof.

"Original Dividend Period" has the meaning set forth in Section 4(a) hereof.

"Parity Stock" means any class or series of stock of the Corporation hereafter authorized which, by its terms, ranks pari passu with the Preferred Stock as to dividends, proceeds upon liquidation or dissolution, or special voting rights.

"Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint-stock company, limited liability company or trust.

"Reorganization Event" has the meaning set forth in Section 10 hereof.

"Registrar" means Registrar and Transfer Company or its nominee or any successor or registrar appointed by the Corporation.

"Preferred Stock" shall have the meaning set forth in Section 1 hereof.

"Senior Stock" means any class or series of stock of the Corporation now existing or hereafter authorized which, by its terms, ranks senior to the Preferred Stock as to dividends, proceeds upon liquidation or dissolution, or special voting rights.

"Stockholder Approval" has the meaning set forth in Section 5(a) hereof.

"Stockholder Meeting" has the meaning set forth in Section 5(a) hereof.

"Stockholder Meeting Deadline" has the meaning set forth in Section 5(a) hereof.

"Trading Day" for purposes of determining the Closing Price means a day on which the shares of Common Stock:


(a)	are not suspended from trading on any national or regional securities exchange or association or over-the-counter market at the close of business; and


(b)	have traded at least once on the national or regional securities exchange or association or over-the-counter market that is the primary market for the trading of the Common Stock.

"Transfer Agent" means Registrar and Transfer Company acting as Transfer Agent, Registrar, and Conversion Agent for the Preferred Stock, and its successors and assigns.


Section 4.	Dividends .

(a)

Rate . Until the expiration date of the Original Dividend Period, Holders of Preferred Stock shall be entitled to receive cash dividends on the liquidation preference of $1,000 per share, when, as and if declared by the Board, but only out of funds legally available therefor, in an amount equal to the Common Stock Dividend Equivalent. The " Original Dividend Period" shall be the period from the closing date (the " Closing Date" ) of the purchase and sale of the Preferred Stock until the date that is 180 days following the Closing Date. " Common Stock Dividend Equivalent" means the dividends per share payable on the Common Stock multiplied by the Conversion Rate. The " Conversion Rate" shall equal the liquidation preference of $1,000 per share (as adjusted equitably to take into account any stock split, reverse stock split or reclassification with respect to the Preferred Stock) divided by the Conversion Price which itself, is subject to adjustment pursuant to Section 9. On the date that is 180 days following the Closing Date, record holders of Preferred Stock will be entitled to a cash dividend of 5% of the total principal amount of the Preferred Stock. Starting at the end of the Original Dividend Period, holders of Preferred Stock will be entitled to receive cash dividends at a rate of 12% per annum, which shall be the dividend rate in effect until the Mandatory Conversion Date. Cash dividends will be payable quarterly in arrears on the last business day of February, May, August and November of each year, beginning on August 29, 2008 (each such day on which dividends are payable a " Dividend Payment Date" ). The period from and including the date of issuance of the Preferred Stock or any Dividend Payment Date to but excluding the next Dividend Payment Date is a " Dividend Period." The record date for payment of dividends on the Preferred Stock shall be the fifteenth day of the calendar month in which the Dividend Payment Date falls. The amount of dividends payable shall be computed on the basis of a 360-day year of twelve 30-day months.

(b)

Non-Cumulative Dividends . Dividends on shares of Preferred Stock shall be non-cumulative. To the extent that any dividends on the shares of Preferred Stock on any Dividend Payment Date are not declared, then such unpaid dividends shall not cumulate and the Corporation shall have no obligation to declare, and the holders of Preferred Stock shall have no right to receive, dividends for such Dividend Period after the Dividend Payment Date for such Dividend Period or interest with respect to such dividends, whether or not dividends are declared for any subsequent Dividend Period with respect to Preferred Stock, Parity Stock, Junior Stock or any other class or series of authorized preferred stock of the Corporation.

(c)

Priority of Dividends . So long as any share of Preferred Stock remains outstanding, unless full dividends on all outstanding shares of Preferred Stock with respect to all prior Dividend Periods have been paid in full or declared and set aside for payment, (i) no dividend shall be declared or paid or set aside for payment and no distribution shall be declared or made or set aside for payment on any Junior Stock, (ii) no shares of Junior Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation, directly or indirectly (other than as a result of a reclassification of Junior Stock for or into other Junior Stock, or the exchange or conversion of one share of Junior Stock for or into another share of Junior Stock, and other than through the use of the proceeds of a substantially contemporaneous sale of other shares of Junior Stock), nor shall any monies be paid to or made available for a sinking fund for the redemption of any such Junior Stock by the Corporation and (iii) no shares of Parity Stock shall be repurchased, redeemed or otherwise acquired for consideration by the Corporation otherwise than pursuant to pro rata offers to purchase all, or a pro rata portion, of the Preferred Stock and such Parity Stock, except by conversion into or exchange for

Junior Stock. The foregoing limitations do not apply to purchases or acquisitions of the Corporation’s Junior Stock pursuant to any employee or director incentive or benefit plan or arrangement (including any employment, severance or consulting agreement) of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted. Subject to the succeeding sentence, for so long as any shares of Preferred Stock remain outstanding, no dividends shall be declared or paid or set aside for payment on any Parity Stock for any period unless full dividends on all outstanding shares of Preferred Stock with respect to all prior Dividend Period have been paid in full or declared and a sum sufficient for the payment thereof set aside. To the extent the Corporation declares dividends on the Preferred Stock and on any Parity Stock but cannot make full payment of such declared dividends, the Corporation will allocate the dividend payments on a pro rata basis among the holders of the shares of Preferred Stock and the holders of any Parity Stock then outstanding. For purposes of calculating the pro rata allocation of partial dividend payments, the Corporation will allocate dividend payments based on the ratio between the then-current dividend payments due on the shares of Preferred Stock and the aggregate of the current and accrued dividends due on the outstanding Parity Stock. No interest will be payable in respect of any dividend payment on shares of Preferred Stock that may be in arrears. Subject to the foregoing, and not otherwise, such dividends (payable in cash, stock or otherwise) as may be determined by the Board may be declared and paid on any Junior Stock from time to time out of any assets legally available therefor, and the shares of Preferred Stock shall not be entitled to participate in any such dividend.


Section 5.	Mandatory Conversion Upon Stockholder Approval .

(a)

The Corporation shall call and hold a special meeting of stockholders (the " Stockholder Meeting" ) within 90 days of the Closing Date (the " Stockholder Meeting Deadline" ). The Corporation shall provide each stockholder entitled to vote at the Stockholder Meeting a proxy statement soliciting each such stockholder’s affirmative vote at the Stockholder Meeting for approval of resolutions providing for the approval of the conversion of the Preferred Stock into Common Stock, in accordance with applicable law and the rules and regulations of Section 302.03 of the NYSE Listed Company Manual (such affirmative approval being referred to herein as the " Stockholder Approval" ), and the Corporation shall use its best efforts to obtain its stockholders’ approval of such resolutions and to cause the Board to recommend to the stockholders that they approve such resolutions. The Corporation shall be obligated to seek to obtain the Stockholder Approval by the Stockholder Meeting Deadline; provided, if the Corporation is unable to obtain Stockholder Approval by the Stockholder Meeting Deadline, the Corporation will use its best efforts to obtain Stockholder Approval at (i) a special meeting of our stockholders held 180 days after the Stockholder Meeting, (ii) each annual meeting of our stockholders in each year until Stockholder Approval is obtained, and (iii) a special meeting of our stockholders to be held every 180 days following our annual meeting in each year until Stockholder Approval is obtained.

(b)

Upon receipt of Stockholder Approval (the " Mandatory Conversion Date" ), each share of Preferred Stock will automatically convert into a number of shares of Common Stock equal to one times the Conversion Rate. Dividends on the Preferred Stock declared and unpaid on the Mandatory Conversion Date shall be paid on the Mandatory Conversion Date out of funds legally available therefor. On the Mandatory Conversion Date, the shares of Preferred Stock converted into shares of Common Stock shall cease to be outstanding and dividends shall no longer be declared on the converted shares of Preferred Stock.


Section 6.	Conversion Procedures.

(a)

All holders of record of shares of Preferred Stock shall be sent written notice of the Mandatory Conversion Date and the place designated for mandatory conversion of all such shares of Preferred Stock pursuant to Section 5. Such notice need not be sent in advance of the occurrence of the Mandatory Conversion Date. All rights with respect to the Preferred Stock converted pursuant to Section 5 will terminate at the Mandatory Conversion Date. As soon as practicable after the Mandatory Conversion Date for Preferred Stock, the Corporation shall issue and deliver to such Holder, or to his, her or its nominees, the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof, together with cash as provided in Section 8 in lieu of any fraction of a share of Common Stock otherwise issuable upon such conversion, and the payment of any declared but unpaid dividends on the shares of Preferred Stock converted. Such

converted Preferred Stock shall be retired and cancelled and may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Preferred Stock accordingly. The person or persons entitled to receive the Common Stock issuable upon any such conversion shall be treated for all purposes as the record holder(s) of such shares of Common Stock as of the close of business on the Mandatory Conversion Date. In the event that a Holder of Preferred Stock shall not by written notice designate the name in which shares of Common Stock to be issued upon conversion of such Preferred Stock should be registered or the address to which the certificate or certificates representing such shares of Common Stock should be sent, the Corporation shall be entitled to register and deliver such shares in the name of the Holder of such Preferred Stock as shown on the records of the Corporation and to send such certificate or certificates representing such shares of Common Stock to the address of such Holder shown on the records of the Corporation.


Section 7.	Reservation of Common Stock.

(a)

The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock or shares held in the treasury by the Corporation, solely for issuance upon the conversion of shares of Preferred Stock as provided in this Certificate of Designations, free from any preemptive or other similar rights, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of Preferred Stock then outstanding, at the Conversion Rate.

(b)

Notwithstanding the foregoing, the Corporation shall be entitled to deliver upon conversion of shares of Preferred Stock, as herein provided, shares of Common Stock reacquired by the Corporation and held in the treasury of the Corporation (in lieu of the issuance of authorized and unissued shares of Common Stock), so long as any such treasury shares are free and clear of all liens, charges, security interests or encumbrances (other than liens, charges, security interests and other encumbrances created by the Holders).


(c)	All shares of Common Stock delivered upon conversion of the Preferred Stock shall be duly authorized, validly issued, fully paid and non-assessable, free and clear of all liens, claims, security interests and other encumbrances (other than liens, charges, security interests and other encumbrances created by the Holders).


(d)	Prior to the delivery of any securities that the Corporation shall be obligated to deliver upon conversion of the Preferred Stock, the Corporation shall use its reasonable best efforts to comply with all federal and state laws and regulations thereunder requiring the registration of such securities with, or any approval of or consent to the delivery thereof by, any governmental authority.

(e)

The Corporation hereby covenants and agrees that, if at any time the Common Stock shall be listed on the NYSE or any other national securities exchange or automated quotation system, the Corporation will, if permitted by the rules of such exchange or automated quotation system, list and keep listed, so long as the Common Stock shall be so listed on such exchange or automated quotation system, all the Common Stock issuable upon conversion of the Preferred Stock; provided, however , that if the rules of such exchange or automated quotation system permit the Corporation to defer the listing of such Common Stock until the first conversion of Preferred Stock into Common Stock in accordance with the provisions hereof, the Corporation covenants to list such Common Stock issuable upon conversion of the Preferred Stock in accordance with the requirements of such exchange or automated quotation system at such time.


Section 8.	Fractional Shares.


(a)	No fractional shares of Common Stock will be issued as a result of any conversion of shares of Preferred Stock.


(b)	In lieu of any fractional share of Common Stock otherwise issuable in respect of the mandatory conversion, the Corporation shall at its option either (i) issue to such Holder a whole share of Common Stock or (ii) pay an amount in cash (computed to the nearest cent) equal to the same

fraction of the Closing Price of the Common Stock determined as of the second Trading Day immediately preceding the effective date of conversion.


(c)	If more than one share of the Preferred Stock is surrendered for conversion by the same Holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of the Preferred Stock so surrendered.


Section 9.	Anti-Dilution Adjustments to the Conversion Price.


(a)	Stock Dividends and Distributions and Subdivisions, Splits and Combinations of the Common Stock. If the Corporation issues Common Stock as a dividend or distribution on the Common Stock to all holders of the Common Stock, or if the Corporation effects a share split or share combination of the Common Stock, the Conversion Price will be adjusted based on the following formula:



CR1	=	CR0 × 0S0 / OS1

where:

CR0	=	the Conversion Price in effect immediately prior to the adjustment relating to such event
CR1	=	the new Conversion Price in effect taking such event into account
OS0	=	the number of shares of Common Stock outstanding immediately prior to such event
OS1	=	the number of shares of Common Stock outstanding immediately after such event

Any adjustment made pursuant to this subclause shall become effective on the date that is immediately after (x) the date fixed for the determination of holders of Common Stock entitled to receive such dividend or other distribution or (y) the date on which such split or combination becomes effective, as applicable. If any dividend or distribution described in this subclause is declared but not so paid or made, the Conversion Price shall be readjusted to the Conversion Price that would then be in effect if such dividend or distribution had not been declared.


(b)	Calculation of Adjustments.


(i)	No adjustment to the Conversion Price shall be made if the Holders actually participate in the transaction that would otherwise give rise to such adjustment on an as-converted basis.


(ii)	The Conversion Price shall not be adjusted:


(A)	upon the issuance of any shares of Common Stock pursuant to any present or future plan providing for the reinvestment of dividends or interest payable on the Corporation’s securities and the investment of additional optional amounts in the Common Stock under any plan;


(B)	upon the issuance of any shares of Common Stock or options or rights to purchase those shares pursuant to any present or future employee, director or consultant benefit plan, employee agreement or arrangement or program of the Corporation;


(C)	upon the issuance of any shares of Common Stock pursuant to any option, warrant, right, or exercisable, exchangeable or convertible security outstanding as of the issue date;


(D)	for a change in the par value of the Common Stock;


(E)	as a result of a tender offer solely to holders of fewer than 100 shares of the Common Stock.


(iii)	The Corporation shall have the power to resolve any ambiguity and its action in so doing, as evidenced by a resolution of the Board, or a duly authorized committee thereof, shall be final and conclusive unless clearly inconsistent with the intent hereof.

(c)

Notice of Adjustment. Whenever the Conversion Price is to be adjusted, the Corporation shall: (i) compute the adjusted Conversion Price and prepare and transmit to the Transfer Agent an Officer’s Certificate setting forth the adjusted Conversion Price, the method of calculation thereof in reasonable detail and the facts requiring such adjustment and upon which such adjustment is based; (ii) as soon as practicable following the occurrence of an event that requires an adjustment to the Conversion Price (or if the Corporation is not aware of such occurrence, as soon as practicable after becoming so aware), provide, or cause to be provided, a written notice to the Holders of the Preferred Stock of the occurrence of such event and (iii) as soon as practicable following the determination of the revised Conversion Price provide, or cause to be provided, to the Holders of the Preferred Stock a statement setting forth in reasonable detail the method by which the adjustment to the Conversion Price was determined and setting forth the revised Conversion Price.

(d)

If the Corporation, at any time or from time to time after the date of original issuance of the Preferred Stock, shall declare or make, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities or other property of the Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of the outstanding shares of Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of such other securities of the Corporation or such other property (or the value of such other property) that they would have received had the Preferred Stock been converted into Common Stock on the date of such event and had such holders thereafter, during the period from the date of such event to and including the conversion date, retained such securities or other property receivable by them during such period giving application to all adjustments called for during such period under this Certificate of Amendment with respect to the rights of the holders of the outstanding shares of Preferred Stock; and, provided, further, however, that no such adjustment shall be made if the holders of Preferred Stock simultaneously receive a dividend or other distribution of such securities or other property in an amount equal to the amount of such securities or other property as they would have received if all outstanding shares of Preferred Stock had been converted into Common Stock on the date of such event.

(e)

In the event (1) the Corporation declares a dividend (or any other distribution) on its Common Stock; (2) the Corporation authorizes the granting to the holders of all or substantially all of its Common Stock of rights, options or warrants to subscribe for or purchase any share of any class or any other rights, options or warrants; (3) of any reclassification or reorganization of the Common Stock of the Corporation (other than a subdivision or combination of its outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Corporation is a party and for which approval of any of the Corporation’s shareholders is required, or of the sale or transfer of all or substantially all of the assets of the Corporation; (4) of a tender offer or exchange offer made by the Corporation or any of its subsidiaries for any portion of the Corporation’s Common Stock; or (5) of a voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall, in each case, send or cause to be sent, by first-class mail, postage prepaid, to each Holder as such Holder appears in the records of the Corporation, as promptly as practicable but in any event at least ten (10) days prior to the applicable date hereinafter specified, a written notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights, options or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or rights, options or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, tender offer, exchange offer, dissolution, liquidation or winding up is expected to become effective or occur, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, tender offer, exchange offer, transfer, dissolution, liquidation or winding up. Notice as provided for above need not be provided by mail if the required information is included in a public filing made by the Corporation with the U.S. Securities and Exchange Commission on or prior to the commencement of the ten (10) day period referenced above.


Section 10.	Reorganization Events .


(a)	In the event of:


(i)	the Corporation’s consolidation or merger with or into another Person, in each case pursuant to which the Common Stock will be converted into cash, securities, or other property of the Corporation or another Person;


(ii)	any sale, transfer, lease, or conveyance to another Person of all or substantially all of the Corporation’s or its subsidiaries property and assets, taken as a whole; or


(iii)	any statutory exchange of the Corporation’s securities with another Person;

(any such event specified in this Section 10(a), a " Reorganization Event" ); each share of Preferred Stock outstanding immediately prior to such Reorganization Event will, without the consent of Holders, become convertible, on an as-converted basis at the Conversion Rate, into the kind of securities, cash, and other property receivable in such Reorganization Event by a holder of the shares of Common Stock that was not the counterparty to the Reorganization Event or an affiliate of such other party (such securities, cash, and other property, the " Exchange Property" ).

(b)

In the event that holders of the shares of the Common Stock have the opportunity to elect the form of consideration to be received in such Reorganization Event, the consideration that the Holders are entitled to receive upon conversion shall be deemed to be (i) the weighted average of the types and amounts of consideration received by the holders of shares of Common Stock that affirmatively make such an election or (ii) if no holders of shares of Common Stock affirmatively make such an election, the weighted average of the types and amounts of consideration actually received by such holders. On each Conversion Date following a Reorganization Event, the Conversion Rate then in effect will be applied to the value on such Conversion Date of the securities, cash, or other property received per share of Common Stock, determined as set forth above. The amount of Exchange Property receivable upon conversion of any Preferred Stock in accordance with Section 5 hereof shall be determined based upon the Conversion Rate.


(c)	The above provisions of this Section 10 shall similarly apply to successive Reorganization Events of the Corporation (or any successor) received by the holders of the Common Stock in any such Reorganization Event.


(d)	The Corporation (or any successor) shall, within 20 days of the occurrence of any Reorganization Event, provide written notice to the Holders of such occurrence of such event and of the kind and amount of the cash, securities or other property that constitutes the Exchange Property. Failure to deliver such notice shall not affect the operation of this Section 10.


Section 11.	Replacement Stock Certificates.

(a)

If any of the Preferred Stock certificates shall be mutilated, lost, stolen or destroyed, the Corporation shall, at the expense of the Holder, issue, in exchange and in substitution for and upon cancellation of the mutilated Preferred Stock certificate, or in lieu of and substitution for the Preferred Stock certificate lost, stolen or destroyed, a new Preferred Stock certificate of like tenor and representing an equivalent amount of shares of Preferred Stock, but only upon receipt of evidence of such loss, theft or destruction of such Preferred Stock certificate and indemnity, if requested, satisfactory to the Corporation and the Transfer Agent.

(b)

The Corporation is not required to issue any certificates representing the Preferred Stock on or after the Mandatory Conversion Date. In lieu of the delivery of a replacement certificate following the Mandatory Conversion Date, the Transfer Agent, upon delivery of the evidence and indemnity described above, shall deliver the shares of Common Stock issuable pursuant to the terms of the Preferred Stock formerly evidenced by the certificate.


Section 12.	Liquidation Rights .

(a)

Liquidation . In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, holders of Preferred Stock shall be entitled, out of assets legally available therefor, before any distribution or payment out of the assets of the Corporation may be made to or set aside for the holders of any Junior Stock, including without limitation the Common Stock, and subject to the rights of the holders of any class or series of securities ranking senior to or on parity with Preferred Stock upon liquidation and the rights of the Corporation’s depositors and other creditors, to receive in full a liquidating distribution in the amount of the liquidation preference of $1,000 per share (as adjusted equitably to take into account any stock split, reverse stock split or reclassification with respect to the Preferred Stock), plus any dividends which have been declared but not yet paid, without accumulation of any undeclared dividends, to the date of liquidation. The holders of Preferred Stock shall not be entitled to any further payments in the event of any such voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation other than what is expressly provided for in this Section 12.

(b)

Partial Payment . If the assets of the Corporation are not sufficient to pay in full the liquidation preference plus any dividends which have been declared but not yet paid to all holders of Preferred Stock and all holders of any Parity Stock, the amounts paid to the holders of Preferred Stock and to the holders of all Parity Stock shall be pro rata in accordance with the respective aggregate liquidation preferences, plus any dividends which have been declared but not yet paid, of Preferred Stock and all such Parity Stock.


(c)	Residual Distributions . If the liquidation preference plus any dividends which have been declared but not yet paid has been paid in full to all holders of Preferred Stock and all holders of any Parity Stock, the holders of Junior Stock shall be entitled to receive all remaining assets of the Corporation according to their respective rights and preferences.

(d)

Merger, Consolidation and Sale of Assets Not Liquidation . For purposes of this Section 12, the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation shall not be deemed a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation, nor shall the merger, consolidation or any other business combination transaction of the Corporation into or with any other corporation or person or the merger, consolidation or any other business combination transaction of any other corporation or person into or with the Corporation be deemed to be a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation.


Section 13.	Redemption . The Preferred Stock shall not be redeemable either at the Corporation’s option or at the option of the Holders at any time.


Section 14.	Voting Rights .

(a)

Whenever the approval or other action of Holders voting as a separate class is required by applicable law or by the Corporation’s Amended and Restated Articles of Incorporation (as amended by this Certificate of Designations), each share of Preferred Stock shall be entitled to one vote, and the affirmative vote of a majority of such shares at a meeting at which a majority of such shares are present or represented shall be sufficient to constitute such approval or other action unless a higher percentage is required by applicable law or by the provisions of this Section 14.

(b)

Unless a higher percentage is otherwise expressly required by applicable law, approval of holders of a majority (by aggregate liquidation preference) of the Preferred Stock outstanding and all other preferred stock or securities having similar voting rights voting in proportion to the respective liquidation preferences, voting as a class, shall be required to amend the Amended and Restated Articles of Incorporation of the Corporation to authorize the issuance of any class or series of Parity Stock or Senior Stock, reclassify the Preferred Stock or to alter or abolish the liquidation preferences or any other preferential right of the Preferred Stock, or to otherwise to alter this Certificate of Designations in a manner adverse to the Holders.

(c)

Unless a higher percentage is otherwise expressly required by applicable law, approval of holders of a majority (by aggregate liquidation preference) of Preferred Stock outstanding and all other preferred stock or securities having similar voting rights voting in proportion to the respective liquidation preferences, voting as a class, shall be required to approve (i) any sale of all or substantially all of the assets or business of the Corporation and its subsidiaries, (ii) any liquidation, dissolution or winding up of the Corporation or (iii) any merger or consolidation of the Corporation with or into any other entity unless, in the case of (iii), either (A) the Corporation is the surviving entity in such merger or consolidation and the Preferred Stock remains outstanding or (B) the Corporation is not the surviving entity in such merger or consolidation but the Preferred Stock is not changed in such merger or consolidation into anything other than a class or series of preferred stock of the surviving or resulting entity, or the entity controlling such entity, having such rights, preferences, privileges and voting powers, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers of the Preferred Stock, taken as a whole.


Section 15.	Preemption . The holders of Preferred Stock shall not have any rights of preemption.


Section 16.	Rank . Notwithstanding anything set forth in the Certificate of Incorporation or this Certificate of Designations to the contrary, the Board, without the vote of the holders of the Preferred Stock, may authorize and issue additional shares of Junior Stock.


Section 17.	No Sinking Fund . Shares of Preferred Stock are not subject to the operation of a sinking fund.

EXHIBIT 10.3

FIRST AMENDMENT TO PURCHASE AGREEMENT

THIS FIRST AMENDMENT TO PURCHASE AGREEMENT (this " Amendment" ), dated as of December , 2008, is entered into by and among Flagstar Bancorp, Inc., a Michigan corporation (the " Company" ), and , (the

"Purchaser" ).

WHEREAS , the Company and the Purchaser entered into that certain Purchase Agreement, dated as of May 14, 2008 (the " Purchase Agreement" ), pursuant to which the Purchaser purchased (i) shares of the Company’s common stock (" Common Shares" ) and (ii) shares of the Company’s mandatory convertible non-cumulative perpetual preferred stock that automatically converted into shares of the Company’s common stock on August 12, 2008 (as so converted, the " Converted Shares ," and together with the Common Shares , the " Purchaser Shares" );

WHEREAS , in the event that the Company sells (i) shares of its common stock at a price less than $4.25 per share or (ii) securities convertible into shares of its common stock at a price less than $4.25 per share, Section 8 of the Purchase Agreement provides that the Company shall pay cash to the Purchaser in an amount per share of the Company’s common stock held by such Purchaser calculated as set forth therein;

WHEREAS , the Company has applied for participation in the United States Department of the Treasury’s capital purchase program (the " TARP Program" ) pursuant to which the Company will issue shares of the Company’s preferred stock and a warrant to purchase shares of the Company’s common stock (the " TARP Investment" );

WHEREAS , in order to consummate the TARP Investment, the Company and the Purchaser desire to amend the Purchase Agreement to provide for the issuance of warrants to the Purchaser in lieu of the cash payment required pursuant to Section 8 of the Purchase Agreement;

NOW, THEREFORE , in consideration of the foregoing and the promises and covenants set forth herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto consent and agree as follows:


1.	Defined Terms . All terms capitalized not defined herein shall have the meanings given to them in the Purchase Agreement.


2.	Amendment . The following will be added to the end of Section 8 of the Purchase Agreement:

"(d) The Company has applied for participation in the United States Department of the Treasury’s capital purchase program (the "TARP Program") pursuant to which, if approved, the Company will issue shares of the Company’s preferred stock and a warrant to purchase shares of the Company’s common stock (the "TARP Investment"). Notwithstanding anything else contained in this Section 8, upon the consummation of the TARP Investment, the Company, in full satisfaction of any and all obligations under this Section 8, will issue to the Purchaser a warrant to purchase, in the aggregate, the number of shares of Common Stock plus the number of Conversion Shares purchased by Purchaser pursuant to this Agreement (the "Warrant") and held by the Purchaser on the date of consummation of the TARP Investment, as specified in an Officer’s Certificate certifying to how many shares of Company common stock the Purchaser purchased pursuant to this Agreement, in the form of Exhibit A hereto and still owns as of the consummation of the TARP Investment. The exercise price of the Warrant shall be equal to lesser of (1) $0.62 and (2) the exercise price of the warrant issued as part of the TARP Investment."


3.	This Amendment is subject to the condition that the TARP Investment is consummated.


4.	Counterparts . This Amendment may be executed in multiple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Amendment may be executed via facsimile, which shall be deemed an original.


5.	Severability . If any provision of this Amendment shall be declared void or unenforceable by any judicial or administrative authority, the validity or enforceability of any other provision and of the entire Amendment shall not be affected.


6.	Governing Law . This Amendment shall be governed by and construed and enforced in accordance with the internal laws of the State of New York.

Further Assurances . Following the date hereof, each party shall execute, deliver, acknowledge and file, or shall cause to be executed, acknowledged, delivered and filed, all such further instruments, certificates and other documents and shall take, or cause to be taken, such other actions as may reasonably be requested by any other party in order to carry out the provisions of this Amendment and the transactions discussed herein.

Confidentiality . The undersigned Purchaser hereby agrees that, except as required by law, to hold in confidence, this Amendment, the TARP Investment, and all of the terms thereof and all of the transactions contemplated thereby and hereby until such time as the material terms thereof and hereof are publicly disclosed by the Company (which the Company agrees to do promptly in compliance with applicable law).


9.	Purchase Agreement to Remain in Place . This Amendment is solely limited to the sections of the Purchase Agreement referenced herein. In all other respects, the parties hereto agree that all of the other covenants and provisions provided in the Purchase Agreement shall remain and continue in full force and effect.

10.

Other Investors . Notwithstanding the foregoing, this Amendment shall only be effective if the Company shall promptly (A) provide notice to the Purchaser of any rights granted by the Company to any other investors that are parties to the Purchase Agreement ("Other Investors"), or rights enforced by any Other Investor, which are more favorable to such Other Investor than the rights enjoyed by the Purchaser, and (B) cause the Purchaser to receive the benefit of such more-favorable rights on a proportionate basis (based on the number of shares of common stock of the Company held by the Investor (on an as-converted to common stock basis), relative to the number of shares of common stock of the Company held by such Other Investor).

[Signature page follows]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

FLAGSTAR BANCORP, INC.

By: _________________________________

Name:

Title:

____________________________________

[NAME OF PURCHASER]

By: _________________________________

Name:

Title:

EXHIBIT 10.4

THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS.

WARRANT

to purchase

__________________________

Shares of Common Stock

of Flagstar Bancorp., Inc. (the "Company")

Issue Date: ___________________


1.	Definitions. Unless the context otherwise requires, when used herein the following terms shall have the meanings indicated.

"Affiliate" means, with respect to any person, any person directly or indirectly controlling, controlled by or under common control with, such other person. For purposes of this definition, " control" (including, with correlative meanings, the terms " controlled by" and " under common control with" ) when used with respect to any person, means the possession, directly or indirectly, of the power to cause the direction of management and/or policies of such person, whether through the ownership of voting securities by contract or otherwise.

"Appraisal Procedure" means a procedure whereby two independent appraisers, one chosen by the Company and one by the Warrantholder, shall mutually agree upon the determinations then the subject of appraisal. Each party shall deliver a notice to the other appointing its appraiser within 15 days after the Appraisal Procedure is invoked. If within 30 days after appointment of the two appraisers they are unable to agree upon the amount in question, a third independent appraiser shall be chosen within 10 days thereafter by the mutual consent of such first two appraisers. The decision of the third appraiser so appointed and chosen shall be given within 30 days after the selection of such third appraiser. If three appraisers shall be appointed and the determination of one appraiser is disparate from the middle determination by more than twice the amount by which the other determination is disparate from the middle determination, then the determination of such appraiser shall be excluded, the remaining two determinations shall be averaged and such average shall be binding and conclusive upon the Company and the Warrantholder; otherwise, the average of all three determinations shall be binding upon the Company and the Warrantholder. The costs of conducting any Appraisal Procedure shall be borne by the Company.

"Board of Directors" means the board of directors of the Company, including any duly authorized committee thereof.

"Business Combination" means a merger, consolidation, statutory share exchange or similar transaction that requires the approval of the Company’s stockholders.

"Business Day" means any day except Saturday, Sunday and any day on which banking institutions in the State of New York generally are authorized or required by law or other governmental actions to close.

"Capital Stock" means (A) with respect to any Person that is a corporation or company, any and all shares, interests, participations or other equivalents (however designated) of capital or capital stock of such Person and (B) with respect to any Person that is not a corporation or company, any and all partnership or other equity interests of such Person.

"Charter" means, with respect to any Person, its certificate or articles of incorporation, articles of association, or similar organizational document.

"Common Stock" shall mean the Company’s Common Stock Par Value, $0.01 per share.

"Company" means Flagstar Bancorp., Inc., a Michigan corporation.

"Conversion" has the meaning set forth in Section 13(B).

"Convertible Securities" has the meaning set forth in Section 13(B).

"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and regulations promulgated thereunder.

"Exercise Price" means the amount set forth in Section 8(d) of the Purchase Agreement dated May 14, 2008, as amended by that certain First Amendment to Purchase Agreement dated December 16, 2008, subject to the adjustment set forth in Section 13 hereto; provided, that such amount shall be reduced by the amount set forth in Item 2(b) of Schedule A hereto on each six month anniversary of the date of this Warrant if the Shareholder Approvals shall not have been obtained prior to such anniversary, up to a maximum reduction of the amount set forth in Item 2(c) of Schedule A hereto.

"Expiration Time" has the meaning set forth in Section 3.

"Fair Market Value" means, with respect to any security or other property, the fair market value of such security or other property as determined by the Board of Directors, acting in good faith or, with respect to Section 14, as determined by the Warrantholder acting in good faith. For so long as the Warrantholder holds this Warrant or any portion thereof, it may object in writing to the Board of Director’s calculation of fair market value within 10 days of receipt of written notice thereof. If the Warrantholder and the Company are unable to agree on fair market value during the 10-day period following the delivery of the Warrantholder’s objection, the Appraisal Procedure may be invoked by either party to determine Fair Market Value by delivering written notification thereof not later than the 30th day after delivery of the Warrantholder’s objection.

"Governmental Entities" has the meaning ascribed to it in the Purchase Agreement.

"Initial Number" has the meaning set forth in Section 13(B).

"Issue Date" means the date set forth in Item 3 of Schedule A hereto.

"Market Price" means, with respect to a particular security, on any given day, the last reported sale price regular way or, in case no such reported sale takes place on such day, the average of the last closing bid and ask prices regular way, in either case on the principal national securities exchange on which the applicable securities are listed or admitted to trading, or if not listed or admitted to trading on any national securities exchange, the average of the closing bid and ask prices as furnished by two members of the Financial Industry Regulatory Authority, Inc. selected from time to time by the Company for that purpose. "Market Price" shall be determined without reference to after hours or extended hours trading. If such security is not listed and traded in a manner that the quotations referred to above are available for the period required hereunder, the Market Price per share of Common Stock shall be deemed to be: the fair market value per share of such security as determined in good faith by the Warrantholder. For the purposes of determining the Market Price of the Common Stock on the "trading day" preceding, on or following the occurrence of an event, (i) that trading day shall be deemed to commence immediately after the regular scheduled closing time of trading on the New York Stock Exchange or, if trading is closed at an earlier time, such earlier time and (ii) that trading day shall end at the next regular scheduled closing time, or if trading is closed at an earlier time, such earlier time (for the avoidance of doubt, and as an example, if the Market Price is to be determined as of the last trading day preceding a specified event and the closing time of trading on a particular day is 4:00 p.m. and the specified event occurs at 5:00 p.m. on that day, the Market Price would be determined by reference to such 4:00 p.m. closing price).

"Permitted Transactions" has the meaning set forth in Section 13(B).

"Person" has the meaning given to it in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act.

"Per Share Fair Market Value" has the meaning set forth in Section 13(C).

"Pro Rata Repurchases" means any purchase of shares of Common Stock by the Company or any Affiliate thereof pursuant to (A) any tender offer or exchange offer subject to Section 13(e) or 14(e) of the Exchange Act or Regulation 14E promulgated thereunder or (B) any other offer available to substantially all holders of Common Stock, in the case of both (A) or (B), whether for cash, shares of Capital Stock of the Company, other securities of the Company, evidences of indebtedness of the Company or any other Person or any other property (including, without limitation, shares of Capital Stock, other securities or evidences of indebtedness of a subsidiary), or any combination thereof, effected while this Warrant is outstanding. The "Effective Date" of a Pro Rata Repurchase shall mean the date of acceptance of shares for purchase or exchange by the Company under any tender or exchange offer which is a Pro Rata Repurchase or the date of purchase with respect to any Pro Rata Repurchasethat is not a tender or exchange offer.

"SEC" means the U.S. Securities and Exchange Commission.

"Securities Act" means the Securities Act of 1933, as amended, or any successor statute, and the rules and regulations promulgated thereunder.

"Shareholder Approvals" means all shareholder approvals necessary to (A) approve the exercise of this Warrant for Shares for purposes of the section or rule set forth in Item 6 of Schedule A hereto, and/or (B) amend the Charter to increase the number of authorized shares of Common Stock to the extent necessary to permit the exercise of this Warrant.

"Shares" has the meaning set forth in Section 2.

"Trading Day" means (A) if the shares of Common Stock are not traded on any national or regional securities exchange or association or over-the-counter market, a business day or (B) if the shares of Common Stock are traded on any national or regional securities exchange or association or over-the-counter market, a business day on which such relevant exchange or quotation system is scheduled to be open for business and on which the shares of Common Stock (i) are not suspended from trading on any national or regional securities exchange or association or over-the-counter market for any period or periods aggregating one half hour or longer; and (ii) have traded at least once on the national or regional securities exchange or association or over-the-counter market that is the primary market for the trading of the shares of Common Stock.

"U.S. GAAP" means United States generally accepted accounting principles.

"Warrantholder" has the meaning set forth in Section 2.

"Warrant" means this Warrant, issued pursuant to the Purchase Agreement.

Number of Shares; Exercise Price. This certifies that, for value received, [Investor] or its permitted assigns (the "Warrantholder" ) is entitled, upon the terms and subject to the conditions hereinafter set forth, to acquire from the Company, in whole or in part, up to an aggregate of the number of fully paid and nonassessable shares of Common Stock set forth in Item 7 of Schedule A hereto, at a purchase price per share of Common Stock equal to the Exercise Price. The number of shares of Common Stock (the " Shares" ) and the Exercise Price are subject to adjustment as provided herein, and all references to "Common Stock," "Shares" and "Exercise Price" herein shall be deemed to include any such adjustment or series of adjustments.

Exercise of Warrant; Term. Subject to Section 2, to the extent permitted by applicable laws and regulations, the right to purchase the Shares represented by this Warrant is exercisable, in whole or in part by the Warrantholder, at any time or from time to time after the execution and delivery of this Warrant by the Company on the date hereof, but in no event later than 5:00 p.m., New York City time on the tenth anniversary of the Issue Date (the " Expiration Time" ), by (A) the surrender of this Warrant and Notice of Exercise annexed hereto, duly completed and executed on behalf of the Warrantholder, at the principal executive office of the Company located at the address set forth in Item 8 of Schedule A hereto (or such other office or agency of the Company in the United States as it may designate by notice in writing to the Warrantholder at the address of the Warrantholder appearing on the books of the Company), and (B) payment of the Exercise Price for the Shares thereby purchased:


(i)	by having the Company withhold, from the shares of Common Stock that would otherwise be delivered to the Warrantholder upon such exercise, shares of Common stock issuable upon exercise of the Warrant equal in

value to the aggregate Exercise Price as to which this Warrant is so exercised based on the Market Price of the Common Stock on the trading day on which this Warrant is exercised and the Notice of Exercise is delivered to the Company pursuant to this Section 3, or


(ii)	with the consent of both the Company and the Warrantholder, by tendering in cash, by certified or cashier’s check payable to the order of the Company, or by wire transfer of immediately available funds to an account designated by the Company.

If the Warrantholder does not exercise this Warrant in its entirety, the Warrantholder will be entitled to receive from the Company within a reasonable time, and in any event not exceeding three business days, a new warrant in substantially identical form for the purchase of that number of Shares equal to the difference between the number of Shares subject to this Warrant and the number of Shares as to which this Warrant is so exercised. Notwithstanding anything in this Warrant to the contrary, the Warrantholder hereby acknowledges and agrees that its exercise of this Warrant for Shares is subject to the condition that the Company will have first received Shareholder Approvals and the Warrantholder will have first received any applicable Regulatory Approvals.

Issuance of Shares; Authorization; Listing. Certificates for Shares issued upon exercise of this Warrant will be issued in such name or names as the Warrantholder may designate and will be delivered to such named Person or Persons within a reasonable time, not to exceed three business days after the date on which this Warrant has been duly exercised in accordance with the terms of this Warrant. The Company hereby represents and warrants that any Shares issued upon the exercise of this Warrant in accordance with the provisions of Section 3 will be duly and validly authorized and issued, fully paid and nonassessable and free from all taxes, liens and charges (other than liens or charges created by the Warrantholder, income and franchise taxes incurred in connection with the exercise of the Warrant or taxes in respect of any transfer occurring contemporaneously therewith). The Company agrees that the Shares so issued will be deemed to have been issued to the Warrantholder as of the close of business on the date on which this Warrant and payment of the Exercise Price are delivered to the Company in accordance with the terms of this Warrant, notwithstanding that the stock transfer books of the Company may then be closed or certificates representing such Shares may not be actually delivered on such date. Subject to receipt of Shareholder Approvals, the Company will at all times reserve and keep available, out of its authorized but unissued Common Stock, solely for the purpose of providing for the exercise of this Warrant, the aggregate number of shares of Common Stock then issuable upon exercise of this Warrant at any time. The Company will (A) procure, at its sole expense, the listing of the Shares issuable upon exercise of this Warrant at any time, subject to issuance or notice of issuance, on all principal stock exchanges on which the Common Stock is then listed or traded and (B) maintain such listings of such Shares at all times after issuance. The Company will use reasonable best efforts to ensure that the Shares may be issued without violation of any applicable law or regulation or of any requirement of any securities exchange on which the Shares are listed or traded.

No Fractional Shares or Scrip. No fractional Shares or scrip representing fractional Shares shall be issued upon any exercise of this Warrant. In lieu of any fractional Share to which the Warrantholder would otherwise be entitled, the Warrantholder shall be entitled to receive a cash payment equal to the Market Price of the Common Stock on the last trading day preceding the date of exercise less the pro-rated Exercise Price for such fractional share.


6.	No Rights as Stockholders; Transfer Books. This Warrant does not entitle the Warrantholder to any voting rights or other rights as a stockholder of the Company prior to the date of exercise hereof. The Company will at no time close its transfer books against transfer of this Warrant in any manner which interferes with the timely exercise of this Warrant.


7.	Charges, Taxes and Expenses. Issuance of certificates for Shares to the Warrantholder upon the exercise of this Warrant shall be made without charge to the Warrantholder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company.


8.	Transfer/Assignment.

This Warrant and all rights hereunder are transferable, in whole or in part, upon the books of the Company by the registered holder hereof in person or by duly authorized attorney: (i) to any Affiliate of the Warrantholder; or (ii) to any third party, in accordance with, or pursuant to an exemption form, the registration requirements of the Securities Act and a new warrant shall be made and delivered by the Company, of the same tenor and date as this Warrant but registered in the name of one or more transferees, upon surrender of this Warrant, duly endorsed, to the office or

agency of the Company described in Section 3. All expenses (other than stock transfer taxes) and other charges payable in connection with the preparation, execution and delivery of the new warrants pursuant to this Section 8 shall be paid by the Company.

Exchange and Registry of Warrant. This Warrant is exchangeable, upon the surrender hereof by the Warrantholder to the Company, for a new warrant or warrants of like tenor and representing the right to purchase the same aggregate number of Shares. The Company shall maintain a registry showing the name and address of the Warrantholder as the registered holder of this Warrant. This Warrant may be surrendered for exchange or exercise in accordance with its terms, at the office of the Company, and the Company shall be entitled to rely in all respects, prior to written notice to the contrary, upon such registry.

10.

Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and in the case of any such loss, theft or destruction, upon receipt of a bond, indemnity or security reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of this Warrant, the Company shall make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and representing the right to purchase the same aggregate number of Shares as provided for in such lost, stolen, destroyed or mutilated Warrant.


11.	Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a business day, then such action may be taken or such right may be exercised on the next succeeding day that is a business day.

12.

Rule 144 Information. The Company covenants that it will use its reasonable best efforts to timely file all reports and other documents required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations promulgated by the SEC thereunder (or, if the Company is not required to file such reports, it will, upon the request of any Warrantholder, make publicly available such information as necessary to permit sales pursuant to Rule 144 under the Securities Act), and it will use reasonable best efforts to take such further action as any Warrantholder may reasonably request, in each case to the extent required from time to time to enable such holder to, if permitted by the terms of this Warrant and the Purchase Agreement, sell this Warrant without registration under the Securities Act within the limitation of the exemptions provided by (A) Rule 144 under the Securities Act, as such rule may be amended from time to time, or (B) any successor rule or regulation hereafter adopted by the SEC. Upon the written request of any Warrantholder, the Company will deliver to such Warrantholder a written statement that it has complied with such requirements.

13.

Adjustments and Other Rights. The Exercise Price and the number of Shares issuable upon exercise of this Warrant shall be subject to adjustment from time to time as follows; provided, that if more than one subsection of this Section 13 is applicable to a single event, the subsection shall be applied that produces the largest adjustment and no single event shall cause an adjustment under more than one subsection of this Section 13 so as to result in duplication:

(A)

Stock Splits, Subdivisions, Reclassifications or Combinations. If the Company shall (i) declare and pay a dividend or make a distribution on its Common Stock in shares of Common Stock, (ii) subdivide or reclassify the outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify the outstanding shares of Common Stock into a smaller number of shares, the number of Shares issuable upon exercise of this Warrant at the time of the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the Warrantholder after such date shall be entitled to purchase the number of shares of Common Stock which such holder would have owned or been entitled to receive in respect of the shares of Common Stock subject to this Warrant after such date had this Warrant been exercised immediately prior to such date. In such event, the Exercise Price in effect at the time of the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification shall be adjusted to the number obtained by dividing (x) the product of (1) the number of Shares issuable upon the exercise of this Warrant before such adjustment and (2) the Exercise Price in effect immediately prior to the record or effective date, as the case may be, for the dividend, distribution, subdivision, combination or reclassification giving rise to this adjustment by (y) the new number of Shares issuable upon exercise of the Warrant determined pursuant to the immediately preceding sentence.

(B)

Certain Issuances of Common Shares or Convertible Securities. If the Company shall (x) issue shares of Common Stock (or rights or warrants or other securities exercisable or convertible into or exchangeable (collectively, a "conversion") for shares of Common Stock) (collectively, "convertible securities") (other than in Permitted Transactions (as defined below) or a transaction to which subsection (A) of this Section 13 is

applicable) or (y) reduces the exercise, conversion or exchange price of existing convertible securities, at or to a consideration per share (or having a conversion exercise or exchange price per share) that is less than the then Exercise Price then, in such event:


(i)	The Exercise Price shall be reduced to equal such lower price; and

(ii)

the number of Shares issuable upon exercise of the Warrant shall be increased by multiplying such number in effect immediately prior to the date of the agreement on pricing of such shares (or of such convertible securities) by a fraction, the numerator of which shall be the Exercise Price in effect before the adjustment and the denominator of which shall be the Exercise Price in effect immediately after such adjustment.

For purposes of the foregoing, the aggregate consideration receivable by the Company in connection with the issuance of such shares of Common Stock or convertible securities shall be deemed to be equal to the sum of the net offering price (including the Fair Market Value of any non-cash consideration and after deduction of any related expenses payable to third parties) of all such securities plus the minimum aggregate amount, if any, payable upon exercise or conversion of any such convertible securities into shares of Common Stock; and "Permitted Transactions" shall mean issuances (i) as consideration for or to fund the acquisition of businesses and/or related assets or (ii) in connection with employee benefit plans and compensation related arrangements in the ordinary course and consistent with past practice approved by the Board of Directors; provided that the aggregate amount of underlying Shares shall not exceed 10% of the outstanding shares of Common Stock. Any adjustment made pursuant to this Section 13(B) shall become effective immediately upon the date of such issuance.

(C)

Other Distributions. In case the Company shall fix a record date for the making of a distribution to all holders of shares of its Common Stock of securities, evidences of indebtedness, assets, cash, rights or warrants (excluding dividends of its Common Stock and other dividends or distributions referred to in Section 13(A)), in each such case, the Exercise Price in effect prior to such record date shall be reduced immediately thereafter to the price determined by multiplying the Exercise Price in effect immediately prior to the reduction by the quotient of (x) the Market Price of the Common Stock on the last trading day preceding the first date on which the Common Stock trades regular way on the principal national securities exchange on which the Common Stock is listed or admitted to trading without the right to receive such distribution, minus the amount of cash and/or the Fair Market Value of the securities, evidences of indebtedness, assets, rights or warrants to be so distributed in respect of one share of Common Stock (such amount and/or Fair Market Value, the "Per Share Fair Market Value") divided by (y) such Market Price on such date specified in clause (x); such adjustment shall be made successively whenever such a record date is fixed. In such event, the number of Shares issuable upon the exercise of this Warrant shall be increased to the number obtained by dividing (x) the product of (1) the number of Shares issuable upon the exercise of this Warrant before such adjustment, and (2) the Exercise Price in effect immediately prior to the distribution giving rise to this adjustment by (y) the new Exercise Price determined in accordance with the immediately preceding sentence. In the event that such distribution is not so made, the Exercise Price and the number of Shares issuable upon exercise of this Warrant then in effect shall be readjusted, effective as of the date when the Board of Directors determines not to distribute such shares, evidences of indebtedness, assets, rights, cash or warrants, as the case may be, to the Exercise Price that would then be in effect and the number of Shares that would then be issuable upon exercise of this Warrant if such record date had not been fixed.

(D)

Certain Repurchases of Common Stock. In case the Company effects a Pro Rata Repurchase of Common Stock, then the Exercise Price shall be reduced to the price determined by multiplying the Exercise Price in effect immediately prior to the Effective Date of such Pro Rata Repurchase by a fraction of which the numerator shall be (i) the product of (x) the number of shares of Common Stock outstanding immediately before such Pro Rata Repurchase and (y) the Market Price of a share of Common Stock on the trading day immediately preceding the first public announcement by the Company or any of its Affiliates of the intent to effect such Pro Rata Repurchase, minus (ii) the aggregate purchase price of the Pro Rata Repurchase, and of which the denominator shall be the product of (i) the number of shares of Common Stock outstanding immediately prior to such Pro Rata Repurchase minus the number of shares of Common Stock so repurchased and (ii) the Market Price per share of Common Stock on the trading day immediately preceding the first public announcement by the Company or any of its Affiliates of the intent to effect such Pro Rata Repurchase. In such event, the number of shares of Common Stock issuable upon the exercise of this Warrant shall be increased to the number obtained by dividing (x) the product of (1) the number of Shares issuable upon the exercise of this Warrant before such

adjustment, and (2) the Exercise Price in effect immediately prior to the Pro Rata Repurchase giving rise to this adjustment by (y) the new Exercise Price determined in accordance with the immediately preceding sentence. For the avoidance of doubt, no increase to the Exercise Price or decrease in the number of Shares issuable upon exercise of this Warrant shall be made pursuant to this Section 13(D).

(E)

Business Combinations. In case of any Business Combination or reclassification of Common Stock (other than a reclassification of Common Stock referred to in Section 13(A)), the Warrantholder’s right to receive Shares upon exercise of this Warrant shall be converted into the right to exercise this Warrant to acquire the number of shares of stock or other securities or property (including cash) which the Common Stock issuable (at the time of such Business Combination or reclassification) upon exercise of this Warrant immediately prior to such Business Combination or reclassification would have been entitled to receive upon consummation of such Business Combination or reclassification; and in any such case, if necessary, the provisions set forth herein with respect to the rights and interests thereafter of the Warrantholder shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to the Warrantholder’s right to exercise this Warrant in exchange for any shares of stock or other securities or property pursuant to this paragraph. In determining the kind and amount of stock, securities or the property receivable upon exercise of this Warrant following the consummation of such Business Combination, if the holders of Common Stock have the right to elect the kind or amount of consideration receivable upon consummation of such Business Combination, then the consideration that the Warrantholder shall be entitled to receive upon exercise shall be deemed to be the types and amounts of consideration received by the majority of all holders of the shares of common stock that affirmatively make an election (or of all such holders if none make an election).

(F)

Rounding of Calculations; Minimum Adjustments. All calculations under this Section 13 shall be made to the nearest one-tenth (1/10th) of a cent or to the nearest one hundredth (1/100th) of a share, as the case may be. Any provision of this Section 13 to the contrary notwithstanding, no adjustment in the Exercise Price or the number of Shares into which this Warrant is exercisable shall be made if the amount of such adjustment would be less than $0.01 or one-tenth (1/10th) of a share of Common Stock, but any such amount shall be carried forward and an adjustment with respect thereto shall be made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate $0.01 or 1/10th of a share of Common Stock, or more.

(G)

Timing of Issuance of Additional Common Stock Upon Certain Adjustments. In any case in which the provisions of this Section 13 shall require that an adjustment shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event (i) issuing to the Warrantholder of this Warrant exercised after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such exercise by reason of the adjustment required by such event over and above the shares of Common Stock issuable upon such exercise before giving effect to such adjustment and (ii) paying to such Warrantholder any amount of cash in lieu of a fractional share of Common Stock; provided, however, that the Company upon request shall deliver to such Warrantholder a due bill or other appropriate instrument evidencing such Warrantholder’s right to receive such additional shares, and such cash, upon the occurrence of the event requiring such adjustment.

(H)

Other Events. If any event occurs as to which the provisions of this Section 13 are not strictly applicable or, if strictly applicable, would not, in the good faith judgment of the Board of Directors of the Company, fairly and adequately protect the purchase rights of the Warrants in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make such adjustments in the application of such provisions, in accordance with such essential intent and principles, as shall be reasonably necessary, in the good faith opinion of the Board of Directors, to protect such purchase rights as aforesaid. The Exercise Price or the number of Shares into which this Warrant is exercisable shall not be adjusted in the event of a change in the par value of the Common Stock or a change in the jurisdiction of incorporation of the Company.

(I)

Statement Regarding Adjustments. Whenever the Exercise Price or the number of Shares into which this Warrant is exercisable shall be adjusted as provided in Section 13, the Company shall forthwith file at the principal office of the Company a statement showing in reasonable detail the facts requiring such adjustment and the Exercise Price that shall be in effect and the number of Shares into which this Warrant shall be exercisable after such adjustment, and the Company shall also cause a copy of such statement to be sent by mail, first class postage prepaid, to each Warrantholder at the address appearing in the Company’s records.

(J)

Notice of Adjustment Event. In the event that the Company shall propose to take any action of the type described in this Section 13 (but only if the action of the type described in this Section 13 would result in an adjustment in the Exercise Price or the number of Shares into which this Warrant is exercisable or a change in the type of securities or property to be delivered upon exercise of this Warrant), the Company shall give notice to the Warrantholder, in the manner set forth in Section 13(I), which notice shall specify the record date, if any, with respect to any such action and the approximate date on which such action is to take place. Such notice shall also set forth the facts with respect thereto as shall be reasonably necessary to indicate the effect on the Exercise Price and the number, kind or class of shares or other securities or property which shall be deliverable upon exercise of this Warrant. In the case of any action which would require the fixing of a record date, such notice shall be given at least 10 days prior to the date so fixed, and in case of all other action, such notice shall be given at least 15 days prior to the taking of such proposed action. Failure to give such notice, or any defect therein, shall not affect the legality or validity of any such action.

(K)

Proceedings Prior to Any Action Requiring Adjustment. As a condition precedent to the taking of any action which would require an adjustment pursuant to this Section 13, the Company shall take any action which may be necessary, including obtaining regulatory, New York Stock Exchange, NASDAQ Stock Market or other applicable national securities exchange or stockholder approvals or exemptions, in order that the Company may thereafter validly and legally issue as fully paid and nonassessable all shares of Common Stock that the Warrantholder is entitled to receive upon exercise of this Warrant pursuant to this Section 13.


(L)	Adjustment Rules. Any adjustments pursuant to this Section 13 shall be made successively whenever an event referred to herein shall occur. If an adjustment in Exercise Price made hereunder would reduce the Exercise Price to an amount below par value of the Common Stock, then such adjustment in Exercise Price made hereunder shall reduce the Exercise Price to the par value of the Common Stock.

14.

Exercise Limitation. Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by the Warrantholder upon exercise pursuant to the terms hereof shall not, when added to the total number of shares of Common Stock deemed beneficially owned by such Warrantholder at such time (other than by virtue of the ownership of securities or rights to acquire securities (including the Shares issuable upon exercise of the Warrant) that have limitations on the Warrantholder’s right to convert, exercise or purchase similar to the limitation set forth herein), as determined pursuant to the rules and regulations promulgated under Section 13(d) of the Exchange Act, including all shares of Common Stock deemed beneficially owned (other than by virtue of the ownership of securities or rights to acquire securities that have limitations on the right to convert, exercise or purchase similar to the limitations set forth herein) at such time by persons that would be aggregated for purposes of determining whether a group under Section 13(d) of the Exchange Act exists, exceed 9.9% of the total issued and outstanding shares of the Common Stock (the "Restricted Ownership Percentage"). Holder shall have the right (w) at any time and from time to time to reduce its Restricted Ownership Percentage immediately upon notice to the Company and (x) (subject to waiver) at any time and from time to time, to increase its Restricted Ownership Percentage immediately in the event of the announcement as pending or planned, of a Business Combination.

15.

Registration Rights. The Warrantholder shall have the rights to have the Shares issuable hereunder ("Warrant Shares") registered for resale under the Securities Act, and related indemnification rights as set forth in Section 7 of the Purchase Agreement, dated as of May 15, 2008 by and among the Company and the initial Warrantholder, as if the Warrant Shares were "Conversion shares" thereunder and as if the issuance date of this Warrant were the "Closing Date."

16.

Exchange. At any time (i) following the date on which the shares of Common Stock of the Company are no longer listed or admitted to trading on a national securities exchange (other than in connection with any Business Combination) or (ii) following the 18-month anniversary of the Issue Date and until the receipt of the Shareholder Approvals allowing the full exercise of this Warrant for Common Stock, the Warrantholder may cause the Company to exchange all or a portion of this Warrant for an economic interest (to be determined by the Original Warrantholder after consultation with the Company) of the Company classified as permanent equity under U.S. GAAP having a value equal to the Fair Market Value of the portion of the Warrant so exchanged. The Original Warrantholder shall calculate any Fair Market Value required to be calculated pursuant to this Section 14, which shall not be subject to the Appraisal Procedure.


17.	No Impairment. The Company will not, by amendment of its Charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all

times in good faith assist in the carrying out of all the provisions of this Warrant and in taking of all such action as may be necessary or appropriate in order to protect the rights of the Warrantholder.

18.

Governing Law. This Warrant will be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State. Each of the Company and the Warrantholder agrees (a) to submit to the exclusive jurisdiction and venue of the federal and state courts located in New York County, New York for any civil action, suit or proceeding arising out of or relating to this Warrant or the transactions contemplated hereby, and (b) that notice may be served upon the Company at the address in Section 20 below and upon the Warrantholder at the address for the Warrantholder set forth in the registry maintained by the Company pursuant to Section 9 hereof. To the extent permitted by applicable law, each of the Company and the Warrantholder hereby unconditionally waives trial by jury in any civil legal action or proceeding relating to the Warrant or the transactions contemplated hereby or thereby.


19.	Binding Effect. This Warrant shall be binding upon any successors or assigns of the Company.


20.	Amendments. This Warrant may be amended and the observance of any term of this Warrant may be waived only with the written consent of the Company and the Warrantholder.

21.

Prohibited Actions. The Company agrees that it will not take any action which would entitle the Warrantholder to an adjustment of the Exercise Price if the total number of shares of Common Stock issuable after such action upon exercise of this Warrant, together with all shares of Common Stock then outstanding and all shares of Common Stock then issuable upon the exercise of all outstanding options, warrants, conversion and other rights, would exceed the total number of shares of Common Stock then authorized by its Charter.

22.

Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other will be in writing and will be deemed to have been duly given (a) on the date of delivery if delivered personally, or by facsimile, upon confirmation of receipt, or (b) on the second business day following the date of dispatch if delivered by a recognized next day courier service. All notices hereunder shall be delivered as set forth in Item 9 of Schedule A hereto, or pursuant to such other instructions as may be designated in writing by the party to receive such notice.

23.

Entire Agreement. This Warrant, the forms attached hereto and Schedule A hereto (the terms of which are incorporated by reference herein), and the Amendment Agreement dated the date hereof between the Company and the Warrantholder (including all documents incorporated therein), contain the entire agreement between the parties with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements or undertakings with respect thereto.

[Remainder of page intentionally left blank]

[Form of Notice of Exercise]

Date: _____________

TO: [Company]

RE: Election to Purchase Common Stock

The undersigned, pursuant to the provisions set forth in the attached Warrant, hereby agrees to subscribe for and purchase the number of shares of the Common Stock set forth below covered by such Warrant. The undersigned, in accordance with Section 3 of the Warrant, hereby agrees to pay the aggregate Exercise Price for such shares of Common Stock in the manner set forth below. A new warrant evidencing the remaining shares of Common Stock covered by such Warrant, but not yet subscribed for and purchased, if any, should be issued in the name set forth below.

Number of Shares of Common Stock

Method of Payment of Exercise Price (note if cashless exercise pursuant to Section 3(i) of the Warrant or cash exercise pursuant to Section 3(ii) of the Warrant, with consent of the Company and the Warrantholder)

Aggregate Exercise Price:

Holder: ____________________________________

By: _______________________________________

Name: _____________________________________

Title: ______________________________________

IN WITNESS WHEREOF , the Company has caused this Warrant to be duly executed by a duly authorized officer.

COMPANY: __________________________

By: _________________________________

Name:

Title:

Attest:

By: _________________________________

Name:

Title:

[Signature Page to Warrant]

SCHEDULE A

Item 1

Name:

Corporate or other organizational form:

Jurisdiction of organization:

Item 2

(Intentionally omitted

Item 3

Issue Date:

Item 4

Amount of last dividend declared prior to the Issue Date:

Item 5

Date of Agreement between the Company and the Investor:

Item 6

Applicable section or rule1:

Item 7

Number of shares of Common Stock:

Item 8

Company’s address:

Item 9

Notice information:

¹ Either Section 312.03 of the NYSE Listed Company Manual or Rule 4350(i) of the NASDAQ Marketplace Rules, as applicable.

EXHIBIT 10.5

Execution Version

INVESTMENT AGREEMENT

dated as of December 17, 2008

between

FLAGSTAR BANCORP, INC.

and

MP Thrift Investments L.P.

TABLE OF CONTENTS

ARTICLE I

PURCHASE; CLOSING

1.1 Purchase 2

1.2 Closing 3

ARTICLE II

REPRESENTATIONS AND WARRANTIES

2.1 Disclosure 6

2.2 Representations and Warranties of the Company 7

2.3 Representations and Warranties of Purchaser 24

ARTICLE III

COVENANTS

3.1 Filings; Other Actions 27

3.2 Access, Information and Confidentiality 29

3.3 Conduct of the Business 30

3.4 Acquisition Proposals 34

ARTICLE IV

ADDITIONAL AGREEMENTS

4.1 Governance Matters 37

4.2 Legend 39

4.3 Reservation for Issuance 40

4.4 Certain Transactions 40

4.5 Indemnity 40

4.6 Exchange Listing 43

4.7 Registration Rights 43

4.8 Certificate of Designations 55

ARTICLE V

TERMINATION

5.1 Termination 55

5.2 Effects of Termination 57

5.3 Fees 57

ARTICLE VI

MISCELLANEOUS

6.1 Survival 58

6.2 Expenses 58

6.3 Amendment; Waiver 58

6.4 Counterparts and Facsimile 59

6.5 Governing Law 59

6.6 Waiver of Jury Trial 59

6.7 Notices 59

6.8 Entire Agreement, Etc 60

6.9 Interpretation; Other Definitions 60

6.10 Captions 61

6.11 Severability 61

6.12 No Third Party Beneficiaries 61

6.13 Time of Essence 62

6.14 Certain Adjustments 62

6.15 Public Announcements 62

6.16 Specific Performance 62

INDEX OF DEFINED TERMS



Term		Location of Definition
Acquisition Proposal		3.4(b)
Affiliate		6.9(a)
Agency		2.2(w)(2)(A)
Agreement		Preamble
Alternative Acquisition Agreement		3.4(c)(2)
Applicant		2.2(f)
Authorizations		2.2(a)(1)
Bank		1.2(c)(2)(D)
Bank Charter		2.2(a)(2)
beneficial owner		6.9(g)
beneficially own		6.9(g)
Benefit Plan		2.2(s)
Board Observers		4.1(a)
Board of Directors		1.2(G)
Board Representative		4.1(a)
Burdensome Condition		1.2(c)(2)(F)
business day		6.9(e)
Capitalization Date		2.2(b)
CERCLA		2.2(q)
Certificate of Incorporation		Recitals
Change of Recommendation		3.4(c)(2)
Closing		1.2(a)
Closing Date		1.2(a)
Code		2.2(j)
Common Stock		Recitals
Company		Preamble
Company Financial Statements		2.2(g)
Company Preferred Stock		2.2(b)
Company Recommendation		3.1(b)
Company Reports		2.2(h)(1)
Company Significant Agreement		2.2(m)
Company 10-K		2.1(c)(2)(A)
control/controlled by/under common control with		6.9(a)
Converted Common Shares		Recitals
Convertible Preferred Stock		Recitals
Covered Persons		4.9
DIF		2.2(a)(2)
Disclosure Schedule		2.1(a)
ERISA		2.2(s)(1)
Exchange Act		2.2(h)(1)
Expense Reimbursement		6.2
FDIC		2.2(a)(2)
GAAP		2.1(b)
Governance Committee		4.1(a)
Governmental Entity		1.2(c)(1)(A)
herein/hereof/hereunder		6.9(d)
HOLA		2.2(a)(1)



Term		Location of Definition
Holder		4.7(l)(1)
Holders’ Counsel		4.7(l)(2)
including/includes/included/include		6.9(c)
Indemnified Party		4.5(c)
Indemnifying Party		4.5(c)
Indemnitee		4.7(g)(1)
Information		3.2(b)
Insurer		2.2(w)(2)(C)
Interim Financials		2.2(g)
Investment Company Act		2.2(ee)
Investor Warrants		Recitals
Investor Amendments		Recitals
knowledge of the Company		6.9(h)
Liens		2.2(d)(2)
Loan Investor		2.2(w)(2)(B)
Losses		4.5(a)
Management Equity		3.1(b)
Management Purchased Shares		Recitals
Management Purchasers		Recitals
material		2.1(b)
Material Adverse Effect		2.1(b)
MatlinPatterson		Recitals
May Purchase Agreement		Recitals
Michigan Secretary		Recitals
NYSE		1.2(c)(1)(D)
NYSE Approval		1.2(c)(1)(C)
Operating Plan		3.3(c)
Option Shares		Recitals
or		6.9(b)
OTS		2.2(f)
Outside Date		5.1(b)
Pending Underwritten Offering		4.7(m)
person		6.9(f)
Piggyback Registration		4.7(a)(4)
Pre-Closing Period		3.3(a)
Preferred Stock Certificate of Designations		Recitals
Previously Disclosed		2.1(c)
Proprietary Rights		2.2(z)
Purchase Price		1.2(b)(2)
Purchased Shares		Recitals
Purchaser		Preamble
Qualifying Ownership Interest		3.2(a)
Register, registered and shelf registration		4.7(l)(3)
Registrable Securities		4.7(l)(4)
Registration Demand		4.7(a)(2)
Registration Expenses		4.7(l)(5)
Regulatory Agreement		2.2(u)
Representatives		3.4
Required Approvals		2.2(f)



Term		Location of Definition
Rule 144		4.7(l)(6)
Rule 144A		4.7(l)(6)
Rule 159A		4.7(l)(6)
Rule 405		4.7(l)(6)
Rule 415		4.7(l)(6)
Scheduled Black‑out Period		4.7(l)(7)
SEC		2.1(c)(2)(A)
Securities		Recitals
Securities Act		Recitals
Selling Expenses		4.7(l)(8)
Shelf Registration Statement		4.7(a)(2)
SLHC Parties		2.2(f)
Special Registration		4.7(j)
Stockholder Proposals		3.1(b)
Subsidiary		2.2(a)(1)
Superior Proposal		3.4(b)
TARP Approval		Recitals
TARP Documents		Recitals
TARP Preferred Stock		Recitals
TARP Securities		Recitals
TARP Transaction		Recitals
TARP Warrant		Recitals
TARP Warrant Shares		Recitals
Tax/Taxes		2.2(j)
Tax Return		2.2(j)
Termination Fee		5.3(c)
Threshold Amount		4.5(e)
Treasury		Recitals
Voting Debt		2.2(b)

LIST OF SCHEDULES AND EXHIBITS



Schedule A	List of Management Members for Recital D
Schedule B	List of Subsidiaries
Schedule C	[Reserved]
Schedule D	List of Management Purchasers
Schedule E	Terms of Management Equity
Schedule F	List of Applicants

Exhibit A	Preferred Stock Certificate of Designations

INVESTMENT AGREEMENT , dated as of December 17, 2008 (this " Agreement" ), between Flagstar Bancorp, Inc., a corporation organized under the laws of the State of Michigan (the " Company" ) and MP Thrift Investments L.P. a Delaware limited partnership (" Purchaser" ).

RECITALS:

Purchaser . Purchaser is formed as an "alternative investment vehicle" for the purpose of making the investment described herein with capital intended to be contributed (subject to the terms and conditions of this Agreement) by investors in MatlinPatterson Global Opportunities Partners III L.P. and MatlinPatterson Global Opportunities Partners Cayman III L.P. The parties acknowledge and agree that the investment is being made by Purchaser in accordance with the "silo" structure set forth in Schedule 2.2(f) of the Purchaser Disclosure Schedule and neither MatlinPatterson Global Advisers LLC or its Affiliates (" MatlinPatterson" ), MatlinPatterson Global Opportunities Partners III L.P., MatlinPatterson Global Opportunities Partners Cayman III L.P., nor any other fund or entity sponsored or advised by MatlinPatterson shall have any obligations hereunder;

The Investment . The Company intends to issue and sell to Purchaser, and Purchaser intends to purchase from the Company, as an investment in the Company 250,000 shares of a series of mandatory convertible participating voting preferred stock, $0.01 par value per share, of the Company, having the terms set forth in Exhibit A (the " Convertible Preferred Stock" ), in each case on the terms and conditions described herein. Each share of Convertible Preferred Stock will be sold to Purchaser at a purchase price of $1,000 per share and shall be convertible into common stock, par value $0.01 per share, of the Company (the " Common Stock" ) at the liquidation preference divided by $0.80;

TARP Transaction . The Company submitted an application for participation in the TARP Capital Purchase Program. If such application is approved by the United States Department of the Treasury (" Treasury" ), the Company intends to issue and sell to Treasury in transactions exempt from registration under the Securities Act of 1933, as amended (the " Securities Act" ), (i) shares of fixed rate cumulative perpetual preferred stock (the " TARP Preferred Stock" ) and (ii) a warrant (the " TARP Warrant" ) to purchase a specified number of shares of Common Stock (the " TARP Warrant Shares" and together with the TARP Preferred Stock and the TARP Warrant, collectively, the " TARP Securities" ; the issuance and sale of the TARP Securities are the " TARP Transaction" ; the approval of the TARP Transaction granted by Treasury is the " TARP Approval" and the definitive documents entered into in connection therewith are the " TARP Documents" );


D.	Management Agreement . In connection with the TARP Transaction, members of management of the Company listed on Schedule A hereto have agreed, if and to the extent required, to amend their respective employment agreements and executive compensation arrangements to comply with the requirements of participation in the TARP Capital Purchase Program;


E.	Certificate of Incorporation Amendment . The Company intends to amend its Amended and Restated Articles of Incorporation (the " Certificate of Incorporation" ) and its bylaws, in form and substance reasonably satisfactory to Purchaser, to give effect to the transactions, including the Stockholder Proposals and the governance matters described in Article IV hereof, contemplated by this Agreement;

Investor Amendments . Certain of the several investors who purchased securities pursuant to the Purchase Agreement, dated May 14, 2008, between the Company and the purchasers named therein (the " May Purchase Agreement" ) have, in connection with the TARP Transaction, agreed to accept in full satisfaction of any and all obligations under Section 8 of the May Purchase Agreement, warrants (the " Investor Warrants" ) to purchase Common Stock (the " Investor Amendments" );

Management Purchase . In connection with the investment by Purchaser, the Company shall issue and sell to the persons listed in Schedule D hereto (the " Management Purchasers" ) shares of Common Stock (the " Management Purchased Shares" ) for an aggregate purchase price of not less than $4 million and not more than $5 million at a price per Management Purchased Share of $0.80 per share, provided , however , that if the Company does not have sufficient shares of Common Stock available for issuance prior to the Certificate of Incorporation amendment, then the Management Purchasers shall instead purchase an equivalent number shares of Convertible Preferred Stock on an as converted basis as would have been purchased if sufficient shares of Common stock were available for issuance; and


H.	The Securities . The term " Purchased Shares" refers to the Convertible Preferred Stock to be purchased pursuant to the terms of Section 1.2(b)(1) of this Agreement. The term " Securities" refers collectively to (1) the Convertible Preferred Stock and the shares of Common Stock into which the Convertible Preferred Stock is convertible in

accordance with the terms thereof and of this Agreement (the " Converted Common Shares" ), (2) the Management Equity (including the shares of Common Stock to be issued upon exercise of options, the " Option Shares" ), (3) the Investor Warrants (including shares of Common Stock to be issued upon exercise thereof), (4) the TARP Securities and the shares of Common Stock issuable upon the exercise of the TARP Warrant and (5) the Management Purchased Shares. When issued and purchased in accordance with the terms of this Agreement, the Convertible Preferred Stock will be evidenced by a share certificate incorporating the terms set forth in a certificate of designations for the Convertible Preferred Stock substantially in the form attached as Exhibit A (the " Preferred Stock Certificate of Designations" ) made a part of the Certificate of Incorporation by the filing of the Preferred Stock Certificate of Designations with the Michigan Department of Labor and Economic Growth (the " Michigan Secretary" ).

NOW, THEREFORE, in consideration of the premises, and of the representations, warranties, covenants and agreements set forth herein, the parties agree as follows:

ARTICLE I

PURCHASE; CLOSING

1.1 Purchase . On the terms and subject to the conditions set forth herein, Purchaser will purchase from the Company, and the Company will sell to Purchaser a number of Purchased Shares determined in accordance with Section 1.2(b)(1).

1.2 Closing .

(a)

Subject to the satisfaction or waiver of the conditions to the Closing set forth in this Agreement, the closing of the purchase of the Purchased Shares referred to in Section 1.1 by Purchaser pursuant hereto (the " Closing" ) shall occur at 9:30 a.m., New York time, on December 31, 2008, provided that if such conditions have not been so satisfied or waived on such date, the Closing shall occur on the third business day after the satisfaction or waiver (by the party entitled to grant such waiver) of the conditions to the Closing set forth in this Agreement (other than those conditions that by their nature are to be satisfied at the Closing, but subject to fulfillment or waiver of those conditions), at the offices of Sullivan & Cromwell LLP located at 125 Broad Street, New York, New York 10004 or such other date or location as agreed by the parties. The date of the Closing is referred to as the " Closing Date ."


(b)	Subject to the satisfaction or waiver on the Closing Date of the applicable conditions to the Closing in Section 1.2(c), at the Closing:


(1)	the Company will deliver to Purchaser (A) the Expense Reimbursement in accordance with Section 6.2 hereof and (B) 250,000 shares of Convertible Preferred Stock; and


(2)	Purchaser will deliver $250,000,000 (the " Purchase Price" ) to the Company.


(c)	Closing Conditions . (1) The obligation of Purchaser, on the one hand, and the Company, on the other hand, to effect the Closing is subject to the fulfillment or written waiver by Purchaser and the Company prior to the Closing of the following conditions:

(A)

no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the Closing or shall prohibit or restrict Purchaser or its Affiliates from owning or voting, or, subject to the receipt of approval of the Stockholder Proposals, converting any Purchased Shares in accordance with the terms thereof and no lawsuit shall have been commenced by any court, administrative agency or commission or other governmental authority or instrumentality, whether federal, state, local or foreign, or any applicable industry self-regulatory organization (each, a " Governmental Entity" ) seeking to effect any of the foregoing;


(B)	the Company shall have received proceeds of the sale of the TARP Securities of not less than $250,000,000 prior to the Closing Date;


(C)	the Company shall have received the approval of the NYSE to issue the Convertible Preferred Stock and to convert the Convertible Preferred Stock into Common Stock without the approval of the Company’s stockholders in reliance on Section 312.05 of the

NYSE Listed Company Manual (the " NYSE Approval" ), and such NYSE Approval shall be in full force and effect; and


(D)	the Converted Common Shares shall have been authorized for listing on the New York Stock Exchange ("NYSE") or such other market on which the Common Stock is then listed or quoted, subject to stockholder approval, if necessary, and official notice of issuance.


(2)	The obligation of Purchaser to purchase the Purchased Shares at Closing is also subject to the fulfillment or written waiver by Purchaser prior to the Closing of each of the following conditions:


(A)	The Company shall have performed in all material respects all obligations required to be performed by it at or prior to Closing;

(B)

All representations and warranties of the Company contained in this Agreement shall be true and correct in all respects as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent any such representations and warranties expressly relate to a specified date, in which case such representation and warranty need only be true and correct as of such specified earlier date);


(C)	Purchaser shall have received a certificate signed on behalf of the Company by a senior executive officer certifying to the effect that the conditions set forth in Sections 1.2(c)(2)(A) and (B) have been satisfied;

(D)

Since the date of this Agreement, (i) no fact, event, change, condition, development or circumstance shall have occurred that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect (as defined herein) with respect to the Company, (ii) there shall have been no decrease greater than or equal to 7.5% in core deposits ( i.e ., money market, demand, checking, savings and transactional accounts for retail customers) of the Company as of September 30, 2008 and (iii) there shall have been no material legislative change or change in regulatory interpretation affecting the tax consequences of the Purchase to Flagstar Bank, FSB (the " Bank" ) under existing Notice 2008-83, or any other material change to any rules under Section 382 that affect the application of Section 382 to unrealized built-in losses of Flagstar Bank, FSB (the " Bank" ) and any Affiliate (if relevant) that exist on or after the Closing Date;


(E)	As of the Closing Date, the Bank’s authorized line of credit under the Advances, Pledge and Security Agreement, dated as of August 6, 1996, among the Bank, Flagstar Capital Markets Corporation and the Federal Home Loan Bank of Indianapolis shall not have decreased by more than 5% from the date of this Agreement, such that such line of credit is less than $6.65 billion;

(F)

Any Required Approvals (as defined herein) required to consummate the transactions contemplated by this Agreement shall have been made or been obtained and shall be in full force and effect as of the Closing Date; provided , however , that (1) no such Required Approval shall impose any restraint or condition that would reasonably be expected to impair in any material respect the benefits to Purchaser of the transactions contemplated by this Agreement and (2) no such Required Approval shall contemplate the registration of MatlinPatterson or any fund sponsored or advised by it, or any of its Affiliates (other than Purchaser or those companies identified as possible Applicants in Schedule F) as a savings and loan company or subsidiary thereof, or impose any activities or other restrictions, require a modification of governance, fee arrangements and carried interests with respect to, or impose any capital or other requirements on MatlinPatterson or any person (other than Purchaser or those companies identified as possible Applicants in Schedule F), including with respect to any person any agreement or requirement to maintain or contribute to capital of the Company or the Bank) (each, a " Burdensome Condition" ) and, provided, further that, notwithstanding any other provision of this Agreement, the imposition of a Burdensome Condition in connection with any Required Approval shall constitute a denial of such Required Approval and such Required Approval shall be deemed not received for all purposes in this Agreement, including Section 5.1(d);


(G)	The board of directors of the Company (the " Board of Directors" ) shall have adopted a board resolution nominating the Board Representatives and appointing the Board Representatives effective as of Closing, as contemplated in Section 4.1;


(H)	The Company shall have received proceeds of the sale of the Management Purchased Shares of not less than $4 million on or prior to the Closing Date; and


(I)	At the Closing, taking into account payment for the Purchased Shares, Management Purchased Shares and the TARP Securities, the Bank’s Tier I leverage ratio shall be no lower than a minimum of 7% and the Bank’s total risk-based capital ratio shall be a minimum of 12%.


(3)	The obligation of the Company to effect the Closing is subject to the fulfillment or written waiver by the Company prior to the Closing of the following additional conditions:


(A)	Purchaser shall have performed in all material respects all obligations required to be performed by it at or prior to the Closing;

(B)

All representations and warranties of Purchaser contained in this Agreement shall be true and correct in all respects as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent any such representations and warranties expressly relate to a specified date, in which case such representation and warranty need only be true and correct as of such specified earlier date); and


(C)	the Company shall have received a certificate signed on behalf of Purchaser by a senior executive officer certifying to the effect that the conditions set forth in Sections 1.2(c)(3)(A) and (B) have been satisfied.

ARTICLE II

REPRESENTATIONS AND WARRANTIES

2.1 Disclosure .

(a)

On or prior to the date hereof, the Company delivered to Purchaser and Purchaser delivered to the Company a schedule (a " Disclosure Schedule" ) setting forth, among other things, items the disclosure of which is necessary or appropriate either in response to an express disclosure requirement contained in a provision hereof or as an exception to one or more representations or warranties contained in Section 2.2 with respect to the Company, or in Section 2.3 with respect to Purchaser, or to one or more covenants contained in Article III.

(b)

As used in this Agreement, any reference to any fact, change, circumstance or effect being "material" with respect to the Company means such fact, change, circumstance or effect is material in relation to the business, assets, properties, prospects or results of operations or condition (financial or otherwise) of the Company and the Subsidiaries taken as a whole. As used in this Agreement, the term " Material Adverse Effect" means any circumstance, event, change, development or effect (including changes in applicable laws, rules and regulations or interpretations thereof by Governmental Entities, changes in U.S. generally accepted accounting principals ("GAAP") or changes in general economic, monetary or financial conditions) that, individually or in the aggregate, (1) is material and adverse to the business, assets, properties, prospects, results of operations or condition (financial or otherwise) of the Company and Subsidiaries taken as a whole, or (2) would materially impair the ability of the Company to perform its obligations under this Agreement or to consummate the Closing.

(c)

"Previously Disclosed" with regard to (1) a party means information set forth on its Disclosure Schedule, provided , however , that disclosure in any section of such Disclosure Schedule shall apply only to the indicated section of this Agreement except to the extent that it is reasonably apparent from the face of such disclosure that such disclosure is relevant to another section of this Agreement, and (2) the Company means

information publicly disclosed by the Company in (A) its Annual Report on Form 10‑K for the fiscal year ended December 31, 2007, as filed by it with the Securities and Exchange Commission (" SEC" ) on March 13, 2008 (the " Company 10-K" ), (B) its Definitive Proxy Statement on Schedule 14A, as filed by it with the SEC on April 29, 2008, (C) its Quarterly Reports filed on Form 10-Q for the periods ended March 31, 2008, June 30, 2008 and September 30, 2008 or (D) any Current Report on Form 8-K filed or furnished by it with the SEC since January 1, 2008 and publicly available prior to the date of this Agreement (excluding any risk factor disclosures contained in such documents under the heading "Risk Factors" and any disclosure of risks included in any "forward-looking statements" disclaimer or other statements that are similarly non-specific and are predictive or forward-looking in nature).

2.2 Representations and Warranties of the Company . The Company represents and warrants to Purchaser, as of the date of this Agreement and as of the Closing Date (except to the extent made only as of a specified date in which case as of such date), that:

(a)

Organization and Authority . (1) The Company is, and at the Closing Date will be, a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan. The Company is a savings and loan holding company under the Home Owners’ Loan Act of 1933, as amended (" HOLA" ). The Company has, and at the Closing Date will have, the power and authority (corporate, governmental, regulatory and otherwise) and has or will have all necessary approvals, orders, licenses, certificates, permits and other governmental authorizations (collectively, the " Authorizations" ) to own or lease all of the assets owned or leased by it and to conduct its business in the manner Previously Disclosed, and has the corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted. The Company is, and at the Closing Date will be, duly licensed or qualified to do business and in good standing as a foreign corporation in all jurisdictions (i) in which the nature of the activities conducted by the Company requires such qualification and (ii) in which the Company owns or leases real property other than such failures that would not have any material impact on the Company. The Amended and Restated Articles of Incorporation of the Company comply in all material respects with applicable law. A complete and correct copy of the Amended and Restated Articles of Incorporation and bylaws of the Company, as amended and as currently in effect, has been delivered or made available to Purchaser. The Company’s subsidiaries (each a " Subsidiary" and collectively the " Subsidiaries" ) are listed on Schedule B to this Agreement.

(2)

The Bank is a Subsidiary of the Company and is a federally chartered stock savings bank duly organized, validly existing and in good standing under HOLA. The deposit accounts of the Bank are insured up to applicable limits by the Deposit Insurance Fund (" DIF" ), which is administered by the Federal Deposit Insurance Corporation (the " FDIC" ), and no proceedings for the termination or revocation of such insurance are pending or, to the knowledge of the Company, threatened. The Bank has the power and authority (corporate, governmental, regulatory and otherwise) and has or will have all necessary Authorizations to own or lease all of the assets owned or leased by it and to conduct its business in the manner Previously Disclosed. The Bank is duly licensed or qualified to do business and in good standing in all jurisdictions (i) in which the nature of the activities conducted by the Bank requires such qualification and (ii) in which the Bank owns or leases real property other than such failures that would not have any material impact on the Company. The Federal Stock Savings Bank Charter (" Bank Charter" ) of the Bank complies in all material respects with applicable law. A complete and correct copy of the Bank Charter, as amended and as currently in effect, has been delivered or made available to Purchaser.

(3)

Each of the Subsidiaries is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Each such Subsidiary has the power and authority (corporate, governmental, regulatory and otherwise) and has or will have all necessary Authorizations to own or lease all of the assets owned or leased by it and to conduct its business as Previously Disclosed. Each such Subsidiary is duly licensed or qualified to do business and in good standing as a foreign corporation in all jurisdictions (i) in which the nature of the activities conducted by such Subsidiary requires such qualification and (ii) in which such Subsidiary owns or leases real property other than such failures that would not have any material impact on the Company. The articles or certificate of incorporation or certificate of trust of each Subsidiary comply in all material respects with applicable law. A complete and correct copy of the articles or certificate of incorporation or certificate of trust of each Subsidiary, as amended and as currently in effect, has been delivered or made available to Purchaser.

(b)

Capitalization . The authorized capital stock of the Company consists of 150,000,000 shares of Common Stock and 25,000,000 shares of preferred stock, $0.01 par value per share, of the Company (the " Company Preferred Stock" ). As of the close of business on December 15, 2008 (the " Capitalization Date" ), there were 83,626,726 shares of Common Stock outstanding and zero shares of Company Preferred Stock outstanding. Since the Capitalization Date and through the date of this Agreement, except in connection with (A) this Agreement and the transactions contemplated hereby, (B) the TARP Securities, (C) the Management Equity, (D) the Investor Warrants, (E) the Management Purchased Shares and (F) as set forth in Company Disclosure Schedule 2.2(b), the Company has not (i) issued or authorized the issuance of any shares of Common Stock or Company Preferred Stock, or any securities convertible into or exchangeable or exercisable for shares of Common Stock or Company Preferred Stock, (ii) reserved for issuance any shares of Common Stock or Company Preferred Stock or (iii) repurchased or redeemed, or authorized the repurchase or redemption of, any shares of Common Stock or Company Preferred Stock. As of the close of business on the Capitalization Date, other than in respect of the Convertible Preferred Stock, the TARP Securities, the Management Equity, the Investor Warrants, the Management Purchased Shares, the Flagstar Bancorp, Inc. 1997 Employees and Directors Stock Option Plan, as amended, the Flagstar Bancorp, Inc. 2000 Stock Incentive Plan, as amended, and the 2006 Equity Incentive Plan in respect of which an aggregate of 521,537 shares of Common Stock have been reserved for issuance, no shares of Common Stock or Company Preferred Stock were reserved for issuance. All of the issued and outstanding shares of Common Stock and Company Preferred Stock have been duly authorized and validly issued and are fully paid and nonassessable, and have been issued in compliance with all federal and state securities laws, and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities. No bonds, debentures, notes or other indebtedness having the right to vote on any matters on which the stockholders of the Company may vote (" Voting Debt" ) are issued and outstanding. As of the date of this Agreement, except (i) pursuant to any cashless exercise provisions of any Company stock options or pursuant to the surrender of shares to the Company or the withholding of shares by the Company to cover tax withholding obligations under the Benefit Plans, and (ii) as set forth elsewhere in this Section 2.2(b), the Company does not have and is not bound by any outstanding subscriptions, options, calls, commitments or agreements of any character calling for the purchase or issuance of, or securities or rights convertible into or exchangeable for, any shares of Common Stock or Company Preferred Stock or any other equity securities of the Company or Voting Debt or any securities representing the right to purchase or otherwise receive any shares of capital stock of the Company (including any rights plan or agreement).

(c)

Subsidiaries . With respect to each of the Subsidiaries, (i) all the issued and outstanding shares of such Subsidiary’s capital stock have been duly authorized and validly issued, are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and (ii) there are no outstanding options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of such Subsidiary’s capital stock, any other equity security or any Voting Debt, or any such options, rights, convertible securities or obligations.

(d)

Authorization . (1) The Company has the full legal right, corporate power and authority to enter into this Agreement and the Preferred Stock Certificate of Designations and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby have been duly authorized by the Board of Directors. This Agreement has been duly and validly executed and delivered by the Company and, assuming due authorization, execution and delivery by Purchaser, is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms (except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and similar laws of general applicability relating to or affecting creditors’ rights or by general equity principles). No other corporate proceedings are necessary for the execution and delivery by the Company of this Agreement, the performance by it of its obligations hereunder or the consummation by it of the transactions contemplated hereby, subject, in the case of the authorization of the Converted Common Shares, to receipt of the approval by the Company’s stockholders of the Stockholder Proposals. Assuming the receipt of the NYSE Approval, no vote of stockholders will be needed for the issuance of the Convertible Preferred Stock or the ability of Purchaser to exercise the voting rights contained therein, except for the approval described in Section 3.1(b)(A) to issue the Converted Common Shares. The only vote of the stockholders of the Company required in connection with (i) the conversion of the Convertible Preferred Stock into Common Stock and the amendments to the Company’s equity compensation plan to effect the Management Equity issuance for purposes of Section 312.03 of the

NYSE Listed Company Manual is a majority of the votes cast on such proposal, provided that the total vote cast on the proposal represents over 50% in interest of all securities entitled to vote on the proposal (after taking into account any securities not entitled to vote pursuant to the rules of the NYSE), (ii) the amendment of the Certificate of Incorporation to increase the number of authorized shares of Common Stock to at least such number as shall be sufficient to permit the full issuance of the Securities and the amendment of the Certificate of Incorporation and bylaws to implement the governance matters contemplated in Section 4.1 hereof, is the affirmative vote of the holders of not less than a majority of the outstanding Common Stock. To the Company’s knowledge, all shares of Common Stock outstanding on the record date for a meeting at which a vote is taken with respect to the Stockholder Proposals shall be eligible to vote on such proposals.

(2)

Neither the execution and delivery by the Company of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance by the Company with any of the provisions hereof (including, without limitation, the conversion provisions of the Convertible Preferred Stock), will (A) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or result in the loss of any benefit or creation of any right on the part of any third party under, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of any liens, charges, adverse rights or claims, pledges, covenants, title defects, security interests and other encumbrances of any kind (" Liens" ) upon any of the material properties or assets of the Company or any Subsidiary under any of the terms, conditions or provisions of (i) subject in the case of the authorization and issuance of the Converted Common Shares to receipt of the approval by the Company’s stockholders of the Stockholder Proposals, its Certificate of Incorporation or bylaws (or similar governing documents) or the certificate of incorporation, charter, bylaws or other governing instrument of any Subsidiary or (ii) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company or any Subsidiary is a party or by which it may be bound, or to which the Company or any Subsidiary or any of the properties or assets of the Company or any Subsidiary may be subject, or (B) subject to compliance with the statutes and regulations referred to in Section 2.2(f), violate any law, statute, ordinance, rule, regulation, permit, concession, grant, franchise or any judgment, ruling, order, writ, injunction or decree applicable to the Company or any Subsidiary or any of their respective properties or assets.

(e)

Accountants . Virchow, Krause & Company, LLP, who has expressed its opinion with respect to the consolidated financial statements contained in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2007, are registered independent public accountants, within the meaning of the Code of Professional Conduct of the American Institute of Certified Public Accountants, as required by the Securities Act and the rules and regulations promulgated thereunder and by the rules of the Public Accounting Oversight Board.

(f)

Consents . Schedule 2.2(f) of the Company Disclosure Schedule lists all governmental and any other material consents, approvals, authorizations, applications, registrations and qualifications that are required to be obtained in connection with or for the consummation of the transactions contemplated by this Agreement (the " Required Approvals" ), including the approval of the persons listed on Schedule 2.2(f) of the Purchaser Disclosure Schedule (the " SLHC Parties" ) as savings and loan holding companies and an application to the Office of Thrift Supervision (" OTS" ) by the persons listed in Schedule F hereto (such listed persons, including the SLHC Parties, the " Applicants" ) and the written determination by each of the FDIC and the OTS that neither MatlinPatterson nor any fund sponsored or advised by it or their Affiliates (other than the Applicants) will control the Company or the Bank or be an "institution affiliated party" (as defined in 12 USC Section 1813(u)) with respect thereto in connection with the structure outlined in Schedule 2.2(f) of the Purchaser Disclosure Schedule. Other than the securities or blue sky laws of the various states and the Required Approvals, no material notice to, registration, declaration or filing with, exemption or review by, or authorization, order, consent or approval of, any Governmental Entity, or expiration or termination of any statutory waiting period, is necessary for the consummation by the Company of the transactions contemplated by this Agreement; no person other than each of the Applicants is required to obtain any Required Approval or other consent or approval from any Governmental Entity in connection with the transactions contemplated by this Agreement and no person other than each of the SLHC Parties is required to be registered as a savings and loan holding company in order to consummate the transactions contemplated by this Agreement.

(g)

Financial Statements . Each of the consolidated balance sheets of the Company and the Subsidiaries and the related consolidated statements of income, stockholders’ equity and cash flows, together with the notes thereto (collectively, the " Company Financial Statements" ), included in any Company Report filed with the SEC prior to the date of this Agreement, and the unaudited consolidated balance sheets of the Company and the Subsidiaries as of November 30, 2008 and the related consolidated statements of income, stockholders’ equity and cash flows for the period ending November 30, 2008, together with the notes thereto and in the form Previously Disclosed to Purchaser (the " Interim Financials" ) (1) have been prepared from, and are in accordance with, the books and records of the Company and the Subsidiaries in all material respects, (2) other than the Interim Financials, complied as to form, as of their respective date of filing with the SEC, in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, (3) have been prepared in accordance with GAAP applied on a consistent basis during the periods involved and (4) present fairly in all material respects the consolidated financial position of the Company and the Subsidiaries as of the dates set forth therein and the consolidated results of operations, changes in stockholders’ equity and cash flows of the Company and the Subsidiaries for the periods stated therein subject, in the case of any unaudited financial statements, to period end adjustments.

(h)

Reports . (1) Since December 31, 2005, the Company and each Subsidiary has timely filed all material reports, registrations, documents, filings, statements and submissions, together with any amendments thereto, that it was required to file with any Governmental Entity (the foregoing, collectively, the " Company Reports" ) and has paid all material fees and assessments due and payable in connection therewith. As of their respective dates of filing, the Company Reports complied in all material respects with all statutes and applicable rules and regulations of the applicable Governmental Entities. To the knowledge of the Company, as of the date of this Agreement, there are no outstanding comments from the SEC or any other Governmental Entity with respect to any Company Report. In the case of each such Company Report filed with or furnished to the SEC, such Company Report did not, as of its date or if amended prior to the date of this Agreement, as of the date of such amendment, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made in it, in light of the circumstances under which they were made, not misleading and complied as to form in all material respects with the applicable requirements of the Securities Act and the Securities Exchange Act of 1934, as amended (the " Exchange Act" ). With respect to all other Company Reports, the Company Reports were complete and accurate in all material respects as of their respective dates, or the dates of their respective amendments. No executive officer of the Company or any Subsidiary has failed in any respect to make the certifications required of him or her under Section 302 or 906 of the Sarbanes-Oxley Act of 2002.

(2)

The records, systems, controls, data and information of the Company and the Subsidiaries are recorded, stored, maintained and operated under means (including any electronic, mechanical or photographic process, whether computerized or not) that are under the exclusive ownership and direct control of the Company or the Subsidiaries or their accountants (including all means of access thereto and therefrom). The Company (i) keeps books, records and accounts that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company and the Bank, and (ii) maintains a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization, (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (C) access to assets is permitted only in accordance with management's general or specific authorization and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company (A) has implemented and maintains disclosure controls and procedures (as defined in Rule 13a‑15(e) of the Exchange Act) to ensure that material information relating to the Company, including the consolidated Subsidiaries, is made known to the chief executive officer and the chief financial officer of the Company by others within those entities, and (B) has disclosed, based on its most recent evaluation prior to the date hereof, to the Company’s outside auditors and the audit committee of the Board of Directors (x) any significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting (as defined in Rule 13a‑15(f) of the Exchange Act) that are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information and (y) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting. Since December 31, 2007 and until the date of this Agreement, (A) neither the Company nor any Subsidiary nor, to the knowledge of the Company, any director,

officer, employee, auditor, accountant or representative of the Company or any Subsidiary has received or otherwise had or obtained knowledge of any material complaint, allegation, assertion or claim, whether written or oral, regarding the accounting or auditing practices, procedures, methodologies or methods of the Company or any Subsidiary or their respective internal accounting controls, including any material complaint, allegation, assertion or claim that the Company or any Subsidiary has engaged in questionable accounting or auditing practices, and (B) no attorney representing the Company or any Subsidiary, whether or not employed by the Company or any Subsidiary, has reported evidence of a material violation of securities laws, breach of fiduciary duty or similar violation by the Company or any of its officers, directors, employees or agents to the Board of Directors or any committee thereof or to any director or officer of the Company. The Company is otherwise in compliance in all material respects with all applicable provisions of the Sarbanes-Oxley Act of 2002, as amended and the rules and regulations promulgated thereunder.

(i)

Properties and Leases . The Company and the Subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them (other than any assets the Company has repossessed), in each case free from Liens that would affect the value thereof or interfere with the use made or to be made thereof by them in any material respect. The Company and its Subsidiaries own or lease all properties as are necessary to their operations as now conducted. The Company and the Subsidiaries hold all leased real or personal property under valid and enforceable leases with no exceptions that would interfere with the use made or to be made thereof by them in any material respect.

(j)

Taxes . Except as set forth in Schedule 2.2(j) of the Company Disclosure Schedule, (1) each of the Company and the Subsidiaries has duly and timely filed (including, pursuant to applicable extensions granted without penalty) all material Tax Returns required to be filed by it and all such Tax Returns are correct and complete in all material respects. Each of the Company and the Subsidiaries have paid in full all Taxes due or made adequate provision in the financial statements of the Company (in accordance with GAAP) for any such Taxes, whether or not shown as due on such Tax Returns; (2) no material deficiencies for any Taxes have been proposed, asserted or assessed in writing against or with respect to any Taxes due by, or Tax Returns of, the Company or any of the Subsidiaries which deficiencies have not since been resolved; and (3) there are no Liens for Taxes upon the assets of either the Company or the Subsidiaries except for statutory Liens for current Taxes not yet due. None of the Company or any of the Subsidiaries has been a "distributing corporation" or a "controlled corporation" in any distribution occurring during the last two years in which the parties to such distribution treated the distribution as one to which Section 355 of the Internal Revenue Code of 1986, as amended (the " Code" ) is applicable. None of the Company or any Subsidiary has engaged in any transaction that is the same as or substantially similar to a "reportable transaction" for federal income tax purposes within the meaning of Treasury Regulations section 1.6011‑4. Neither the Company nor any of the Subsidiaries has engaged in a transaction of which it made disclosure to any taxing authority to avoid penalties under Section 6662(d) or any comparable provision of state, foreign or local law. Neither the Company nor any of the Subsidiaries has participated in any "tax amnesty" or similar program offered by any taxing authority to avoid the assessment of penalties or other additions to Tax. The Company and each of the Subsidiaries have complied in all material respects with all requirements to report information for Tax purposes to any individual or Taxing Authority, and have collected and maintained all requisite certifications and documentation in valid and complete form with respect to any such reporting obligation, including, without limitation, valid Internal Revenue Service Forms W-8 and W-9. No claim has been made by a Tax Authority in a jurisdiction where the Company or any of the Subsidiaries, as the case may be, does not file Tax Returns that the Company or any of such Subsidiaries, as the case may be, is or may be subject to Tax by that jurisdiction. For purposes of this Agreement, " Taxes" shall mean all taxes, charges, levies, penalties or other assessments imposed by any United States federal, state, local or foreign taxing authority, including any income, excise, property, sales, transfer, franchise, payroll, withholding, social security, abandoned or unclaimed property or other taxes, together with any interest or penalties attributable thereto, and any payments made or owing to any other person measured by such taxes, charges, levies, penalties or other assessment, whether pursuant to a tax indemnity agreement, tax sharing payment or otherwise (other than pursuant to commercial agreements or Benefit Plans). For purposes of this Agreement, " Tax Return" shall mean any return, report, information return or other document (including any related or supporting information) required to be filed with any taxing authority with respect to Taxes, including, without limitation, all information returns relating to Taxes of third parties, any claims for refunds of Taxes and any amendments or supplements to any of the foregoing.

(k)

Absence of Certain Changes . Since December 31, 2007 until the date hereof and except as Previously Disclosed, (1) the Company and the Subsidiaries have conducted their respective businesses in all material respects in the ordinary and usual course of business and consistent with prior practice, (2) neither the Company nor the Bank has issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, except borrowings in the ordinary course of business, (3) except for publicly disclosed ordinary dividends on the Common Stock and outstanding Company Preferred Stock, the Company has not made or declared any distribution in cash or in kind to its stockholders or issued or repurchased any shares of its capital stock or other equity interests, (4) the Company has not had and no fact, event, change, condition, development or circumstance has occurred that would reasonably be expected to have a Material Adverse Effect with respect to the Company, and (5) no material default (or event which, with notice or lapse of time, or both, would constitute a material default) exists on the part of either the Company or the Bank or, to their knowledge, on the part of any other party, in the due performance and observance of any term, covenant or condition of any agreement to which the Company or the Bank is a party and which is, individually or in the aggregate, material to the condition (financial or otherwise) of the Company and the Bank, taken as a whole. Such agreements are in full force and effect, and no other party to any such agreement has instituted or, to the knowledge of the Company or the Bank, threatened any action or proceeding wherein the Company or the Bank is or would be alleged to be in default thereunder, under circumstances where such action or proceeding, if determined adversely to the Company or the Bank, would have or be reasonably likely to have a Material Adverse Effect.

(l)

No Undisclosed Liabilities . Neither the Company nor any of the Subsidiaries has any material liabilities or obligations of any nature and is not an obligor under any guarantee, keepwell or other similar agreement (absolute, accrued, contingent or otherwise) except for (i) liabilities or obligations reflected in or reserved against in the Company’s consolidated balance sheet as of December 31, 2007 and September 30, 2008 and current liabilities that have arisen since the respective dates thereof in the ordinary and usual course of business and consistent with past practice and (ii) contractual liabilities under (other than liabilities arising from any breach or violation of) agreements made in the ordinary and usual course of business and consistent with past practice and that have either been Previously Disclosed or would not have a material impact on the Company.


(m)	Commitments and Contracts . (i) The Company has Previously Disclosed or provided (by hard copy, electronic data room or otherwise) to Purchaser or its representatives true, correct and complete copies of, each of the following to which the Company or any Subsidiary is a party or subject (whether written or oral, express or implied) (each, a " Company Significant Agreement" ):


(1)	any contract or agreement which is a "material contract" within the meaning of Item 601(b)(10) of Regulation S-K to be performed in whole or in part after the date of this Agreement;


(2)	any contract or agreement which limits the freedom of the Company or any of the Subsidiaries to compete in any material line of business;


(3)	any material contract or agreement with a labor union or guild (including any collective bargaining agreement);


(4)	any contract or agreement which grants any person a right of first refusal, right of first offer or similar right with respect to any material properties, assets or businesses of the Company or the Subsidiaries;


(5)	any indenture, deed of trust, loan agreement or other financing agreement or instrument; and


(6)	any contract relating to the acquisition or disposition of any material business or material assets (whether by merger, sale of stock or assets or otherwise), which acquisition or disposition is not yet complete or where such contract contains continuing material obligations, including continuing material indemnity obligations, of the Company or any of the Subsidiaries.


(ii)	Each of the Company Significant Agreements has been duly and validly authorized, executed and delivered by the Company or any Subsidiary and is binding on the Company and the Subsidiaries, as

applicable, and in full force and effect; (iii) the Company and each of the Subsidiaries, as applicable, are in all material respects in compliance with and have in all material respects performed all obligations required to be performed by them to date under each Company Significant Agreement; and (iv) as of the date hereof, to the Company’s knowledge, neither the Company nor any of the Subsidiaries has received notice of any material violation or default (or any condition which with the passage of time or the giving of notice would cause such a violation of or a default) by any party under any Company Significant Agreement.

(n)

Offering of Purchased Shares . Neither the Company nor any person acting on its behalf has taken any action (including any offering of any securities of the Company) under circumstances which would require the integration of such offering with the offering of any of the Purchased Shares to be issued pursuant to this Agreement under the Securities Act, and the rules and regulations of the SEC promulgated thereunder, which might subject the offering, issuance or sale of any of the Purchased Shares to Purchaser pursuant to this Agreement to the registration requirements of the Securities Act.

(o)

Status of Purchased Shares . The Purchased Shares (upon filing of the Preferred Stock Certificate of Designations with the Michigan Secretary) to be issued pursuant to this Agreement have been duly authorized by all necessary corporate action, subject to the approval of the Stockholder Proposals. When issued, delivered and sold against receipt of the consideration therefore as provided in this Agreement, the Purchased Shares will be validly issued, fully paid and nonassessable, will not be issued in violation of or subject to preemptive rights of any other stockholder of the Company and, provided that the TARP Transaction is consummated, will not result in the violation or triggering of any price-based antidilution adjustments under any agreement to which the Company is a party. The voting rights of the Holders of the Purchased Shares will be enforceable in accordance with the terms of this Agreement and with the terms of the Certificate of Designations. No stockholder of the Company has any right (which will not have been waived or will not have expired by reason of lapse of time following notification of the Company’s intention to file the Shelf Registration Statement (as defined herein)) to require the Company to register the sale of any capital stock owned by such stockholder under the Shelf Registration Statement.

(p)

Litigation and Other Proceedings . There is no pending or, to the knowledge of the Company, threatened material claim, action, suit, investigation or proceeding, against the Company or any Subsidiary or to which any of their assets are subject, nor is the Company or any Subsidiary subject to any order, judgment or decree. There is no material unresolved violation, criticism or exception by any Governmental Entity with respect to any report or relating to any examinations or inspections of the Company or any Subsidiaries.

(q)

Compliance with Laws. The Company and each Subsidiary have all material permits, licenses, franchises, authorizations, orders and approvals of, and have made all filings, applications and registrations with, Governmental Entities that are required in order to permit them to own or lease their properties and assets and to carry on their business as presently conducted and that are material to the business of the Company or such Subsidiary. The Company and each Subsidiary has complied in all material respects and is not in default or violation in any respect of, and none of them is, to the knowledge of the Company, under investigation with respect to or, to the knowledge of the Company, has been threatened to be charged with or given notice of any material violation of, any applicable material domestic (federal, state or local) or foreign law, statute, ordinance, license, rule, regulation, policy or guideline, order, demand, writ, injunction, decree or judgment of any Governmental Entity. Except for statutory or regulatory restrictions of general application, no Governmental Entity has placed any material restriction on the business or properties of the Company or any Subsidiary. The Company and its Subsidiaries have, and at the Closing Date will have complied in all material respects with all laws, regulations, ordinances and orders relating to public health, safety or the environment (including without limitation all laws, regulations, ordinances and orders relating to releases, discharges, emissions or disposals to air, water, land or groundwater, to the withdrawal or use of groundwater, to the use, handling or disposal of polychlorinated biphenyls, asbestos or urea formaldehyde, to the treatment, storage, disposal or management of hazardous substances, pollutants or contaminants, or to exposure to toxic, hazardous or other controlled, prohibited or regulated substances), the violation of which would or might have a material impact on the Company on the consummation of the transactions contemplated by this Agreement. In addition, and irrespective of such compliance, neither the Company nor any of its Subsidiaries is subject to any liability for environmental remediation or clean-up, including any liability or class of liability of the lessee under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (" CERCLA" ), or the Resource Conservation and Recovery Act of 1976, as amended,

which liability would or might have a material impact on the consummation of the transactions contemplated by this Agreement.

(r)

Labor . Employees of the Company and the Subsidiaries are not represented by any labor union nor are any collective bargaining agreements otherwise in effect with respect to such employees. No labor organization or group of employees of the Company or any Subsidiary has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or threatened to be brought or filed with the National Labor Relations Board or any other labor relations tribunal or authority. There are no organizing activities, strikes, work stoppages, slowdowns, lockouts, material arbitrations or material grievances, or other material labor disputes pending or to the Company’s knowledge threatened against or involving the Company or any Subsidiary. The Company and each Subsidiary believe that their relations with their employees are good. No executive officer of the Company (as defined in Rule 501(f) promulgated under the Securities Act) has notified the Company that such officer intends to leave the Company or otherwise terminate such officer’s employment with the Company. No executive officer of the Company is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non-competition agreement, or any other agreement or any restrictive covenant, and the continued employment of each such executive officer does not subject the Company or any Subsidiary to any liability with respect to any of the foregoing matters.


(s)	Company Benefit Plans .

(1)

(A) With respect to each Benefit Plan, the Company and the Subsidiaries have complied, and are now in compliance, in all material respects, with all provisions of Employee Retirement Income Security Act of 1974, as amended (" ERISA" ), the Code and all laws and regulations applicable to such Benefit Plan; and (B) each Benefit Plan has been administered in all material respects in accordance with its terms. " Benefit Plan" means any employee welfare benefit plan within the meaning of Section 3(1) of ERISA, any employee pension benefit plan within the meaning of Section 3(2) of ERISA, and any bonus, incentive, deferred compensation, vacation, stock purchase, stock option, severance, employment, change of control or fringe benefit plan, program, agreement or policy sponsored or maintained by the Company and the Subsidiaries.

(2)

Except for liabilities fully reserved for or identified in the Financial Statements, no claim has been made, or to the knowledge of the Company threatened, against the Company or any of the Subsidiaries related to the employment and compensation of employees or any Benefit Plan, including, without limitation, any claim related to the purchase of employer securities or to expenses paid under any defined contribution pension plan.

(3)

No Benefit Plans are subject to Title IV or described in Section 3(37) of ERISA, and neither the Company nor its Subsidiaries has at any time within the past six (6) years sponsored or contributed to, or has or had within the past six (6) years any liability or obligation in respect of, any plan subject to Title IV or described in Section 3(37) of ERISA. The Company has not incurred any current or projected liability in respect of post-retirement health, medical or life insurance benefits for Company Employees, except as required to avoid an excise tax under Section 4980B of the Code or comparable State benefit continuation laws.

(4)

(A) Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby will (i) result in any payment (including severance, unemployment compensation, "excess parachute payment" (within the meaning of Section 280G of the Code), forgiveness of indebtedness or otherwise) becoming due to any current or former employee, officer or director of the Company or any Subsidiary from the Company or any Subsidiary under any Benefit Plan or otherwise, (ii) increase any benefits otherwise payable under any Benefit Plan, (iii) result in any acceleration of the time of payment or vesting of any such benefits, (iv) require the funding or increase in the funding of any such benefits or (v) result in any limitation on the right of the Company or any Subsidiary to amend, merge, terminate or receive a reversion of assets from any Benefit Plan or related trust and (B) neither the Company nor any Subsidiary has taken, or permitted to be taken, any action that required, and no circumstances exist that will require the funding, or increase in the funding, of any benefits, or will result, in any limitation on the right of the Company

or any Subsidiary to amend, merge, terminate any Benefit Plan or receive a reversion of assets from any Benefit Plan or related trust.


(5)	The Company and the Subsidiaries will be in compliance as of the Closing Date, with Sections 111 and 302 of the Emergency Economic Stabilization Act of 2008, including all guidance issued thereunder by a Governmental Entity.

(t)

Risk Management Instruments . All material derivative instruments, including, swaps, caps, floors and option agreements, whether entered into for the Company’s own account, or for the account of one or more of the Subsidiaries, were entered into (1) only in the ordinary and usual course of business and consistent with past practice, (2) in accordance with prudent practices and in all material respects with all applicable laws, rules, regulations and regulatory policies and (3) with counterparties believed to be financially responsible at the time; and each of them constitutes the valid and legally binding obligation of the Company or one of the Subsidiaries, enforceable in accordance with its terms. Neither the Company or the Subsidiaries, nor, to the knowledge of the Company, any other party thereto, is in breach of any of its material obligations under any such agreement or arrangement.

(u)

Agreements with Regulatory Agencies . Except as set forth in Schedule 2.2(u) of the Company Disclosure Schedule, neither the Company nor any Subsidiary is subject to any cease-and-desist or other similar order or enforcement action issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any capital directive by, or has adopted any board resolutions at the request of, any Governmental Entity that currently restricts in any material respect the conduct of its business or that in any material manner relates to its capital adequacy, its liquidity and funding policies and practices, its ability to pay dividends, its credit, risk management or compliance policies, its internal controls, its management or its operations or business (each item in this sentence, a " Regulatory Agreement" ), nor has the Company or any Subsidiary been advised since December 31, 2006 and until the date hereof by any Governmental Entity that it is considering issuing, initiating, ordering, or requesting any such Regulatory Agreement. Neither the Company nor any Subsidiary is a party or subject to any Regulatory Agreement.

(v)

Environmental Liability . There is no legal, administrative, arbitral or other proceeding, claim, action or notice of any nature seeking to impose, or that could result in the imposition of, on the Company or any Subsidiary, any liability or obligation of the Company or any Subsidiary with respect to any environmental health or safety matter or any private or governmental, environmental health or safety investigation or remediation activity of any nature arising under common law or under any local, state or federal environmental, health or safety statute, regulation or ordinance, including CERCLA, pending or, to the Company’s knowledge, threatened against the Company or any Subsidiary or any property in which the Company or any Subsidiary has taken a security interest the result of which has had or would reasonably be expected to have a material impact on the Company; to the Company’s knowledge, there is no reasonable basis for, or circumstances that could reasonably be expected to give rise to, any such proceeding, claim, action, investigation or remediation; and to the Company’s knowledge, neither the Company nor any Subsidiary is subject to any agreement, order, judgment, decree, letter or memorandum by or with any Governmental Entity or third party that could impose any such environmental obligation or liability.


(w)	Mortgage Banking Business .

(1)

Other than as set forth in Schedule 2.2(w)(i) of the Company Disclosure Schedule, the Company and each Subsidiary has in all material respects complied with, and all documentation in connection with the origination, processing, underwriting and credit approval of any mortgage loan originated, purchased or serviced by the Company or any Subsidiary satisfied in all material respects, (A) all applicable federal, state and local laws, rules and regulations with respect to the origination, insuring, purchase, sale, pooling, servicing, subservicing, or filing of claims in connection with mortgage loans, including all laws relating to real estate settlement procedures, consumer credit protection, truth in lending laws, usury limitations, fair housing, transfers of servicing, collection practices, equal credit opportunity and adjustable rate mortgages, (B) the responsibilities and obligations relating to mortgage loans set forth in any agreement between the Company or any Subsidiary and any Agency, Loan Investor or Insurer, (C) the applicable rules, regulations, guidelines, handbooks and other requirements of any Agency, Loan Investor or Insurer and (D) the

terms and provisions of any mortgage or other collateral documents and other loan documents with respect to each mortgage loan; and

(2)

Other than as set forth in Schedule 2.2(w)(2) of the Company Disclosure Schedule, no Agency, Loan Investor or Insurer has (A) claimed in writing that the Company or any Subsidiary has violated or has not complied in all material respects with the applicable underwriting standards with respect to mortgage loans sold by the Company or any Subsidiary to a Loan Investor or Agency, or with respect to any sale of mortgage servicing rights to a Loan Investor, (B) imposed in writing restrictions on the activities (including commitment authority) of the Company or any Subsidiary or (C) indicated in writing to the Company or any Subsidiary that it has terminated or intends to terminate its relationship with the Company or any Subsidiary for poor performance, poor loan quality or concern with respect to the Company’s or any Subsidiary’s compliance with laws.

For purposes of this Section 2.2(w):

(A)

"Agency" shall mean the Federal Housing Administration, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Government National Mortgage Association, or any other federal or state agency with authority to (i) authority to determine any investment, origination, lending or servicing requirements with regard to mortgage loans originated, purchased or serviced by the Company or any Subsidiary or (ii) originate, purchase, or service mortgage loans, or otherwise promote mortgage lending, including, without limitation, state and local housing finance authorities;


(B)	"Loan Investor" shall mean any person (including an Agency) having a beneficial interest in any mortgage loan originated, purchased or serviced by the Company or any Subsidiary or a security backed by or representing an interest in any such mortgage loan; and

(C)

(x)

Insurance . The Company maintains insurance underwritten by insurers of recognized financial responsibility, of the types and in the amounts that the Company reasonably believes is adequate for its business, including, but not limited to, insurance covering all real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, with such deductibles as are customary for companies in the same or similar business, all of which insurance is in full force and effect.

(y)

Reinsurance. There are no provisions in any first lien residential mortgage insurance policy or any other insurance policy, certificate of insurance or other contingent obligation, or any derivative or hedging instrument, or any commitment to issue any of the foregoing, under which Flagstar Bank, FSB or any of its affiliates is a beneficiary or owed obligations, that require as a condition to payment or other performance of the obligor hereunder that (i) Flagstar Reinsurance Company not be insolvent or subject to any rehabilitation, liquidation, conservatorship or similar proceeding, (ii) Flagstar Reinsurance Company be in compliance with, or not in default under, any or all of its obligations under any reinsurance or other agreement, or (iii) any reinsurance or other agreement to which Flagstar Reinsurance Company is a party to be in full force and effect.

(z)

Intellectual Property . The Company and its Subsidiaries own or possess all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets, applications and other unpatented or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names (collectively, " Proprietary Rights" ) used in or necessary for the conduct of the business of the Company as now conducted and as proposed to be conducted as Previously Disclosed, except where the failure to own such Proprietary Rights would not have any material impact on the Company. The Company and its Subsidiaries have the right to use all Proprietary Rights used in or necessary for the conduct of their

respective businesses without infringing the rights of any person or violating the terms of any licensing or other agreement to which the Company or any Subsidiary is a party and, to the Company’s knowledge, no person is infringing upon any of the Proprietary Rights, except where the infringement of or lack of a right to use such Proprietary Rights would not have any material impact on the Company. Except as Previously Disclosed, no charges, claims or litigation have been asserted or, to the Company’s knowledge, threatened against the Company or any Subsidiary contesting the right of the Company or any Subsidiary to use, or the validity of, any of the Proprietary Rights or challenging or questioning the validity or effectiveness of any license or agreement pertaining thereto or asserting the misuse thereof, and, to the Company's knowledge, no valid basis exists for the assertion of any such charge, claim or litigation. All licenses and other agreements to which the Company or any Subsidiary is a party relating to Proprietary Rights are in full force and effect and constitute valid, binding and enforceable obligations of the Company or such Subsidiary, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles, as the case may be, and there have not been and there currently are not any defaults (or any event which, with notice or lapse of time, or both, would constitute a default) by the Company or any Subsidiary under any license or other agreement affecting Proprietary Rights used in or necessary for the conduct of the business of the Company or any Subsidiary, except for defaults, if any, which would not have any material impact on the Company. The validity, continuation and effectiveness of all licenses and other agreements relating to the Proprietary Rights and the current terms thereof will not be affected by the transactions contemplated by this Agreement.

(aa)

Anti-takeover Provisions Not Applicable . The Board of Directors has taken all necessary action to ensure that the transactions contemplated by this Agreement and any of the transactions contemplated hereby will be deemed to be exceptions to the provisions of the Michigan Business Corporation Act, and that any other similar "moratorium," "control share," "fair price," "takeover" or "interested stockholder" law does not and will not apply to this Agreement or to any of the transactions contemplated hereby.

(ab)

Knowledge as to Conditions . As of the date of this Agreement, the Company knows of no reason why any regulatory approvals and, to the extent necessary, any other approvals, authorizations, filings, registrations, and notices required or otherwise a condition to the consummation of the transactions contemplated by this Agreement will not be obtained or that any Required Approval will not be granted without imposition of a Burdensome Condition.

(ac)

Brokers and Finders . Except as set forth in Schedule 2.2(cc) of the Company Disclosure Schedule, neither the Company nor any Subsidiary nor any of their respective officers, directors, employees or agents has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finder’s fees, and no broker or finder has acted directly or indirectly for the Company or any Subsidiary, in connection with this Agreement or the transactions contemplated hereby.


(ad)	Price of Common Stock . The Company has not taken, and will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or that might reasonably be expected to constitute, the stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Securities.

(ae)

Investment Company . The Company is not and, after giving effect to the offering and sale of the Purchased Shares and the application of the proceeds thereof, will not be an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for an investment company, as such term is defined in the Investment Company Act of 1940 (the " Investment Company Act" ), as amended, and the rules and regulations of the SEC promulgated thereunder.


(af)	Transfer Taxes . On the Closing Date, all stock transfer or other taxes (other than income taxes) that are required to be paid in connection with the sale and transfer of the Purchased Shares to be sold to the Purchaser hereunder will have been, fully paid or provided for by the Company and all laws imposing such taxes will have been fully complied with.


(ag)	Related Party Transactions . No transaction has occurred between or among the Company, on the one hand, and its Affiliates, officers or directors on the other hand, that is required to have been described under applicable securities laws in its Exchange Act filings and is not so described in such filings.

(ah)

Listing . Except as Previously Disclosed, (i) the Company is in compliance with the requirements of the NYSE for continued listing of the Common Stock thereon and (ii) the Company has taken no action designed to, or, to its knowledge, likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or the listing of the Common Stock on the NYSE, nor has the Company received any notification that the SEC or the NYSE is contemplating terminating such registration or listing. The transactions contemplated by this Agreement will not contravene the rules and regulations of the NYSE. The Company will comply with all requirements of the NYSE with respect to the issuance of the Converted Common Shares and shall cause the Common Stock and Converted Common Shares to be listed on the NYSE.

(ai)

Foreign Corrupt Practices . Neither the Company, nor any Subsidiary, nor, to the knowledge of the Company, any director, officer, agent, employee or other person acting on behalf of the Company or any Subsidiary has, in the course of its actions for, or on behalf of, the Company (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.


(aj)	U.S. Real Property Holding Corporation Status . The Company is not, nor has ever been, a U.S. real property holding corporation within the meaning of Section 897 of the Internal Revenue Code of 1986, as amended.


(ak)	Shell Company Status . The Company is not, nor has ever been, an issuer of the type described in Rule 144(i)(l) under the Securities Act.

(al)

Solvency . The Company and each of its Subsidiaries does and will after giving effect to the to the transactions contemplated hereby to occur at the Closing and the issuance and sale of the Securities (a) own assets the fair saleable value of which are (i) greater than the total amount of its liabilities (including known contingent liabilities) and (ii) greater than the amount that will be required to pay the probable liabilities of its existing debts as they become absolute and matured considering the financing alternatives reasonably available to it and (b) not have capital that will be unreasonably small in relation to its business as presently conducted or any contemplated. The Company has no knowledge of any facts or circumstances which lead it to believe that it or any of its Subsidiaries will be required to file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction, and has no present intent to so file.

2.3 Representations and Warranties of Purchaser . Purchaser hereby represents and warrants to the Company, as of the date of this Agreement and as of the Closing Date (except to the extent made only as of a specified date, in which case as of such date), that:

(a)

Organization and Authority . Purchaser is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, is duly qualified to do business and is in good standing in all jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified, and Purchaser has the corporate or other power and authority and governmental authorizations to own its properties and assets and to carry on its business as it is now being conducted.

(b)

Authorization . (1) Purchaser has the corporate or other power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement by Purchaser and the consummation of the transactions contemplated hereby have been duly authorized by Purchaser’s board of directors, general partner or managing members, as the case may be, and no further approval or authorization by any of its partners or other equity owners, as the case may be, is required. This Agreement has been duly and validly executed and delivered by Purchaser and assuming due authorization, execution and delivery by the Company, is a valid and binding obligation of Purchaser enforceable against Purchaser in accordance with its terms (except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and similar laws of general applicability relating to or affecting creditors’ rights or by general equity principles).


(2)	Neither the execution, delivery and performance by Purchaser of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance by Purchaser with any of the provisions hereof, will (A) violate, conflict with, or result in a breach of any provision of, or

constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of any Lien upon any of the properties or assets of Purchaser under any of the terms, conditions or provisions of (i) its certificate of limited partnership or partnership agreement or similar governing documents or (ii) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Purchaser is a party or by which it may be bound, or to which Purchaser or any of the properties or assets of Purchaser may be subject, or (B) subject to compliance with the statutes and regulations referred to in the next paragraph, violate any law, statute, ordinance, rule or regulation, permit, concession, grant, franchise or any judgment, ruling, order, writ, injunction or decree applicable to Purchaser or any of its properties or assets except in the case of clauses (A)(ii) and (B) for such violations, conflicts and breaches as would not reasonably be expected to materially and adversely affect Purchaser’s ability to perform its respective obligations under this Agreement or consummate the transactions contemplated hereby on a timely basis.

(3)

Assuming the Company’s representation contained in Section 2.2(f) is true and correct and other than the securities or blue sky laws of the various states or as set forth in Schedule 2.3(c)(3) of the Purchaser Disclosure Schedule, no material notice to, registration, declaration or filing with, exemption or review by, or authorization, order, consent or approval of, any Governmental Entity, or expiration or termination of any statutory waiting period, is necessary for the consummation by the Purchaser of the transactions contemplated by this Agreement.

(c)

Purchase for Investment . Purchaser acknowledges that the Securities have not been registered under the Securities Act or under any state securities laws. Purchaser (1) is acquiring the Securities pursuant to an exemption from registration under the Securities Act solely for investment with no present intention to distribute any of the Securities to any person, (2) will not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws, (3) has such knowledge and experience in financial and business matters and in investments of this type that it is capable of evaluating the merits and risks of its investment in the Securities and of making an informed investment decision, and (4) is an "accredited investor" (as that term is defined by Rule 501 of the Securities Act).

(d)

Financial Capability . At Closing, Purchaser will have available funds necessary to consummate the Closing on the terms and conditions contemplated by this Agreement; Purchaser has available to it commitments for the full Purchase Price to be funded by persons advised by MatlinPatterson. As of the date hereof, neither MatlinPatterson Global Opportunities Partners III L.P. nor MatlinPatterson Global Opportunities Partners Cayman III L.P. is the subject of any pending withdrawals or redemption requests that it does not have the financial ability to fulfill, nor do either MatlinPatterson Global Opportunities Partners III L.P. or MatlinPatterson Global Opportunities Partners Cayman III L.P. have any knowledge of any pending withdrawal or redemption requests that it will not have the financial ability to fulfill.


(e)	Purchaser’s Operations . Purchaser has not conducted any business other than that (x) incidental to its formation for the sole purpose of carrying out the transactions contemplated by this Agreement and (y) in relation to this Agreement the transactions contemplated hereby.

(f)

Brokers and Finders . Neither Purchaser nor its Affiliates, any of their respective officers, directors, employees or agents has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finder’s fees, and no broker or finder has acted directly or indirectly for Purchaser, in connection with this Agreement or the transactions contemplated hereby, in each case, whose fees the Company would be required to pay (other than pursuant to the reimbursement of expenses provisions of Section 6.2).

(g)

Knowledge as to Conditions . As of the date of this Agreement, the Purchaser has not been advised by any Governmental Entity that any regulatory approvals and, to the extent necessary, any other approvals, authorizations, filings, registrations, and notices required or otherwise a condition to the consummation of the transactions contemplated by this Agreement will not be obtained or that any Required Approval will not be granted without the imposition of a Burdensome Condition.


(h)	Ownership . As of the date of this Agreement, Purchaser is not the owner of record or the beneficial owner of shares of Common Stock or securities convertible into or exchangeable for Common Stock.


(i)	Investment Company Status. The Purchaser is not an "investment company" nor controlled by an "investment company" as such term is defined in the Investment Company Act and the rules and regulations of the SEC promulgated thereunder.

ARTICLE III

COVENANTS

3.1 Filings; Other Actions .

(a)

Purchaser, on the one hand, and the Company, on the other hand, will cooperate and consult with the other and use reasonable best efforts to prepare and file all necessary documentation, to effect all necessary applications, notices, petitions, filings and other documents, and to obtain all necessary permits, consents, orders, approvals and authorizations of, or any exemption by, all third parties and Governmental Entities, including, without limitation, the Required Approvals, and the expiration or termination of any applicable waiting period, necessary or advisable to consummate the transactions contemplated by this Agreement, and to perform the covenants contemplated by this Agreement. Each party shall execute and deliver both before and after the Closing such further certificates, agreements and other documents and take such other actions as the other party may reasonably request to consummate or implement such transactions or to evidence such events or matters. In particular, Purchaser will use its reasonable best efforts to promptly obtain or submit, and the Company will cooperate as may reasonably be requested by Purchaser to help Purchaser promptly obtain or submit, as the case may be, as promptly as practicable, (i) the approvals and authorizations of, filings, applications and registrations with, and notifications to, or expiration or termination of any applicable waiting period, under the HOLA (it being understood and agreed that such application shall reflect and seek approval for the "silo" structure previously disclosed to the Company (and set forth in the Purchaser’s Disclosure Schedule) and that no person other than Purchaser and the other Applicants listed on Schedule F (nor any investors in any fund sponsored or advised by MatlinPatterson, including investors in MatlinPatterson Global Opportunities Partners III L.P. or MatlinPatterson Global Opportunities Partners Cayman III L.P.) shall be required to file or become parties to any such filing or registration, or in any way become subject to HOLA or restrictions or requirements thereunder), and, as applicable, any such approvals and authorizations, filings, applications and registrations shall include information and documentation to implement the securities trading platform as described at Schedule 3.1(a) of the Purchaser Disclosure Schedule and otherwise shall be consistent with the silo structure referred to above and (ii) a written determination, in form and substance reasonably satisfactory to the relevant Applicant and notified to Purchaser, of each of the FDIC and the OTS that neither MatlinPatterson nor any fund sponsored or advised by it or its Affiliates (other than the Applicants) will control the Company or the Bank or be an "institution affiliated party" (as defined in 12 USC Section 1813(u)) with respect thereto. Purchaser and the Company will have the right to review in advance, and to the extent practicable, each will consult with the other in each case, subject to applicable laws relating to the exchange of information, all the information relating to such other party, and any of their respective Affiliates, which appears in any filing made with, or written materials submitted to, any third party or any Governmental Entity in connection with the transactions to which it will be party contemplated by this Agreement. In exercising the foregoing right, each of the parties hereto agrees to act reasonably and as promptly as practicable. Each party hereto agrees to keep the other party apprised of the status of matters referred to in this Section 3.1(a). Purchaser shall promptly furnish the Company, and the Company shall promptly furnish Purchaser, to the extent permitted by applicable law, with copies of written communications received by it or its Subsidiaries from, or delivered by any of the foregoing to, any Governmental Entity in respect of the transactions contemplated by this Agreement.

(b)

Unless this Agreement has been terminated pursuant to Section 5.1, the Company shall call a special meeting of its stockholders, as promptly as practicable following the Closing but in any event no later than the next annual stockholder meeting, to vote on proposals (collectively, the " Stockholder Proposals" ) to (A) amend the Certificate of Incorporation to increase the number of authorized shares of Common Stock to at least such number as shall be sufficient to permit issuance of all of the Securities and (B) amend the Certificate of Incorporation and bylaws to opt out of Article 7B of the Michigan Business Corporation Act and to implement the governance matters contemplated in Section 4.1 hereof and (C) to amend the Company’s

equity compensation plans as necessary to implement an equity incentive program (the " Management Equity" ) as described at Schedule E hereto. The Board of Directors shall unanimously recommend to the Company’s stockholders that such stockholders vote in favor of the Stockholder Proposals (subject to any legally required abstentions) (such recommendation, the " Company Recommendation" ) and the Purchaser shall vote (to the extent it is entitled to vote) in favor of the Stockholder Proposals, provided that, Purchaser’s obligation to vote in favor of the Stockholder Proposal described in clause (C) above shall be conditioned upon the prior approval by the stockholders of the Stockholder Proposals described in clauses (A) and (B) above. In connection with such meeting, the Company shall promptly prepare (and Purchaser will reasonably cooperate with the Company to prepare) and file with the SEC a preliminary proxy statement, shall use its reasonable best efforts to respond to any comments of the SEC or its staff and to cause a definitive proxy statement related to such stockholders’ meeting to be mailed to the Company’s stockholders not more than five business days after clearance thereof by the SEC, and shall use its reasonable best efforts to solicit proxies for such stockholder approval. The Company shall notify Purchaser promptly of the receipt of any comments from the SEC or its staff with respect to the proxy statement and of any request by the SEC or its staff for amendments or supplements to such proxy statement or for additional information and will supply Purchaser with copies of all correspondence between the Company or any of its representatives, on the one hand, and the SEC or its staff, on the other hand, with respect to such proxy statement. If at any time prior to such stockholders’ meeting there shall occur any event that is required to be set forth in an amendment or supplement to the proxy statement, the Company shall as promptly as practicable prepare and mail to its stockholders such an amendment or supplement. Each of Purchaser and the Company agrees promptly to correct any information provided by it or on its behalf for use in the proxy statement if and to the extent that such information shall have become false or misleading in any material respect, and the Company shall, as promptly as practicable, prepare and mail to its stockholders an amendment or supplement to correct such information to the extent required by applicable laws and regulations. The Company shall consult with Purchaser prior to filing any proxy statement, or any amendment or supplement thereto, and provide Purchaser with a reasonable opportunity to comment thereon. In the event that the approval of any of the Stockholder Proposals is not obtained at such special stockholders meeting, the Company shall include a proposal to approve (and the Board of Directors shall unanimously recommend approval of and the Purchaser shall vote in favor of) each such proposal at a meeting of its stockholders no less than once in each subsequent six-month period beginning on March 1, 2009 until all such approvals are obtained or made.

(c)

Purchaser, on the one hand, agrees to furnish the Company, and the Company, on the other hand, agrees, upon request, to furnish to Purchaser, all information concerning itself, its Affiliates, directors, officers, partners and stockholders and such other matters as may be reasonably necessary or advisable in connection with the proxy statement in connection with any such stockholders meeting and any other statement, filing, notice or application made by or on behalf of such other party or any of its Subsidiaries to any Governmental Entity in connection with the Closing and the other transactions contemplated by this Agreement.

(d)

Unless this Agreement has been terminated pursuant to Section 5.1, Purchaser hereby agrees that at any meeting of the stockholders of the Company held to vote on any Stockholder Proposals contemplated herein and not previously approved by the Company’s stockholders, however called, Purchaser shall vote, or cause to be voted, all of the Purchased Shares owned by Purchaser and its Affiliates in favor of such Stockholder Proposals; provided, further that, Purchaser’s obligation to vote in favor of the Stockholder Proposal described in clause (C) of Section 3.1(b) above shall be conditioned upon the prior approval by the stockholders of the Stockholder Proposals described in clauses (A) and (B) of Section 3.1(b) above.

3.2 Access, Information and Confidentiality .

(a)

From the date hereof until the date when the Securities purchased pursuant to this Agreement and held by Purchaser represent less than 5% of the outstanding Common Stock (counting as shares owned by Purchaser all Converted Common Shares and assuming that to the extent Purchaser shall purchase any additional shares of Common Stock, any later sales of Common Stock by Purchaser shall be deemed to be shares other than Securities to the extent of such additional purchases) (the " Qualifying Ownership Interest" ), the Company will permit Purchaser to visit and inspect, at Purchaser’s expense, the properties of the Company and the Subsidiaries, to examine the corporate books and to discuss the affairs, finances and accounts of the Company and the Subsidiaries with the principal officers of the Company, all upon reasonable notice and at such reasonable times and as often as Purchaser may reasonably request. Any investigation pursuant to this Section 3.2 shall be conducted during normal business hours and in such manner as not to interfere unreasonably with the conduct of the business of the Company, and nothing herein shall require the Company

or any Subsidiary to disclose any information to the extent (i) prohibited by applicable law or regulation, (ii) that the Company reasonably believes such information to be competitively sensitive proprietary information (except to the extent Purchaser provides assurances reasonably acceptable to the Company that such information shall not be used by Purchaser or its Affiliates to compete with the Company and Subsidiaries), or (iii) that such disclosure would reasonably be expected to cause a violation of any agreement to which the Company or any Subsidiary is a party or would cause a risk of a loss of privilege to the Company or any Subsidiary ( provided that the Company shall use commercially reasonable efforts to make appropriate substitute disclosure arrangements under circumstances where the restrictions in this clause (iii) apply). In the event, and to the extent, that, as a result of any change in applicable law or regulation or a judicial or administrative interpretation of applicable law or regulation, it is reasonably determined that the rights afforded pursuant to this Section 3.2 are not sufficient for purposes of the Department of Labor’s "plan assets" regulations, to the extent such plan assets regulation applies to the investment in the Securities, Purchaser and the Company shall cooperate in good faith to agree upon mutually satisfactory management access and information rights which satisfy such regulations.

(b)

Each party to this Agreement will hold, and will cause its respective Affiliates and their directors, officers, employees, agents, consultants and advisors to hold, in strict confidence, unless disclosure to a regulatory authority is necessary or appropriate in connection with any necessary regulatory approval or unless disclosure is required by judicial or administrative process or, in the written opinion of its counsel, by other requirement of law or the applicable requirements of any regulatory agency or relevant stock exchange, all non-public records, books, contracts, instruments, computer data and other data and information (collectively, " Information" ) concerning the other party hereto furnished to it by such other party, its representatives or any Board Observer pursuant to this Agreement (except to the extent that such information can be shown to have been (1) previously known by such party on a non-confidential basis, (2) in the public domain through no fault of such party or (3) later lawfully acquired from other sources by the party to which it was furnished), and neither party hereto shall release or disclose such Information to any other person, except its auditors, attorneys, financial advisors, other consultants and advisors and as permitted by Section 4.1(f).

3.3 Conduct of the Business .


(a)	The Company agrees that, prior to the earlier of the Closing Date and the termination of this Agreement pursuant to Section 5.1 (the " Pre-Closing Period" ), except as Previously Disclosed in the comparable subsection of the Disclosure Schedule with regard to the Company, without the prior written consent of Purchaser, it will not, and will cause each of the Subsidiaries not to:

(1)

Ordinary Course . Fail to use commercially reasonable efforts to carry on its business in the ordinary and usual course of business and consistent with past practice or fail to use reasonable best efforts to maintain and preserve its and such Subsidiary’s business (including its organization, assets, properties, goodwill and insurance coverage) and to preserve its business relationships with customers, strategic partners, suppliers, distributors and others having business dealings with it.


(2)	Operations . Enter into any new line of business or materially change its lending, investment, underwriting, risk and asset liability management, and other banking and operating policies, except as required by applicable law or policies imposed by any Governmental Entity.


(3)	Capital Expenditures . Make any capital expenditures in excess of $500,000 individually or $2,500,000 in the aggregate, other than as required pursuant to commitments already entered into.


(4)	Material Contracts . Terminate, enter into, amend, modify (including by way of interpretation) or renew any material contract, other than in the ordinary course of business and consistent with past practice, or terminate, amend or modify (including by way of interpretation) any Investor Waiver.

(5)

Capital Stock . Issue, sell or otherwise permit to become outstanding, or dispose of or encumber or pledge, or authorize or propose the creation of, any additional shares of its stock or any additional options or other rights, grants or awards with respect to the Common Stock, except the TARP Securities, the Management Purchased Shares, the Investor Warrants and any shares of Common Stock issued pursuant to the exercise of outstanding stock options or vesting of restricted stock.

(6)

Dividends, Distributions, Repurchases . Make, declare, pay or set aside for payment any dividend on or in respect of, or declare or make any distribution on any shares of its stock (other than (A) dividends from its wholly owned Subsidiaries to it or another of its wholly owned Subsidiaries or (B) dividends on trust preferred securities issued by any Subsidiary) or directly or indirectly adjust, split, combine, redeem, reclassify, purchase or otherwise acquire, any shares of its stock or any options or other rights, grants or awards with respect to the Common Stock.

(7)

Dispositions . Sell, transfer, mortgage, encumber or otherwise dispose of or discontinue any of its assets, deposits, business or properties, except for sales, transfers, mortgages, encumbrances or other dispositions or discontinuances in the ordinary course of business consistent with past practice and in a transaction that individually or taken together with all other such transactions is not material to it and the Subsidiaries, taken as a whole.

(8)

Extensions of Credit and Interest Rate Instruments . Make, renew or amend (except in the ordinary and usual course of business and consistent with past practice where there has been no material change in the relationship with the borrower or in an attempt to mitigate loss with respect to the borrower) any extension of credit in excess of $2,000,000, or enter into, renew or amend any interest rate swaps, caps, floors and option agreements and other interest rate risk management arrangements, whether entered into for the account of it or for the account of a customer of it or one of the Subsidiaries, except in the ordinary and usual course of business and consistent with past practice.

(9)

Acquisitions . Acquire (other than by way of foreclosures, acquisitions of control in a fiduciary or similar capacity, acquisitions of loans or participation interests, or in satisfaction of debts previously contracted in good faith, in each case in the ordinary and usual course of business and consistent with past practice) all or any portion of the assets, business, deposits or properties of any other person.


(10)	Constituent Documents . Amend its Certificate of Incorporation or bylaws or similar organizational documents of its Subsidiaries.


(11)	Accounting Methods . Implement or adopt any change in its accounting principles, practices or methods, other than as may be required by GAAP or applicable accounting requirements of a Governmental Entity.


(12)	Tax Matters . Make, change or revoke any Tax election, file any amended Tax Return (unless to correct an error), enter into any closing agreement, settle any Tax claim or assessment, or surrender any right to claim a refund of Taxes.

(13)

Claims . Settle any action, suit, claim or proceeding against it, except for an action, suit, claim or proceeding that is settled in the ordinary and usual course of business and consistent with past practice in an amount or for consideration not in excess of $500,000 and that would not (A) impose any material restriction on the business of it or the Subsidiaries and, after the Closing, Purchaser or its Subsidiaries or (B) create precedent for claims that are reasonably likely to be material to it or its subsidiaries and, after the Closing, Purchaser or its subsidiaries.

(14)

Compensation . Terminate, enter into, amend, modify (including by way of interpretation) or renew any employment, officer, consulting, severance, change in control or similar contract, agreement or arrangement with any director, officer, employee or consultant, or grant any salary or wage increase or increase any employee benefit, including incentive or bonus payments (or, with respect to any of the preceding, communicate any intention to take such action), except (A) to make changes that are required by applicable law, or (B) to satisfy Previously Disclosed contractual obligations existing as of the date hereof, or (C) annual or merit-based salary or wage increases or increases in benefits, in both cases to employees who are not executive officers or directors of the Company, undertaken in the ordinary and usual course of business and consistent with past practice and in any event not to exceed three percent (3%) of such employees’ annual salaries in the aggregate, or (D) pursuant to the TARP Transaction.

(15)

Benefit Arrangements . Terminate, enter into, establish, adopt, amend, modify (including by way of interpretation), make new grants or awards under or renew any pension, retirement, stock option, stock purchase, savings, profit sharing, deferred compensation, consulting, bonus, group insurance or other employee benefit, incentive or welfare contract, plan or arrangement, or any trust agreement (or similar arrangement) related thereto, in respect of any director, officer, employee or consultant, amend the terms of any outstanding equity-based award, take any action to accelerate the vesting, exercisability or payment (or fund or secure the payment) of stock options, restricted stock or other compensation or benefits payable thereunder or add any new participants to any non-qualified retirement plans (or, with respect to any of the preceding, communicate any intention to take such action), except (A) as required by applicable law and (B) to satisfy Previously Disclosed contractual obligations existing as of the date hereof, or (C) pursuant to the TARP Transaction.

(16)

Intellectual Property . (i) grant, extend, amend (except as required in the diligent prosecution of the Proprietary Rights owned (beneficially, and of record where applicable) by or developed for the Company and its Subsidiaries), waive, or modify any material rights in or to, sell, assign, lease, transfer, license, let lapse, abandon, cancel, or otherwise dispose of, or extend or exercise any option to sell, assign, lease, transfer, license, or otherwise dispose of, any Proprietary Rights, or (ii) fail to exercise a right of renewal or extension under any material agreement under which the Company or any of its Subsidiaries is licensed or otherwise permitted by a third party to use any Proprietary Rights (other than "shrink wrap" or "click through" licenses).

(17)

Communication . Make any written or oral communications to the officers or employees of the Company or any of the Subsidiaries pertaining to compensation or benefit matters that are affected by the transactions contemplated by this Agreement without providing Purchaser with a copy or written description of the intended communication and a reasonable period of time to review and comment on such communication; provided, however, that the foregoing shall not prevent human resources personnel of the Company from orally answering questions of individual employees pertaining to compensation or benefit matters with respect to such individual employee that are affected by the transactions contemplated by this Agreement on an individual basis with such employee.

(18)

Adverse Actions . Notwithstanding any other provision hereof, knowingly take, or knowingly omit to take, any action that is reasonably likely to result in any of the conditions set forth in Section 1.2(c) not being satisfied, or any action that is reasonably likely to materially impair its ability to perform its obligations under this Agreement or to consummate the transactions contemplated hereby, except as required by applicable law or this Agreement.


(19)	Commitments . Enter into any contract with respect to, or otherwise agree or commit to do, any of the foregoing.

Notwithstanding the foregoing, nothing in this Section 3.3(a) shall limit or require any actions that the Board of Directors may, in good faith, determine to be inconsistent with their duties or the Company’s obligations under applicable law or imposed by any Governmental Entity.

(b)

If applicable, in the event the Company takes any action that would require any antidilution adjustment to be made under the Preferred Stock Certificate of Designations as if issued on the date of this Agreement, the Company shall make appropriate adjustments such that Purchaser will receive the benefit of such transaction as if the Securities to be purchased by Purchaser at the Closing had been outstanding as of the date of such action.

(c)

As soon as practicable after the date of this Agreement, the Company shall develop an operating plan (the " Operating Plan" ) and use its best efforts to cause such plan, in form and substance reasonably satisfactory to Purchaser (such approval not to be unreasonably withheld), to be approved by the Board of Directors as soon as reasonably practicable thereafter; provided that, such approval by the Board of Directors shall occur no later than the Closing. The Board of Directors may make such changes or modifications to the Operating Plan that, in the exercise of its fiduciary duties upon advice of counsel, it determines are necessary or in the best interests of the Company, provided that, no change or modification shall be made without providing Purchaser with a reasonable opportunity for consultation prior to any such change or modification.

(d)

The Company shall cooperate with the Purchaser and use its reasonable best efforts to take, or cause to be taken, all appropriate action to implement the securities trading platform contemplated in Schedule 3.1(a) of the Purchaser Disclosure Schedule and from the date hereof and through the closing of any such transactions contemplated thereby, shall comply with the terms and obligations set forth in such Section 3.1(a) (provided that no such transaction shall be required to be implemented prior to Closing).

3.4 Acquisition Proposals .

(a)

No Solicitation or Negotiation . The Company agrees that, except for the TARP Transaction or as expressly permitted by this Section 3.4, neither it nor any of the Subsidiaries nor any of the officers and directors of it or the Subsidiaries shall, and that it shall use its best efforts to instruct and cause its and the Subsidiaries’ employees, investment bankers, attorneys, accountants and other advisors or representatives (such directors, officers, employees, investment bankers, attorneys, accountants and other advisors or representatives, collectively, " Representatives" ) not to, directly or indirectly:


(1)	initiate, solicit or encourage any inquiries or the making of any proposal or offer that constitutes, or could reasonably be expected to lead to, any Acquisition Proposal;


(2)	engage in, continue or otherwise participate in any discussions or negotiations regarding, or provide any non-public information or data to any person relating to, any Acquisition Proposal; or


(3)	otherwise facilitate knowingly any effort or attempt to make an Acquisition Proposal.

Notwithstanding anything in the foregoing to the contrary, the Company may (A) provide information in response to a request therefor by a person who has made an unsolicited bona fide written Acquisition Proposal providing for the acquisition of more than 50% of the assets (on a consolidated basis) or total voting power of the equity securities of the Company if the Company receives from the person so requesting such information an executed confidentiality agreement on terms not less restrictive to the other party than those contained in the confidentiality agreement entered into by the Company and Purchaser on November 18, 2008 and promptly discloses (and, if applicable, provides copies of) any such information to Purchaser to the extent not previously provided to Purchaser; (B) engage or participate in any discussions or negotiations with any person who has made such an unsolicited bona fide written Acquisition Proposal; or (C) after having complied with Section 3.4(c), approve, recommend, or otherwise declare advisable or propose to approve, recommend or declare advisable (publicly or otherwise) such an Acquisition Proposal, if and only to the extent that, (x) prior to taking any action described in clause (A), (B) or (C) above, the Board of Directors determines in good faith after consultation with outside legal counsel that such action is necessary in order for such directors to comply with the directors’ fiduciary duties under applicable law, (y) in each such case referred to in clause (A) or (B) above, the Board of Directors has determined in good faith based on the information then available and after consultation with its financial advisor that such Acquisition Proposal either constitutes a Superior Proposal or is reasonably likely to result in a Superior Proposal, and (z) in the case referred to in clause (C) above, the Board of Directors determines in good faith (after consultation with its financial advisor and outside legal counsel) that such Acquisition Proposal is a Superior Proposal.


(b)	Definitions : For purposes of this Agreement:

"Acquisition Proposal" means (i) any proposal or offer with respect to a merger, joint venture, partnership, consolidation, dissolution, liquidation, tender offer, recapitalization, reorganization, rights offering, share exchange, business combination or similar transaction involving the Company or any of the Subsidiaries and (ii) any acquisition by any person resulting in, or proposal or offer, which, if consummated, would result in any person becoming the beneficial owner, directly or indirectly, in one or a series of related transactions, of 15% or more of the total voting power of any class of equity securities of the Company or those of any of the Subsidiaries, or 15% or more of the consolidated total assets (including, without limitation, equity securities of its Subsidiaries) of the Company, in each case other than the transactions contemplated by this Agreement, including, but not limited to, the TARP Transaction.

" Superior Proposal" means an unsolicited bona fide Acquisition Proposal that would result in any person becoming the beneficial owner, directly or indirectly, more than 50% of the assets (on a consolidated basis) or more than 50% of the total voting power of the equity securities of the Company that the Board of Directors has determined in its good faith judgment is reasonably likely to be consummated in accordance with its

terms, taking into account all legal, financial and regulatory aspects of the proposal and the person making the proposal, and, if consummated, would result in a transaction more favorable to the Company’s stockholders from a financial point of view than the transaction contemplated by this Agreement (after taking into account any revisions to the terms of the transaction contemplated by Section 3.4(c) of this Agreement pursuant to Section 3.4(c) and the time likely to be required to consummate such Acquisition Proposal).


(c)	No Change in Recommendation or Alternative Acquisition Agreement . The Board of Directors and each committee of the Board of Directors shall not:


(1)	withhold, withdraw, qualify or modify (or publicly propose or resolve to withhold, withdraw, qualify or modify) the Company Recommendation in a manner adverse to Purchaser; or

(2)

except as expressly permitted by, and after compliance with, Section 5.1(g) hereof, cause or permit the Company to enter into any letter of intent, memorandum of understanding, agreement in principle, acquisition agreement, merger agreement or other agreement (other than a confidentiality agreement referred to in Section 3.4(a) entered into in compliance with Section 3.4(a)) (an " Alternative Acquisition Agreement" ) relating to any Acquisition Proposal.

Notwithstanding anything to the contrary set forth in this Agreement, prior to the earlier of the time, but not after, the Closing or the date the Stockholder Proposals are approved, the Board of Directors may withhold, withdraw, qualify or modify the Company Recommendation or approve, recommend or otherwise declare advisable any Superior Proposal made after the date of this Agreement that was not solicited, initiated, encouraged or knowingly facilitated in breach of this Agreement, if the Board of Directors determines in good faith, after consultation with outside counsel, that such action is necessary in order for such directors to comply with the directors’ fiduciary duties under applicable law (a " Change of Recommendation" ); provided, however, that no Change of Recommendation may be made until after at least three business days following Purchaser’s receipt of notice from the Company advising that management of the Company currently intends to recommend to the Board of Directors that it take such action and the basis therefor, including all necessary information under Section 3.4(f). In determining whether to make a Change of Recommendation in response to a Superior Proposal or otherwise, the Board of Directors shall take into account any changes to the terms of this Agreement proposed by Purchaser and any other information provided by Purchaser in response to such notice. Any material amendment to any Acquisition Proposal will be deemed to be a new Acquisition Proposal for purposes of this Section 3.4(c), including with respect to the notice period referred to in this Section 3.4(c).

(d)

Certain Permitted Disclosure . Nothing contained in this Section 3.4 shall be deemed to prohibit the Company from complying with its disclosure obligations under U.S. federal or state law with regard to an Acquisition Proposal; provided, however, that if such disclosure does not reaffirm the Company Recommendation or has the substantive effect of withdrawing or adversely modifying the Company Recommendation, such disclosure shall be deemed to be a Change in Recommendation and Purchaser shall have the right to terminate this Agreement as set forth in Section 5.1(h).

(e)

Existing Discussions . The Company agrees that it will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any Acquisition Proposal. The Company agrees that it will take the necessary steps to promptly inform the individuals or entities referred to in the first sentence hereof of the obligations undertaken in this Section 3.4. The Company also agrees that it will promptly request each person that has heretofore executed a confidentiality agreement in connection with its consideration of acquiring it or any of the Subsidiaries to return or destroy all confidential information heretofore furnished to such person by or on behalf of it or any of the Subsidiaries.

(f)

Notice . The Company agrees that it will promptly (and, in any event, within 24 hours) notify Purchaser if any inquiries, proposals or offers with respect to an Acquisition Proposal are received by, any such information is requested from, or any such discussions or negotiation are sought to be initiated or continued with, it or any of its Representatives indicating, in connection with such notice, the name of such person and the material terms and conditions of any proposals or offers (including, if applicable, copies of any written requests, proposals or offers, including proposed agreements) and thereafter shall keep Purchaser informed, on a current basis, of the status and terms of any such proposals or offers (including any amendments thereto)

and the status of any such discussions or negotiations, including any change in the Company’s intentions as previously notified.

ARTICLE IV

ADDITIONAL AGREEMENTS

4.1 Governance Matters .

(a)

At and following the Closing, the Company will cause such number of persons nominated by Purchaser as will represent the Purchaser’s pro rata share of the total number of members of the Board of Directors (each a " Board Representative" and collectively, the " Board Representatives" ) to be elected and appointed to the Board of Directors, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and to the reasonable approval of the Company’s Nominating and Board of Directors Governance Committee (" Governance Committee" ) (such approval not to be unreasonably withheld or delayed). For purposes of this Section 4.1, "pro rata share" shall mean that fraction where the numerator is all shares of Common Stock beneficially owned by Purchaser, assuming full conversion of the Convertible Preferred Stock and assuming sufficient Common Stock is authorized under the Certificate of Incorporation to allow such conversion and the denominator is the total number of issued shares of Common Stock (other than treasury shares) plus the number of shares of Common Stock into which the Convertible Preferred Stock may be converted. After such appointment, so long as Purchaser holds at least 10% of the voting power in the Company (including for this purpose votes in respect of shares of Common Stock issuable upon conversion of the Convertible Preferred Stock acquired pursuant to this Agreement) acquired by Purchaser in connection with the transactions contemplated by this Agreement (as adjusted from time to time for any reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other like changes in the Company’s capitalization), the Company will be required to recommend to its stockholders the election of the Board Representatives at the Company’s annual meeting, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and to the reasonable approval of the Governance Committee (such approval not to be unreasonably withheld or delayed), to the Board of Directors. Purchaser shall also be entitled to appoint two observers to the Board of Directors (the " Board Observers" ), which Board Observers are reasonably acceptable to the Board of Directors. The Board Observers shall be entitled to participate fully in all meetings of the Board of Directors, but shall not have the authority to vote thereat. If Purchaser no longer holds the minimum percentage of voting power specified in the prior sentence, Purchaser will have no further rights under Sections 4.1(a) through 4.1(c) and, at the written request of the Board of Directors, shall use all reasonable best efforts to cause its Board Representatives to resign from the Board of Directors and the Board Observers to resign as promptly as possible thereafter. At the option of the Board Representatives, the Board of Directors shall cause the Board Representatives to be appointed to the Governance Committee of the Board of Directors (or any successor committee thereto), so long as the Board Representatives qualify to serve on such Governance Committee under the applicable rules of the NYSE or any other nationally recognized securities exchange on which the Common Stock may be listed and the Company’s corporate governance guidelines and the charter of such Governance Committee.

(b)

The Board Representatives (including any successor nominee) duly selected in accordance with Section 4.1(a) shall, subject to applicable law, be the Company’s and the Governance Committee’s nominees to serve on the Board of Directors. The Company shall use its reasonable best efforts to have the Board Representatives elected as a director of the Company and the Company shall solicit proxies for each such person to the same extent as it does for any of its other nominees to the Board of Directors. If applicable law or the NYSE rules and regulations prevent any Board Representative from serving on a committee, the Purchaser shall be entitled to appoint a Board Observer to such committee, so long as any such Board Observer meets any applicable independence rules of the NYSE.

(c)

Subject to Section 4.1(a), Purchaser shall have the power to designate each Board Representative’s replacement upon the death, resignation, retirement, disqualification or removal from office of such director, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and to the reasonable approval of the Governance Committee (such approval not to be unreasonably withheld or delayed). The Board of Directors will promptly take all action reasonably required to fill the vacancy resulting therefrom with such person (including such person, subject to applicable law,

being the Company’s and the Governance Committee’s nominee to serve on the Board of Directors, using all reasonable best efforts to have such person elected as director of the Company and the Company soliciting proxies for such person to the same extent as it does for any of its other nominees to the Board of Directors).

(d)

The Board Representatives shall be entitled to the same compensation and same indemnification and insurance coverage in connection with his or her role as a director as the other members of the Board of Directors, and each Board Representative shall be entitled to reimbursement for documented, reasonable out-of-pocket expenses incurred in attending meetings of the Board of Directors or any committees thereof, to the same extent as the other members of the Board of Directors. The Company shall notify the Board Representatives of all regular and special meetings of the Board of Directors and shall notify the Board Representatives of all regular and special meetings of any committee of the Board of Directors of which each Board Representative is a member. The Company shall provide the Board Representatives with copies of all notices, minutes, consents and other materials provided to all other members of the Board of Directors concurrently as such materials are provided to the other members.

(e)

Promptly following the execution of this Agreement, the Company will take all steps necessary to amend (including recommending and submitting for stockholder approval in accordance with Section 3.1(a)) its organizational documents (including, without limitation, the Certificate of Incorporation, its bylaws, its corporate governance guidelines and the charters of relevant committees of the Board of Directors) in form and substance reasonably satisfactory to Purchaser, to effectuate, to the extent required, the purpose and intent of, and the matters contemplated by, this Section 4.1 (including, without limitation, removal of classified Board of Directors provisions).

(f)

For so long as Purchaser holds the Securities purchased pursuant to this Agreement, the Company shall provide or permit the Board Observer to provide to Purchaser any Information provided to the Board of Directors, including any materials presented at any ordinary or special meeting of the Board of Directors or any committee thereof, and Purchaser agrees to hold, and will cause its respective Affiliates and its and their directors, officers, employees, agents, consultants and advisors and any prospective participant in a sale or disposition of the Purchased Shares to hold, such Information in strict confidence for three years from the receipt of such Information, unless disclosure to a regulatory authority is necessary or appropriate in connection with any necessary regulatory approval or unless disclosure is required by judicial or administrative process or, in the written opinion of its counsel, by other requirement of law or the applicable requirements of any regulatory agency or relevant stock exchange and except to the extent that such Information can be shown to have been (1) previously known by such party on a non-confidential basis, (2) in the public domain through no fault of such party or (3) later lawfully acquired from other sources by the party to which it was furnished). In addition, Purchaser agrees not to release or disclose such Information to any other person, except its auditors, attorneys, financial advisors, other consultants and advisors and any prospective participant in a sale or disposition of the Purchased Shares.

4.2 Legend .


(a)	Purchaser agrees that all certificates or other instruments representing the Securities subject to this Agreement will bear a legend substantially to the following effect:

(1)

THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS.


(2)	THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO TRANSFER AND OTHER RESTRICTIONS SET FORTH IN AN INVESTMENT AGREEMENT, DATED AS OF DECEMBER 17, 2008, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE ISSUER.


(b)	Upon request of Purchaser, upon receipt by the Company of an opinion of counsel reasonably satisfactory to the Company to the effect that such legend is no longer required under the Securities Act and applicable state laws, the Company shall promptly cause clause (1) of the legend to be removed from any certificate for any

Securities to be Transferred in accordance with the terms of this Agreement and clause (2) of the legend shall be removed upon the expiration of such transfer and other restrictions set forth in this Agreement.

4.3 Reservation for Issuance . The Company will reserve that number of shares of Common Stock sufficient for issuance upon exercise or conversion of the Securities without regard to any limitation on such conversion; provided that in the case of the Convertible Preferred Stock, solely to the extent the Company is unable to reserve such number of shares under its charter the Company will reserve such sufficient number of shares of Common Stock following the approval of the Stockholder Proposals pursuant to Section 3.1(b).

4.4 Certain Transactions . The Company will not merge or consolidate into, or sell, transfer or lease all or substantially all of its property or assets to, any other party unless the issuer constituent corporation, successor, transferee or lessee party, as the case may be (if not the Company), expressly assumes the due and punctual performance and observance of each and every covenant and condition of this Agreement to be performed and observed by the Company.

4.5 Indemnity .

(a)

Following the Closing, the Company agrees to indemnify and hold harmless Purchaser and its Affiliates and each of their respective officers, directors, partners, members and employees, and each person who controls Purchaser within the meaning of the Exchange Act and the rules and regulations promulgated thereunder, to the fullest extent lawful, from and against any and all actions, suits, claims, proceedings, costs, losses, liabilities, damages, expenses (including reasonable attorneys’ fees and disbursements), amounts paid in settlement and other costs (in each case calculated to take into account Purchaser’s ownership interest in the Company as of the relevant payment date - i.e., increased to take into account Purchaser’s ownership interest in the capital of the Company as of such date) (collectively, " Losses" ) arising out of or resulting from (1) any inaccuracy in or breach of the Company’s representations or warranties in this Agreement or (2) the Company’s breach of agreements or covenants made by the Company in this Agreement or (3) any action, suit, claim, proceeding or investigation by any Governmental Entity, stockholder of the Company or any other person (other than the Company) relating to this Agreement or the transactions contemplated hereby (other than any Losses attributable to the acts, errors or omissions on the part of Purchaser, but not including the transactions contemplated hereby); and the Company agrees to indemnify and hold harmless the Purchaser from and against any Losses with respect to Taxes of the Company for taxable periods or portions thereof ending on or prior to the Closing Date.

(b)

Following the Closing, Purchaser agrees to indemnify and hold harmless each of the Company and its Affiliates and each of their officers, directors, partners, members and employees, and each person who controls the Company within the meaning of the Exchange Act and the rules and regulations promulgated thereunder, to the fullest extent lawful, from and against any and all Losses arising out of or resulting from (1) any inaccuracy in or breach of Purchaser’s representations or warranties in this Agreement or (2) Purchaser’s breach of agreements or covenants made by Purchaser in this Agreement.

(c)

A party entitled to indemnification hereunder (each, an " Indemnified Party" ) shall give written notice to the party indemnifying it (the " Indemnifying Party" ) of any claim with respect to which it seeks indemnification promptly after the discovery by such Indemnified Party of any matters giving rise to a claim for indemnification; provided that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 4.5 unless and to the extent that the Indemnifying Party shall have been actually prejudiced by the failure of such Indemnified Party to so notify such party. Such notice shall describe in reasonable detail such claim. In case any such action, suit, claim or proceeding is brought against an Indemnified Party, the Indemnified Party shall be entitled to hire, at its own expense, separate counsel and participate in the defense thereof; provided , however , that the Indemnifying Party shall be entitled to assume and conduct the defense thereof, unless the counsel to the Indemnified Party advises such Indemnifying Party in writing that such claim involves a conflict of interest (other than one of a monetary nature) that would reasonably be expected to make it inappropriate for the same counsel to represent both the Indemnifying Party and the Indemnified Party, in which case the Indemnified Party shall be entitled to retain its own counsel at the cost and expense of the Indemnifying Party (except that the Indemnifying Party shall only be liable for the legal fees and expenses of one law firm for all Indemnified Parties, taken together with respect to any single action or group of related actions). If the Indemnifying Party assumes the defense of any claim, all Indemnified Parties shall thereafter deliver to the Indemnifying Party copies of all notices and documents (including court papers) received by the Indemnified Party relating to the claim, and each Indemnified Party shall cooperate in the defense or prosecution of such claim. Such

cooperation shall include the retention and (upon the Indemnifying Party’s request) the provision to the Indemnifying Party of records and information that are reasonably relevant to such claim, and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Indemnifying Party shall not be liable for any settlement of any action, suit, claim or proceeding effected without its written consent; provided , however , that the Indemnifying Party shall not unreasonably withhold or delay its consent. The Indemnifying Party further agrees that it will not, without the Indemnified Party’s prior written consent (which shall not be unreasonably withheld or delayed), settle or compromise any claim or consent to entry of any judgment in respect thereof in any pending or threatened action, suit, claim or proceeding in respect of which indemnification has been sought hereunder unless such settlement or compromise includes an unconditional release of such Indemnified Party from all liability arising out of such action, suit, claim or proceeding.

(d)

For purposes of the indemnity contained in Section 4.5(a)(1) and Section 4.5(b)(1), all qualifications and limitations set forth in the parties’ representations and warranties (other than Section 2.2(j)(3)) as to "materiality" and words of similar import, shall be disregarded in determining whether there shall have been any inaccuracy in or breach of any representations and warranties in this Agreement; provided that no inaccuracy in or breach of the representations and warranties contained in Section 2.2(v) shall be deemed to occur if such representations and warranties are true and correct in all material respects.

(e)

The Company shall not be required to indemnify the Indemnified Parties affiliated with (or whose claims are permitted by virtue of their relationship with) Purchaser pursuant to Section 4.5(a)(1) unless and until the aggregate amount of all Losses incurred with respect to all claims pursuant to Section 4.5(a)(1) exceed $1,500,000 (the " Threshold Amount" ), in which event the Company shall indemnify the Indemnified Parties pursuant to Section 4.5(a)(1) the full amount of such Losses (not merely the portion of such Losses exceeding the Threshold Amount). Purchaser shall not be required to indemnify the Indemnified Parties affiliated with (or whose claims are permitted by virtue of their relationship with) the Company pursuant to Section 4.5(b)(1) unless and until the aggregate amount of all Losses incurred with respect to all claims pursuant to Section 4.5(b)(1) exceed the Threshold Amount, in which event Purchaser shall indemnify the Company pursuant to Section 4.5(b)(1) the full amount of such Losses (not merely the portion of such Losses exceeding the Threshold Amount). The cumulative indemnification obligation of (1) the Company to Purchaser and all of the Indemnified Parties affiliated with (or whose claims are permitted by virtue of their relationship with) Purchaser or (2) Purchaser to the Company and the Indemnified Parties affiliated with (or whose claims are permitted by virtue of their relationship with) the Company, in each case for inaccuracies in or breaches of representations and warranties, shall in no event exceed the Purchase Price. Notwithstanding the foregoing, the indemnification by the Company of the Purchaser for Losses with respect to Taxes shall not be subject to the limitations of this Section 4.5(e).

(f)

Any claim for indemnification pursuant to this Section 4.5 for breach of any representation or warranty can only be brought on or prior to the second anniversary of the Closing Date; provided that if notice of a claim for indemnification pursuant to this Section 4.5 for breach of any representation or warranty is brought prior to the end of such period, then the obligation to indemnify in respect of such breach shall survive as to such claim, until such claim has been finally resolved. Any claim for indemnification pursuant to this Section 4.5 for Losses with respect to Taxes can only be brought on or before the thirtieth (30) day following the expiration of the applicable statute of limitations.

(g)

The indemnity provided for in this Section 4.5 shall be the sole and exclusive monetary remedy of Indemnified Parties after the Closing for any inaccuracy of any representation or warranty or any other breach of any covenant or agreement contained in this Agreement; provided that nothing herein shall limit in any way any such party’s remedies in respect of fraud by any other party in connection with the transactions contemplated hereby. No party to this Agreement (or any of its Affiliates) shall, in any event, be liable or otherwise responsible to any other party (or any of its Affiliates) for any consequential or punitive damages of such other party (or any of its Affiliates) arising out of or relating to this Agreement or the performance or breach hereof.


(h)	No investigation of the Company by Purchaser, or by the Company of Purchaser, whether prior to or after the date hereof, shall limit any Indemnified Party’s exercise of any right hereunder or be deemed to be a waiver of any such right.


(i)	Any indemnification payments pursuant to this Section 4.5 shall be treated as an adjustment to the Purchase Price for the Securities for U.S. federal income and applicable state and local Tax purposes, unless a different treatment is required by applicable law.

4 . 6 Exchange Listing . The Company shall promptly use its reasonable best efforts to cause the shares of Common Stock reserved for issuance upon the conversion of the Convertible Preferred Stock to be approved for listing on the NYSE or such other nationally recognized securities exchange on which the Common Stock may be listed, subject to official notice of issuance and upon receipt of the approval by the Company’s stockholders of the Stockholder Proposals, as promptly as practicable, and in any event before the Closing if permitted by the rules of the NYSE.

4.7 Registration Rights .


(a)	Registration .

(1)

Subject to the terms and conditions of this Agreement, the Company covenants and agrees that no later than the date that is six months after the Closing Date, the Company shall have prepared and filed with the SEC a Shelf Registration Statement covering all Registrable Securities (or otherwise designate an existing Shelf Registration Statement filed with the SEC to cover the Registrable Securities), and, to the extent the Shelf Registration Statement has not theretofore been declared effective or is not automatically effective upon such filing, the Company shall use reasonable best efforts to cause such Shelf Registration Statement to be declared or become effective and to keep such Shelf Registration Statement continuously effective and in compliance with the Securities Act and usable for resale of such Registrable Securities for a period from the date of its initial effectiveness until such time as there are no Registrable Securities remaining (including by refiling such Shelf Registration Statement (or a new Shelf Registration Statement) if the initial Shelf Registration Statement expires). So long as the Company is a well-known seasoned issuer (as defined in Rule 405 under the Securities Act) at the time of filing of the Shelf Registration Statement with the SEC, such Shelf Registration Statement shall be designated by the Company as an automatic Shelf Registration Statement.

(2)

Any registration pursuant to this Section 4.7(a) shall be effected by means of a shelf registration under the Securities Act (a " Shelf Registration Statement" ) in accordance with the methods and distribution set forth in the Shelf Registration Statement and Rule 415. If Purchaser or any other holder of Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with this Agreement intends to distribute any Registrable Securities by means of an underwritten offering (a " Registration Demand" ) it shall promptly so advise the Company and the Company shall take all reasonable steps to facilitate such distribution, including the actions required pursuant to Section 4.7(c), provided that Purchaser and any other Holder will be entitled to initiate no more than three such Registration Demands, and the Company will not be obligated to facilitate an underwritten offering of Registrable Securities unless the expected gross proceeds from such offering exceed $50,000,000. The lead underwriters in any such distribution shall be selected by the holders of a majority of the Registrable Securities to be distributed.

(3)

The Company shall not be required to effect a registration (including a resale of Registrable Securities from an effective Shelf Registration Statement) pursuant to this Section 4.7(a): (i) with respect to securities that are not Registrable Securities; (ii) during any Scheduled Black-out Period or (iii) if the Company has notified Purchaser that in the good faith judgment of the Board of Directors, it would be materially detrimental to the Company or its securityholders for such registration to be effected at such time, in which event the Company shall have the right to defer such registration for a period of not more than 90 days after receipt of the request of Purchaser; provided that such right to delay a registration shall be exercised by the Company (A) only if the Company has generally exercised (or is concurrently exercising) similar black-out rights against holders of similar securities that have registration rights and (B) not more than twice in any 12-month period and not more than 90 days in the aggregate in any 12-month period.

(4)

Whenever the Company proposes to register any of its securities, other than a registration pursuant to Section 4.7(a)(1) or a Special Registration, and the registration form to be filed may be used for the registration or qualification for distribution of Registrable Securities, the Company will give prompt written notice to Purchaser and all other Holders of its intention to effect such a registration

(but in no event less than ten days prior to the anticipated filing date) and will include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within ten business days after the date of the Company’s notice (a " Piggyback Registration" ). Any such person that has made such a written request may withdraw its Registrable Securities from such Piggyback Registration by giving written notice to the Company and the managing underwriter, if any, on or before the fifth business day prior to the planned effective date of such Piggyback Registration. The Company may terminate or withdraw any registration under this Section 4.7(a)(4) prior to the effectiveness of such registration, whether or not Purchaser or any other Holders have elected to include Registrable Securities in such registration.

(5)

If the registration referred to in Section 4.7(a)(4) is proposed to be underwritten, the Company will so advise Purchaser and all other Holders as a part of the written notice given pursuant to Section 4.7(a)(4). In such event, the right of Purchaser and all other Holders to registration pursuant to this Section 4.7(a) will be conditioned upon such persons’ participation in such underwriting and the inclusion of such person’s Registrable Securities in the underwriting, and each such person will (together with the Company and the other persons distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. If any participating person disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and Purchaser.

(6)

If a Piggyback Registration relates to an underwritten primary offering on behalf of the Company, and the managing underwriters advise the Company that in their reasonable opinion the number of securities requested to be included in such registration exceeds the number which can be sold without adversely affecting the marketability of such offering (including an adverse effect on the per share offering price), the Company will include in such registration or prospectus only such number of securities that in the reasonable opinion of such underwriters can be sold without adversely affecting the marketability of the offering (including an adverse effect on the per share offering price), which securities will be so included in the following order of priority subject to any conflicting terms of the TARP Documents: (i) first, the securities the Company proposes to sell, (ii) second, Registrable Securities of Purchaser and all other Holders who have requested registration of Registrable Securities pursuant to Section 4.7(a)(4), pro rata on the basis of the aggregate number of such securities or shares owned by each such person and (iii) third, any other securities of the Company that have been requested to be so included, subject to the terms of this Agreement.

(b)

Expenses of Registration . All Registration Expenses incurred in connection with any registration, qualification or compliance hereunder shall be borne by the Company. All Selling Expenses incurred in connection with any registrations hereunder, shall be borne by the holders of the securities so registered pro rata on the basis of the aggregate offering or sale price of the securities so registered.

(c)

Obligations of the Company . The Company shall use its reasonable best efforts for so long as there are Registrable Securities outstanding, to take such actions as are under its control to not become an ineligible issuer (as defined in Rule 405 under the Securities Act). In addition, whenever required to effect the registration of any Registrable Securities or facilitate the distribution of Registrable Securities pursuant to an effective Registration Statement, the Company shall, as expeditiously as reasonably practicable:


(1)	Prepare and file with the SEC a prospectus supplement with respect to a proposed offering of Registrable Securities pursuant to an effective registration statement, subject to Section 4.7(c), keep such registration statement effective or such prospectus supplement current.


(2)	Prepare and file with the SEC such amendments and supplements to the applicable registration statement and the prospectus or prospectus supplement used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement.


(3)	Furnish to the Holders and any underwriters such number of copies of the applicable registration statement and each such amendment and supplement thereto (including in each case all exhibits) and of a prospectus, including a preliminary prospectus, in conformity with the requirements of the

Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned or to be distributed by them.

(4)

Use its reasonable best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as shall be reasonably requested by the Holders or any managing underwriter(s), to keep such registration or qualification in effect for so long as such registration statement remains in effect, and to take any other action which may be reasonably necessary to enable such seller to consummate the disposition in such jurisdictions of the securities owned by such Holder; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions.

(5)

Notify each Holder of Registrable Securities at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the applicable prospectus, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing.


(6)	Give written notice to the Holders:


(A)	when any registration statement filed pursuant to Section 4.7(a) or any amendment thereto has been filed with the SEC and when such registration statement or any post-effective amendment thereto has become effective;


(B)	of any request by the SEC for amendments or supplements to any registration statement or the prospectus included therein or for additional information;


(C)	of the issuance by the SEC of any stop order suspending the effectiveness of any registration statement or the initiation of any proceedings for that purpose;


(D)	of the receipt by the Company or its legal counsel of any notification with respect to the suspension of the qualification of the Common Stock for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose;


(E)	of the happening of any event that requires the Company to make changes in any effective registration statement or the prospectus related to the registration statement in order to make the statements therein not misleading (which notice shall be accompanied by an instruction to suspend the use of the prospectus until the requisite changes have been made); and


(F)	if at any time the representations and warranties of the Company contained in any underwriting agreement contemplated by Section 4.7(c)(10) cease to be true and correct.


(7)	Use its reasonable best efforts to prevent the issuance or obtain the withdrawal of any order suspending the effectiveness of any registration statement referred to in Section 4.7(c)(6)(C) at the earliest practicable time.

(8)

Upon the occurrence of any event contemplated by Section 4.7(c)(5) or 4.7(c)(6)(E), promptly prepare a post-effective amendment to such registration statement or a supplement to the related prospectus or file any other required document so that, as thereafter delivered to the Holders and any underwriters, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company notifies the Holders in accordance with Section 4.7(c)(6)(E) to suspend the use of the prospectus until the requisite changes to the prospectus have been made, then the Holders and any underwriters shall suspend use of such prospectus and use their reasonable best efforts to return to the Company all copies of such prospectus (at the Company’s expense) other than permanent file copies then in such Holder’s or underwriter’s possession. The total number of days that any such suspension may be in effect in any 12-month period shall not exceed 90 days.


(9)	Use reasonable best efforts to procure the cooperation of the Company’s transfer agent in settling any offering or sale of Registrable Securities, including with respect to the transfer of physical stock certificates into book-entry form in accordance with any procedures reasonably requested by the Holders or any managing underwriter(s).

(10)

Enter into an underwriting agreement in customary form, scope and substance and take all such other actions reasonably requested by the Holders of a majority of the Registrable Securities being sold in connection therewith or by the managing underwriter(s), if any, to expedite or facilitate the underwritten disposition of such Registrable Securities, and in connection therewith in any underwritten offering (including making members of management and executives of the Company available to participate in "road show", similar sales events and other marketing activities), (i) make such representations and warranties to the Holders that are selling stockholders and the managing underwriter(s), if any, with respect to the business of the Company and its Subsidiaries, and the Shelf Registration Statement, prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, in customary form, substance and scope, and, if true, confirm the same if and when requested, (ii) use its reasonable best efforts to furnish underwriters opinions of counsel to the Company, addressed to the managing underwriter(s), if any, covering the matters customarily covered in such opinions requested in underwritten offerings, (iii) use its reasonable best efforts to obtain "cold comfort" letters from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any business acquired by the Company for which financial statements and financial data are included in the Registration Statement) who have certified the financial statements included in such Registration Statement, addressed to each of the managing underwriter(s), if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters, (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures customary in underwritten offerings, and (v) deliver such documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Securities being sold in connection therewith, their counsel and the managing underwriter(s), if any, to evidence the continued validity of the representations and warranties made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. Notwithstanding anything contained herein to the contrary, the Company shall not be required to enter into any underwriting agreement or permit any underwritten offering absent an agreement by the applicable underwriter(s) to indemnify the Company in form, scope and substance as is customary in underwritten offerings by the Company in which an affiliate of the Company acts as an underwriter.

(11)

Make available for inspection by a representative of Holders that are selling stockholders, the managing underwriter(s), if any, and any attorneys or accountants retained by such Holders or managing underwriter(s), at the offices where normally kept, during reasonable business hours, financial and other records, pertinent corporate documents and properties of the Company, and cause the officers, directors and employees of the Company to supply all information in each case reasonably requested by any such representative, managing underwriter(s), attorney or accountant in connection with such Registration Statement.

(12)

Cause all such Registrable Securities (other than Convertible Preferred Stock) to be listed on each securities exchange on which similar securities issued by the Company are then listed or, if no similar securities issued by the Company are then listed on any securities exchange, use its reasonable best efforts to cause all such Registrable Securities (other than Convertible Preferred Stock) to be listed on the NYSE or the NASDAQ Stock Market, as determined by the Company.

(13)

If requested by Holders of a majority of the Registrable Securities being registered and/or sold in connection therewith, or the managing underwriter(s), if any, promptly include in a prospectus supplement or amendment such information as the Holders of a majority of the Registrable Securities being registered and/or sold in connection therewith or managing underwriter(s), if any, may reasonably request in order to permit the intended method of distribution of such securities and make all required filings of such prospectus supplement or such amendment as soon as practicable after the Company has received such request.


(14)	Timely provide to its security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder.

(d)

Suspension of Sales . During any Scheduled Black-out Period and upon receipt of written notice from the Company that a registration statement, prospectus or prospectus supplement contains or may contain an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that circumstances exist that make inadvisable use of such registration statement, prospectus or prospectus supplement, Purchaser and each Holder of Registrable Securities shall forthwith discontinue disposition of Registrable Securities until termination of such Scheduled Black-Out Period or until Purchaser and/or Holder has received copies of a supplemented or amended prospectus or prospectus supplement, or until such Holder is advised in writing by the Company that the use of the prospectus and, if applicable, prospectus supplement may be resumed, and, if so directed by the Company, such Holder shall deliver to the Company (at the Company’s expense) all copies, other than permanent file copies then in such Holder’s possession, of the prospectus and, if applicable, prospectus supplement covering such Registrable Securities current at the time of receipt of such notice. The total number of days that any such suspension may be in effect in any 12-month period shall not exceed 90 days.


(e)	Termination of Registration Rights . A Holder’s registration rights as to any securities held by such Holder (and its Affiliates, partners, members and former members) shall not be available unless such securities are Registrable Securities.


(f)	Furnishing Information .


(1)	Neither Purchaser nor any Holder shall use any free writing prospectus (as defined in Rule 405) in connection with the sale of Registrable Securities without the prior written consent of the Company.

(2)

It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 4.7(c) that Purchaser and/or the selling Holders and the underwriters, if any, shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registered offering of their Registrable Securities.


(g)	Indemnification .

(1)

The Company agrees to indemnify each Holder and, if a Holder is a person other than an individual, such Holder’s officers, directors, employees, agents, representatives and Affiliates, and each person, if any, that controls a Holder within the meaning of the Securities Act (each, an " Indemnitee" ), against any and all losses, claims, damages, actions, liabilities, costs and expenses (including, without limitation, reasonable fees, expenses and disbursements of attorneys and other professionals incurred in connection with investigating, defending, settling, compromising or paying any such losses, claims, damages, actions, liabilities, costs and expenses), joint or several, arising out of or based upon any untrue statement or alleged untrue statement of material fact contained in any registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto or any documents incorporated therein by reference or contained in any free writing prospectus (as such term is defined in Rule 405) prepared by the Company or authorized by it in writing for use by such Holder (or any amendment or supplement thereto); or any omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided , that the Company shall not be liable to such Indemnitee in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon (i) an untrue statement or omission made in such registration statement, including any such preliminary prospectus or final prospectus contained therein or any such amendments or supplements thereto or contained in any free writing prospectus (as such term is defined in Rule 405) prepared by the Company or authorized by it in writing for use by such Holder (or any amendment or supplement thereto), in reliance upon and in conformity with information regarding such Indemnitee or its plan of distribution or ownership interests which was furnished in writing to the Company by such Indemnitee for use in connection with such registration statement, including any such preliminary prospectus or final prospectus contained therein or any such amendments or supplements thereto, or (ii) offers or sales effected by or on behalf, such

Indemnitee "by means of" (as defined in Rule 159A) a "free writing prospectus" (as defined in Rule 405) that was not authorized in writing by the Company.

(2)

If the indemnification provided for in Section 4.7(g)(1) is unavailable to an Indemnitee with respect to any losses, claims, damages, actions, liabilities, costs or expenses referred to therein or is insufficient to hold the Indemnitee harmless as contemplated therein, then the Company, in lieu of indemnifying such Indemnitee, shall contribute to the amount paid or payable by such Indemnitee as a result of such losses, claims, damages, actions, liabilities, costs or expenses in such proportion as is appropriate to reflect the relative fault of the Indemnitee, on the one hand, and the Company, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, actions, liabilities, costs or expenses as well as any other relevant equitable considerations. The relative fault of the Company, on the one hand, and of the Indemnitee, on the other hand, shall be determined by reference to, among other factors, whether the untrue statement of a material fact or omission to state a material fact relates to information supplied by the Company or by the Indemnitee and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; the Company and each Holder agree that it would not be just and equitable if contribution pursuant to this Section 4.7(g)(2) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in this Section 4.7(g)(2). No Indemnitee guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from the Company if the Company was not guilty of such fraudulent misrepresentation.

(h)

Assignment of Registration Rights . The rights of Purchaser to registration of Registrable Securities pursuant to Section 4.7(a) may be assigned by Purchaser to a transferee or assignee of Registrable Securities to which (i) there is transferred to such transferee no less than $50,000,000 in Registrable Securities and (ii) such Transfer is permitted under the terms hereof; provided , however , the transferor shall, within ten days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the number and type of Registrable Securities that are being assigned.


(i)	"Market Stand-Off" Agreement; Agreement to Furnish Information . Purchaser and each Holder hereby agrees:

(1)

that Purchaser shall not sell, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale with respect to any common equity securities of the Company or any securities convertible into or exchangeable or exercisable for any common equity securities of the Company held by Purchaser (other than those included in the registration) for a period specified by the representatives of the underwriters of the common equity or equity-related securities not to exceed ten days prior and 90 days following the effective date of any firm commitment underwritten registered sale of common equity securities of the Company or any securities convertible into or exchangeable or exercisable for any common equity securities of the Company by the Company for the Company’s own account in which the Company gave Purchaser an opportunity to participate in accordance with Sections 4.7(a)(4) through 4.7(a)(6); provided that all executive officers and directors of the Company enter into similar agreements and only if such persons remain subject thereto (and are not released from such agreement) for such period; provided that nothing herein will prevent Purchaser from making any distribution of Registrable Securities to the partners or stockholders thereof or a transfer to an Affiliate that is otherwise in compliance with applicable securities laws, so long as such distributees or transferees agree to be bound by the restrictions set forth in this Section 4.7(i);


(2)	to execute and deliver such other agreements as may be reasonably requested by the Company or the representatives of the underwriters which are consistent with the foregoing obligation in Section 4.7(i)(1) or which are necessary to give further effect thereto; and

(3)

if requested by the Company or the representative of the underwriters of Common Stock (or other securities of the Company), Purchaser shall provide, within ten days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company’s securities pursuant to a registration statement filed under the Securities Act in which Purchaser participates;

provided , that clauses (1) and (2) of this Section 4.7(i) shall not apply to Purchaser or any Holder that, together with its affiliates, is the beneficial owner of less than 5% of the outstanding Common Stock.

(j)

With respect to any underwritten offering of Registrable Securities by Purchaser or other Holders pursuant to this Section 4.7, the Company agrees not to effect (other than pursuant to such registration or pursuant to a Special Registration) any public sale or distribution, or to file any Registration Statement (other than such registration or a Special Registration) covering any of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the period not to exceed ten days prior and 90 days following the effective date of such offering, if requested by the managing underwriter. " Special Registration" means the registration of (i) equity securities and/or options or other rights in respect thereof solely registered on Form S-4 or Form S-8 (or successor form) or (ii) shares of equity securities and/or options or other rights in respect thereof to be offered to directors, members of management, employees, consultants, customers, lenders or vendors of the Company or its direct or indirect Subsidiaries or in connection with dividend reinvestment plans.


(k)	Rule 144; Rule 144A . With a view to making available to Purchaser and Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its reasonable best efforts to:


(1)	make and keep public information available, as those terms are understood and defined in Rule 144(c)(1) or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of this Agreement;


(2)	(A) file with the SEC, in a timely manner, all reports and other documents required of the Company under the Exchange Act and (B) if at any time the Company is not required to file such reports, make available, upon request of any Holder, such information necessary to permit sales pursuant to Rule 144A (including the information required by Rule 144A(d)(4) under the Securities Act);

(3)

so long as Purchaser or a Holder owns any Registrable Securities, furnish to Purchaser or such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of Rule 144 under the Securities Act, and of the Exchange Act; a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as Purchaser or Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration; and


(4)	take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act.


(l)	As used in this Section 4.7, the following terms shall have the following respective meanings:


(1)	"Holder" means Purchaser and any other holder of Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with Section 4.7(h) hereof.


(2)	"Holders’ Counsel" means one counsel for the selling Holders chosen by Holders holding a majority interest in the Registrable Securities being registered.

(3)

"Register ," " registered ," and " Shelf Registration" shall refer to a registration effected by preparing and (a) filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of effectiveness of such registration statement or (b) filing a prospectus and/or prospectus supplement in respect of an appropriate effective Shelf Registration Statement.

(4)

"Registrable Securities" means the Purchased Shares (and any shares of capital stock or other equity interests issued or issuable to any Holder with respect to such Purchased Shares (including the Converted Common Shares) by way of stock dividends or stock splits or in connection with a combination of shares, recapitalization, merger or other reorganization), provided that, once issued, such Securities will not be Registrable Securities when (i) they are sold pursuant to an effective registration statement under the Securities Act, (ii) they may be sold pursuant to Rule 144 without

limitation thereunder on volume or manner of sale, (iii) they shall have ceased to be outstanding or (iv) they have been sold in a private transaction in which the transferor's rights under this Agreement are not assigned to the transferee of the securities. No Registrable Securities may be registered under more than one registration statement at any one time.

(5)

"Registration Expenses" means all expenses incurred by the Company in effecting any registration pursuant to this Agreement (whether or not any registration or prospectus becomes effective or final) or otherwise complying with its obligations under this Section 4.7, including, without limitation, all registration, filing and listing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses, expenses incurred in connection with any "road show", the reasonable fees and disbursements of Holders’ Counsel, and expenses of the Company’s independent accountants in connection with any regular or special reviews or audits incident to or required by any such registration, but shall not include Selling Expenses and the compensation of regular employees of the Company, which shall be paid in any event by the Company.


(6)	"Rule 144" , " Rule 144A" , " Rule 159A" , " Rule 405" and " Rule 415" mean, in each case, such rule promulgated under the Securities Act (or any successor provision), as the same shall be amended from time to time.

(7)

"Scheduled Black-out Period" means the period from and including the last day of a fiscal quarter of the Company to and including the business day after the day on which the Company publicly releases its earnings for such fiscal quarter, provided that the trading window applicable to the Company’s senior management under the Company’s trading policies then in effect is not open any time during such period.


(8)	"Selling Expenses" mean all discounts, selling commissions and stock transfer taxes applicable to the sale of Registrable Securities and fees and disbursements of counsel for any Holder (other than the fees and disbursements of Holders’ Counsel included in Registration Expenses).

(m)

At any time, any holder of Securities (including any Holder) may elect to forfeit its rights set forth in this Section 4.7 from that date forward; provided , that a Holder forfeiting such rights shall nonetheless (i) be obligated under Section 4.7(i)(1) with respect to any Pending Underwritten Offering to the same extent that such Holder would have been obligated if the holder had not withdrawn and (ii) be entitled to participate under Sections 4.7(a)(4)-(6) in any Pending Underwritten Offering to the same extent that such Holder would have been entitled to if the holder had not withdrawn; and provided , further , that no such forfeiture shall terminate a Holder’s rights or obligations under Section 4.7(f) with respect to any prior registration or Pending Underwritten Offering. " Pending Underwritten Offering" means, with respect to any Holder forfeiting its rights pursuant to this Section 4.7(m), (i) any registered sale described in Section 4.7(i)(1) that has an effective date prior to the date of such Holder’s forfeiture, and (ii) any other underwritten offering of Registrable Securities (including an underwritten offering pursuant to a Shelf Registration Statement) in which such Holder has advised the Company of its intent to register its Registrable Securities either pursuant to Section 4.7(a)(2) or 4.7(a)(4) prior to the date of such Holder’s forfeiture.

4.8 Certificate of Designations . The Company shall file the Preferred Stock Certificate of Designations for the Convertible Preferred Stock in the form attached to this Agreement as Exhibit A with the Michigan Secretary, and such Preferred Stock Certificate of Designations shall be in full force and effect as of the Closing Date.

4.9 Indemnification. Neither Article XI nor Article XII of the Certificate of Incorporation shall be amended, repealed or otherwise modified for a period of six years after the Closing Date in any manner that would adversely affect the rights thereunder of any individuals covered thereby (the " Covered Persons" ). From and after the Closing Date, any determination to be made pursuant to Article XI of the Certificate of Incorporation by the Board of Directors with respect to the advancement of expenses shall be made without the participation of any Board Representative. If the Board of Directors makes a determination that the facts then known to the Board of Directors would not preclude indemnification under the Michigan Business Corporation Act, and the Covered Person has complied with the requirements of clauses (a) and (b) of the second sentence of Article XI of the Certificate of Incorporation, then the Company shall be required to advance such expenses to such Covered Person to the fullest extent permitted by the Michigan Business Corporations Act. The provisions of this Section 4.9 shall survive the Closing Date and are intended to be for the benefit of, and shall be enforceable by, each Covered Person and his or her heirs and representatives.

ARTICLE V

TERMINATION

5.1 Termination . This Agreement may be terminated prior to the Closing:


(a)	by mutual written agreement of the Company and Purchaser;

(b)

by the Company or Purchaser, upon written notice to the other party, in the event that the Closing Date does not occur on or before February 16, 2009 or such later date, if any, as Purchaser and the Company agree upon in writing (as such date may be extended, the " Outside Date" ); provided , however , that the right to terminate this Agreement pursuant to this Section 5.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing Date to occur on or prior to the Outside Date;


(c)	by the Company or Purchaser, upon written notice to the other party, in the event that any Governmental Entity shall have issued any order, decree or injunction or taken any other action restraining, enjoining or prohibiting any of the transactions contemplated by this Agreement, and such order, decree, injunction or other action shall have become final and nonappealable;

(d)

by Purchaser, if Purchaser or any of its Affiliates receives written notice from or is otherwise advised by a Governmental Entity that it will not grant (or intends to rescind or revoke if previously approved) any Required Approval or receives written notice from such Governmental Entity that it will not grant such Required Approval on the terms contemplated by this Agreement without imposing any Burdensome Condition, provided that, prior to terminating this Agreement, Purchaser shall have used its reasonable best efforts to obtain such Required Approval without the imposition of such Burdensome Condition;

(e)

by the Company, if the Company is not in material breach of any of the terms of this Agreement, and there has been a breach of any representation, warranty, covenant or agreement made by Purchaser in this Agreement, or any such representation and warranty shall have become untrue after the date of this Agreement, such that Section 1.2(c)(3)(A) or (B) would not be satisfied and such breach or condition is not curable or, if curable, is not cured within thirty (30) days after written notice thereof is given by the Company to Purchaser;

(f)

by Purchaser, if the Purchaser is not in material breach of any of the terms of this Agreement, and there has been a breach of any representation, warranty, covenant or agreement made by the Company in this Agreement, or any such representation and warranty shall have become untrue after the date of this Agreement, such that Section 1.2(c)(2)(A) or (B) would not be satisfied and such breach or condition is not curable or, if curable, is not cured within thirty (30) days after written notice thereof is given by Purchaser to the Company;

(g)

by the Company, at any time following the date of this Agreement and prior to the Closing Date, if (i) the Company is not in material breach of any of the terms of this Agreement, (ii) the Board of Directors of the Company authorizes the Company, subject to complying with the terms of this Agreement, to enter into an agreement with respect to a Superior Proposal and the Company notifies Purchaser in writing that it intends to enter into such an agreement, attaching the most current version of such agreement to such notice, (iii) Purchaser does not make, within three business days of receipt of the Company’s written notification of its intention to enter into a binding agreement for a Superior Proposal, an offer that the Board of Directors determines, in good faith after consultation with its financial advisors, is at least as favorable, from a financial point of view, to the stockholders of the Company as the Superior Proposal and (iv) the Company prior to such termination pays to Purchaser in immediately available funds any fees required to be paid pursuant to Section 5.3. The Company agrees (x) that it will not enter into the binding agreement referred to in clause (ii) above until at least the fourth business day after it has provided the notice to Purchaser required thereby, (y) to notify Purchaser promptly if its intention to enter into the written agreement referred to in its notification changes and (z) during such three business day period, to negotiate in good faith with Purchaser with respect to any revisions to the terms of the transaction contemplated by this Agreement proposed by Purchaser in response to such proposed Superior Proposal, if any;


(h)	by Purchaser if the Board of Directors shall have made a Change of Recommendation or the Company shall have breached the covenant contained in Section 3.4 hereof; or


(i)	by Purchaser (1) if the TARP Approval is not obtained on reasonably satisfactory terms by January 19, 2009 or (2) if the OTS Required Approvals (as defined in Schedule 2.2(f) of the Company Disclosure Schedule), on reasonably satisfactory terms, are not received on or before January 30, 2009.

5.2 Effects of Termination . In the event of any termination of this Agreement as provided in Section 5.1, subject to Section 5.3, this Agreement (other than Section 3.2(b) and Articles V and VI, which shall remain in full force and effect) shall forthwith become wholly void and of no further force and effect; provided that nothing herein shall relieve any party from liability for intentional breach of this Agreement.

5.3 Fees .


(a)	Subject to Section 5.3(b), if this Agreement is terminated by Purchaser pursuant to any of the subsections of Section 5.1 (other than Section 5.1(i)), the Company shall pay to Purchaser the Expense Reimbursement (not to exceed $5 million) pursuant to Sections 5.3(c) and 6.2.

(b)

In lieu of any Expense Reimbursement payable pursuant to (a) above, (1) if this Agreement is terminated pursuant to Section 5.1(f) if the Company breached Section 3.4, or pursuant to Section 5.1 (g) or (h), the Company shall pay to Purchaser a Termination Fee in accordance with Section 5.3(c) and (2) if an Acquisition Proposal is made to the Company, any Subsidiary, or its stockholders generally, or becomes public and thereafter this Agreement is terminated pursuant to Section 5.1(b), (f), (g), (h) or (i) and within 12 months after such termination the Company enters into a definitive agreement to effect, or consummates, an Acquisition Proposal, the Company shall pay to Purchaser a Termination Fee in accordance with Section 5.3(c).

(c)

"Termination Fee" means an amount in cash equal to 3.99% of the Purchase Price. Any Termination Fee or Expense Reimbursement payable pursuant to this Section 5.3 shall be paid by wire transfer of immediately available funds to the account or accounts designated by Purchaser (i) in the case of Section 5.3(a) or 5.3(b)(1), contemporaneously with the termination of this Agreement, (ii) in the case of Section 5.3(b)(2), no later than two business days after the day on which the obligation to pay such Termination Fee or Expense Reimbursement arises. To the extent not paid when due, any Termination Fee shall accrue interest at a rate equal to 18%. In the event the Termination Fee is paid when due, the Company shall have no obligation to pay any Expense Reimbursement.

(d)

Each of the Company and Purchaser acknowledges that the agreements contained in this Section 5.3 are an integral part of the transactions contemplated by this Agreement. In the event that a party shall fail to pay the Termination Fee when due, the party obligated to pay such Termination Fee shall reimburse the party receiving the Termination Fee for all reasonable expenses actually incurred or accrued by such other party (including reasonable expenses of counsel) in connection with the collection under and enforcement of this Section 5.3. The parties hereto agree and understand that in no event shall any party be required to pay a Termination Fee on more than one occasion, and in no event shall the aggregate fees payable by any such party pursuant to Section 5.3 exceed the maximum amount of the Termination Fee.

ARTICLE VI

MISCELLANEOUS

6.1 Survival . Each of the representations and warranties set forth in this Agreement, shall survive the Closing under this Agreement but only for a period of two years following the Closing Date (or until final resolution of any claim or action arising from the breach of any such representation and warranty, if notice of such breach was provided prior to the end of such period) and thereafter shall expire and have no further force and effect, including in respect of Section 4.5 provided that (i) the representations and warranties contained in Section 2.2(a) (Organization and Authority), Section 2.2(d) (Authorization), Section 2.2(b) (Capitalization), Section 2.2(c) (Subsidiaries) each of which shall survive the Closing until the date that is three years from the Closing Date, and (ii) the representations and warranties contained in Section 2.2(j) (Taxes) which shall survive the Closing until 60 days after the expiration of the applicable statute of limitations. Except as otherwise provided herein, all

covenants and agreements contained herein, other than those which by their terms are to be performed in whole or in part after the Closing Date, shall terminate as of the Closing Date.

6.2 Expenses . Each of the parties will bear and pay all other costs and expenses incurred by it or on its behalf in connection with the transactions contemplated pursuant to this Agreement; except that the Company shall bear and upon Purchaser’s request in the manner specified below, reimburse Purchaser for all of its reasonable out-of-pocket expenses incurred in connection with due diligence, the negotiation and preparation of this Agreement and undertaking of the transactions contemplated pursuant to this Agreement (including fees and expenses of attorneys, consultants and accounting and financial advisers incurred by or on behalf of Purchaser or its Affiliates in connection with the transactions contemplated pursuant to this Agreement) (the " Expense Reimbursement" ); provided that, if payable at any time other than in connection with a termination pursuant to Section 5.1, such Expense Reimbursement shall not exceed $10 million.

6.3 Amendment; Waiver . No amendment or waiver of any provision of this Agreement will be effective with respect to any party unless made in writing and signed by an officer of a duly authorized representative of such party. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The conditions to each party’s obligation to consummate the Closing are for the sole benefit of such party and may be waived by such party in whole or in part to the extent permitted by applicable law. No waiver of any party to this Agreement, as the case may be, will be effective unless it is in a writing signed by a duly authorized officer of the waiving party that makes express reference to the provision or provisions subject to such waiver. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.

6.4 Counterparts and Facsimile . For the convenience of the parties hereto, this Agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts will together constitute the same agreement. Executed signature pages to this Agreement may be delivered by facsimile and such facsimiles will be deemed as sufficient as if actual signature pages had been delivered.

6.5 Governing Law . This Agreement will be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State (except to the extent that mandatory provisions of Michigan law are applicable). The parties hereby irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the state and federal courts located in the Borough of Manhattan, State of New York for any actions, suits or proceedings arising out of or relating to this Agreement and the transactions contemplated hereby.

6.6 WAIVER OF JURY TRIAL . EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

6.7 Notices . Any notice, request, instruction or other document to be given hereunder by any party to the other will be in writing and will be deemed to have been duly given (a) on the date of delivery if delivered personally or by telecopy or facsimile, upon confirmation of receipt, (b) on the first business day following the date of dispatch if delivered by a recognized next-day courier service, or (c) on the third business day following the date of mailing if delivered by registered or certified mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice.


(a)	If to Purchaser to it at:

MP Thrift Investments L.P.

520 Madison Avenue

New York, New York 10022

Attn: Robert H. Weiss, General Counsel

Telephone: 212-651-9525

Fax: 212-651-4014

with a copy to (which copy alone shall not constitute notice):

Sullivan & Cromwell LLP

125 Broad Street

New York, New York 10004

Attn: Mitchell S. Eitel

George Sampas

Telephone: (212) 558-4000

Fax: (212) 558-3588


(b)	If to the Company:

Flagstar Bancorp, Inc.

5151 Corporate Drive

Troy, Michigan 48098-2639

Fax No.: (248) 312-6833

Attn: Paul Borja

with a copy to (which copy alone shall not constitute notice):

Kutak Rock LLP

1101 Connecticut Avenue, N.W.

Suite 1000

Washington, DC 20036-4374

Fax No.: (202) 828-2488

Attn: Jeremy T. Johnson

6.8 Entire Agreement, Etc. (a) This Agreement (including the Exhibits, Schedules and Disclosure Schedules hereto) constitutes the entire agreement, and supersedes all other prior agreements, understandings, representations and warranties, both written and oral, among the parties, with respect to the subject matter hereof; and (b) this Agreement will not be assignable by operation of law or otherwise (any attempted assignment in contravention hereof being null and void); provided that Purchaser may assign its rights and obligations under this Agreement (i) to any Affiliate, but only if the transferee agrees in writing for the benefit of the Company (with a copy thereof to be furnished to the Company) to be bound by the terms of this Agreement (any such transferee shall be included in the term " Purchaser" ); provided , further , that no such assignment shall relieve Purchaser of its obligations hereunder and (ii) for those rights contained in Article IV (subject to applicable law).

6.9 Interpretation; Other Definitions . Wherever required by the context of this Agreement, the singular shall include the plural and vice versa, and the masculine gender shall include the feminine and neuter genders and vice versa, and references to any agreement, document or instrument shall be deemed to refer to such agreement, document or instrument as amended, supplemented or modified from time to time. All article, section, paragraph or clause references not attributed to a particular document shall be references to such parts of this Agreement, and all exhibit, annex and schedule references not attributed to a particular document shall be references to such exhibits, annexes and schedules to this Agreement. In addition, the following terms are ascribed the following meanings:

(a)

the term " Affiliate" means, with respect to any person, any person directly or indirectly controlling, controlled by or under common control with, such other person. For purposes of this definition, " control" (including, with correlative meanings, the terms " controlled by" and " under common control with" ) when used with respect to any person, means the possession, directly or indirectly, of the power to cause the direction of management or policies of such person, whether through the ownership of voting securities by contract or otherwise;


(b)	the word " or" is not exclusive;


(c)	the words " including ," " includes ," " included" and " include" are deemed to be followed by the words "without limitation"; and


(d)	the terms " herein ," " hereof" and " hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision;


(e)	"business day" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York or in the State of Ohio generally are authorized or required by law or other governmental action to close;


(f)	"person" has the meaning given to it in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act;


(g)	a person shall be deemed to " beneficially own" any securities of which such person is considered to be a " beneficial owner" under Rule 13d-3 under the Exchange Act; and


(h)	to the " knowledge of the Company" or " Company’s knowledge" means the actual knowledge after due inquiry of the "officers" (as such term is defined in Rule 3b-2 under the Exchange Act, but excluding any Vice President or Secretary) of the Company.

6.10 Captions . The article, section, paragraph and clause captions herein are for convenience of reference only, do not constitute part of this Agreement and will not be deemed to limit or otherwise affect any of the provisions hereof.

6.11 Severability . If any provision of this Agreement or the application thereof to any person (including the officers and directors the parties hereto) or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, will remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties.

6.12 No Third Party Beneficiaries . Nothing contained in this Agreement, expressed or implied, is intended to confer upon any person other than the parties hereto, any benefit right or remedies, except that (i) the provisions of Sections 4.5 shall inure to the benefit of the persons referred to in that Section, (ii) the provisions of Section 4.9 shall inure to the benefit of the Covered Persons and (iii) the provisions of Sections 1.2(c)(1)(C), 3.1(a) and Section 3.2(b) shall inure to the benefit of MatlinPatterson, and in the case of clause (iii) MatlinPatterson shall be entitled to seek specific performance of the terms thereof, in addition to any other remedies to which it is entitled at law or equity; provided that, it is understood that the rights of MatlinPatterson pursuant to this Section 6.12 are not intended to create any obligation for MatlinPatterson under this Agreement nor make MatlinPatterson a party to this Agreement.

6.13 Time of Essence . Time is of the essence in the performance of each and every term of this Agreement.

6.14 Certain Adjustments . If the representations and warranties set forth in Section 2.2(b) shall not be true and correct as of the Closing Date, the number of shares of Common Stock and Convertible Preferred Stock to be purchased shall be, at Purchaser’s option, proportionately adjusted to provide Purchaser the same economic effect as contemplated by this Agreement in the absence of such failure to be true and correct.

6.15 Public Announcements . Subject to each party’s disclosure obligations imposed by law or regulation or the rules of any stock exchange upon which its securities are listed, each of the parties hereto will cooperate with each other in the development and distribution of all news releases and other public information disclosures with respect to this Agreement and any of the transactions contemplated by this Agreement, and neither the Company nor Purchaser will make any such news release or public disclosure without first consulting with the other, and, in each case, also receiving the other’s consent (which shall not be unreasonably withheld or delayed) and each party shall coordinate with the party whose consent is required with respect to any such news release or public disclosure.

6.16 Specific Performance . The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms. It is accordingly agreed that the parties shall be entitled to seek specific performance of the terms hereof, this being in addition to any other remedies to which they are entitled at law or equity.

* * *

IN WITNESS WHEREOF , this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto as of the date first herein above written.



		FLAGSTAR BANCORP, INC.

		By:	/s/ Mark T. Hammond
		Name:	Mark T. Hammond
		Title:	President and Chief Executive Officer


		MP THRIFT INVESTMENTS L.P.

		By:	MP (Thrift) Global Partners III LLC,
			its General Partner

			/s/ Robert H. Weiss
		Name:	Robert H. Weiss
		Title:	General Counsel

Schedule A

List of Management Members


1.	Thomas J. Hammond


2.	Mark T. Hammond


3.	Paul D. Borja


4.	Kirstin A. Hammond


5.	Matthew I. Roslin


6.	Robert O. Rondeau

Schedule A-1

Schedule B



Name of Subsidiary		State or Other Jurisdiction of Incorporation/Organization

Douglas Insurance Agency, Inc.		Michigan
Flagstar Bank, FSB		United States of America
Flagstar Commercial Corporation		Michigan
Flagstar Investment Group, Inc.		Michigan
Flagstar Reinsurance Company		Vermont
Flagstar Statutory Trust II		Connecticut
Flagstar Statutory Trust III		Delaware
Flagstar Statutory Trust IV		Delaware
Flagstar Statutory Trust V		Delaware
Flagstar Statutory Trust VI		Delaware
Flagstar Statutory Trust VII		Delaware
Flagstar Statutory Trust VIII		Delaware
Flagstar Statutory Trust IX		Delaware
Flagstar Statutory Trust X		Delaware
Flagstar Title Insurance Agency, Inc.		Michigan
Paperless Office Solutions, Inc.		Michigan

Schedule B-1

Schedule C

[Reserved]

Schedule C-1

Schedule D

List of Management Purchasers of Management Purchased Shares


1.	Thomas J. Hammond, who the Company represents is committed to invest $2 million.


2.	Mark T. Hammond, who the Company represents is committed to invest $2 million.


3.	Such other senior executives of the Company, who may invest, in the aggregate, an additional $1 million.

Schedule D-1

Schedule E

The following is a summary Term Sheet of the material terms of the equity awards that will be applicable to certain senior executives of the Company, subject to (i) all requisite approvals of the Compensation Committee of the Company’s Board of Directors, and (ii) the occurrence of the Closing. Following the date hereof, the parties shall promptly and in good faith negotiate the definitive terms and documents on customary terms, including with respect to antidilution, and consistent with the terms below and reasonably acceptable to the parties.



PLAN	Equity for 14.5% of the total shares of Company common stock will be granted under the Company’s stockholder-approved Flagstar Bancorp, Inc. 2006 Equity Incentive Plan (as amended, the "Plan"). The executives to receive grants below have agreed to waive their current outstanding equity grants, with the exception of restricted stock grants that have been issued but not yet vested.
TYPE OF AWARDS	Stock options and restricted shares will be granted in three tranches. The first tranch of awards will be time-vested stock options, which will be granted to the following executives at the Closing, as further described herein. The executives receiving the first tranch will be determined prior to Closing. The second tranch of awards will be a performance-vested stock option pool, which will be granted subject to performance criteria and allocation, as further described herein. The third tranch of awards will be restricted shares, which will be granted to the first tranch executives at the time the Purchaser disposes of a majority of the aggregate amount of Company shares that it acquired at the Closing (an "MP Sale").
TIME VESTED STOCK OPTIONS TERMS	Time and Amount of Grants: • The first tranch will be options to acquire shares of Company common stock equal to up to 3% of the total shares of Company common stock on the date of grant (the “ Time Vested Stock Options ”). The Time Vested Stock Options will have a term that expires 10 years after the date of grant. • The allocation among the executives of the Time Vested Stock Options will be determined before Closing. • In the event that there is not a sufficient number of shares available for issuance under the Plan to allow for the award of the full 3% of the Time Vested Stock Options on the Closing, the proposed amendments to the Plan as part of the Stockholder Proposals will provide adequate availability to increase the amount of shares available for issuance under the Plan to accommodate the equity grants contemplated under this Term Sheet so that, promptly following the approval, the executives will receive an additional grant of Time Vested Stock Options equal to the remainder of the Time Vested Stock Option 3% grant that was not granted at the Closing.
	Vesting : • The Time Vested Stock Options will vest and become exercisable as follows: (1) ratably over three years from the date of grant on each anniversary of grant, or (2) immediately on the date of an MP Sale. The vesting of the Time Vested Stock Options will be subject to and conditioned upon the continuous employment of the grantee through the relevant vesting date. If the grantee’s employment is terminated for any reason (other than as described below), all unvested Time Vested Stock Options will be forfeited upon such termination of employment.



	• In the event that a grantee is terminated by the Company without Cause or resigns for Good Reason (each, as defined) prior to the vesting date, he or she will be automatically vested in any unvested Time Vested Stock Options on the date of such termination. The Time Vested Stock Options will have a post-termination exercise period equal to the shorter of (i) 1 year following the date of such termination or (ii) the remainder of the term of the option.
	Exercise Price : The exercise price of the Time Vested Stock Options will be the greater of (i) the per share Purchase Price, or (ii) the fair market value of the Company’s common stock on the date of grant (“FMV”).
PERFORMANCE-VESTED STOCK OPTION POOL	Time and Amount of Grant: • After the approval of the Stockholder Proposals concerning the amended Plan, the Company will allocate for options to acquire shares of Company common stock equal to 4.5% of the total shares of Company common stock on the date of grant (the “ Performance Vested Stock Option Pool ”). The Performance Vested Stock Option Pool will have a term that expires 10 years from the date of grant. • The allocation among the executives, other members of management and employees of the Performance Vested Stock Option Pool will be established as of the relevant performance vesting dates as set forth in the grant documentation approved by the Compensation Committee of the Board. The allocation mechanics and the structure as options and/or restricted stock and/or SARs will be subject to further tax review and optimization.
	Allocation/Vesting : • The Performance Vested Stock Option Pool will be allocated and will initially vest based upon the attainment of performance criteria to be established by the Compensation Committee. The subsequent vesting of allocated portions of the Performance Vested Stock Option Pool will also be subject to and conditioned upon the continuous employment of the applicable grantee(s), with ratable vesting of the allocated grants over the three years following the date(s) of allocation on each anniversary date. If an applicable grantee terminates employment for any reason (other than as set forth in his or her specific grant or employment contract), all unvested grants from the Performance Vested Stock Option Pool will be forfeited upon such termination of employment.
	• In the event of a Change of Control (as defined) of the Company, all performance criteria will be measured by the Compensation Committee as of the Change of Control date and vesting/allocations will be effected accordingly or, if determined by the Board, the Performance Vested Stock Option Pool will continue following such event with such modifications to performance criteria as the Compensation Committee deems appropriate to give effect to the transaction.
	Exercise Price : The “exercise price” of the Performance Vested Stock Option Pool grants will be the FMV at the initial allocation date for the pool.



RESTRICTED SHARE TERMS	TIME AND AMOUNT OF GRANT: • At the time of an MP Sale, all executives who received the Time Vested Stock Options and who remain employed with the Company at the time of an MP Sale will receive a one-time grant of restricted shares under the Plan (the “ Restricted Shares ”). • Only one grant of Restricted Shares will be granted to the executives under this program in the amount described below. • The initial allocation of the Restricted Shares for issuance to the executives in connection with a MP Sale shall be as set forth below will be determined before Closing. • The aggregate number of Restricted Shares subject to grant to the executives on the MP Sale will be such number of shares of Common Stock that equal the dollar value determined as follows:
	(FMV per share of Company common stock determined in MP Sale - the per-share Purchase Price) x “n” shares of Company common stock. “n” is determined as follows: If and to the extent that the Purchaser’s return on the MP Sale (as measured by the sale price of Company common shares in the MP Sale compared to the per-share Purchase Price) is equal to the following multiples, As a hypothetical example, if at the time of the MP Sale, the FMV per share of Company stock is $2, and the return to Purchaser on this MP Sale is a 2.0X return, the Executives as a group would receive a grant of restricted shares in aggregate value equal to $1 [$2 - $1] multiplied by 1.5% of the total shares of Company common stock at the Closing (i.e., the value as if such 1.5% of the Company common stock had a value of $1 per share). As another hypothetical example, if at the time of the MP Sale, the FMV per share of Company is $5 per share, and the return to Purchaser on this MP Sale is a 5.0X return, the Executives as a group would receive a grant of restricted shares in aggregate value equal to $4 [$5 - $1] multiplied by 7.0% of the total shares of Company common stock at the Closing (i.e., the value as if such 7.0% of the Company common stock had a value of $4 per share). then “n” shall be set as follows:
	2.0X = 1.5% of the total shares of Company common stock at the Closing 3.0X = + 1.5% of the total shares of Company common stock at the Closing 4.0X = + 2.0% of the total shares of Company common stock at the Closing 5.0X = + 2.0% of the total shares of Company common stock at the Closing
	Vesting : • The Restricted Shares will vest and the restrictions thereon will lapse based upon the percentage of interest in the Company that is sold by Purchaser in the MP Sale. • If the MP Sale results in Purchaser disposing of 100% of its interests in the Company, the Restricted Shares that are issued in connection with the MP Sale will fully vest in the executives on such date.

¹ As a hypothetical example, if at the time of the MP Sale, the FMV per share of Company stock is $2, and the return to Purchaser on this MP Sale is a 2.0X return, the Executives as a group would receive a grant of restricted shares in aggregate value equal to $1 [$2 - $1] multiplied by 1.5% of the total shares of Company common stock at the Closing (i.e., the value as if such 1.5% of the Company common stock had a value of $1 per share).

As another hypothetical example, if at the time of the MP Sale, the FMV per share of Company is $5 per share, and the return to Purchaser on this MP Sale is a 5.0X return, the Executives as a group would receive a grant of restricted shares in aggregate value equal to $4 [$5 - $1] multiplied by 7.0% of the total shares of Company common stock at the Closing (i.e., the value as if such 7.0% of the Company common stock had a value of $4 per share).



	• If the MP Sale results in Purchaser retaining any portion of its interest in the Company, the Restricted Shares that are issued will vest in the executives as follows: (i) the proportion of Restricted Shares equal to the actual percentage disposed of by Purchaser in the MP Sale will vest fully in the executives on such date, and (ii) the remaining Restricted Shares that are issued in connection with the MP Sale will vest ratably over the two years following the date of grant on each anniversary date, conditioned on the continued employment of the executive with the Company during such period, provided, however, that if a Change of Control occurs after the MP Sale, all unvested Restricted Shares that were issued in connection with the MP Sale shall vest on such date of the Change of Control.
	• In the event that an executive is terminated by the Company without Cause or leaves for Good Reason either prior to an MP Sale or after such an MP Sale but prior to the relevant vesting date, he or she will retain the rights to receive the Restricted Shares for up to one year from the date of such termination, and any Restricted Shares that were or are issued to an executive in connection with an MP Sale that would remain subject to two-year vesting will be fully vested.

Schedule E-7

Schedule F

MP (Thrift) LLC

MP (Thrift) Asset Management LLC

MP (Thrift) Global Partners III LLC

MP (Thrift) Global Opportunities Partners (Special) III LP

MP (Thrift) Global Opportunities Investments III LP

Schedule F-1

Exhibit A

Preferred Stock Certificate of Designations

EXHIBIT 10.6

AGREEMENT

RELATING TO FLAGSTAR BANCORP, INC.’S PARTICIPATION IN THE

DEPARTMENT OF THE TREASURY’S CAPITAL PURCHASE PROGRAM

This Agreement Relating to Flagstar Bancorp, Inc.’s Participation in the Department of the Treasury’s Capital Purchase Program ("Agreement") is entered into among Flagstar Bancorp, Inc. (the "Company"), Flagstar Bank, FSB (the "Bank") and the undersigned Senior Executive Officer ("SEO") effective as of the Effective Date specified below.

WHEREAS , the Company anticipates entering into a Securities Purchase Agreement or similar agreement (the "Purchase Agreement") with the United States Department of the Treasury (the "Treasury") that provides for the Company’s participation in the Capital Purchase Program (the "CPP") of the Troubled Assets Relief Program as established by the Treasury under the Emergency Economic Stabilization Act of 2008 (the "EESA");

WHEREAS , as a condition of closing the investment contemplated by the Purchase Agreement, the Company is required to meet specified standards for compensation payable to an SEO;

WHEREAS, the undersigned SEO provides services to the Company and the Bank; and

WHEREAS , the Company, the Bank and the undersigned SEO desire to enter into this Agreement to comply with the CPP and in consideration of the benefits the undersigned SEO will receive as a result of the Company’s participation in the CPP.

NOW, THEREFORE, BE IT HEREBY AGREED THAT:


1.	This Agreement is effective as of the date the Company and the Treasury close the transaction contemplated under the Purchase Agreement (the "Effective Date").


2.	Notwithstanding the terms of any compensation, bonus, incentive, equity, severance, employment or other plan, arrangement or agreement applicable to the undersigned SEO (the "Compensation Programs"), the following restrictions govern the Company, the Bank and the undersigned SEO:


(a)	No Golden Parachute Payments . Neither the Company nor the Bank shall make any Golden Parachute Payment to the undersigned SEO during any period during which such individual is an SEO and the Treasury holds an equity or debt position acquired from the Company through the CPP (the "CPP Covered Period").


(b)	Recovery of Bonus and Incentive Compensation . Any bonus and incentive compensation paid to the undersigned SEO during the CPP Covered Period is subject to recovery or clawback by the Company or the Bank if the compensation was based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria.


(c)	Compensation Program Amendments . Each of the Company’s and Bank’s Compensation Programs is hereby amended to the extent necessary to give effect to Sections 2(a) and (b) above. By way of reference only and not intending to be completely exhaustive, the Compensation Programs may include those plans, arrangements or agreements listed on Exhibit A of this Agreement.


(d)	Definitions and Interpretations . This Agreement shall be interpreted as follows:


(i)	"Senior Executive Officers" means the individuals of the Company as defined in Section 111(b)(3) of the EESA;


(ii)	"Golden Parachute Payment" means a payment as defined in Section 111(b)(2)(C) of the EESA;


(iii)	This Agreement is applicable to the Company, the Bank and any entities treated as a single employer with the Company under 31 C.F.R. § 30.1(b) (as in effect on the Effective Date);


(iv)	The CPP Covered Period shall be limited by, and interpreted in a manner consistent with, 31 C.F.R. § 30.11 (as in effect on the Effective Date); and


(v)	Sections 2(a) and (b) above are intended to, and will be interpreted, administered and construed to, comply with Section 111 of the EESA (and, to the maximum extent consistent with the preceding, to permit operation of the Compensation Programs in accordance with their terms before giving effect to this Agreement).


(e)	Miscellaneous . To the extent not subject to federal law, this Agreement will be governed by and construed in accordance with the laws of the State of Michigan.

[SIGNATURE PAGE FOLLOWS]

EXECUTED this 30th day of January, 2009, effective as of the Effective Date.



FLAGSTAR BANCORP, INC.		FLAGSTAR BANK, FSB

(Name and Title)		(Name and Title)

		SENIOR EXECUTIVE OFFICER

		Printed Name:

EXHIBIT A

COMPENSATION PROGRAMS

Employment Agreement

Performance-Based Incentive Compensation Program

Flagstar Bancorp, Inc. 2006 Equity Incentive Plan

Flagstar Bancorp, Inc. 1997 Employees and Directors Stock Option Plan

Flagstar Bancorp, Inc. 2000 Stock Incentive Plan

EXHIBIT 10.7

PURCHASE AGREEMENT

THIS PURCHASE AGREEMENT (this "Agreement") is effective as of the 17th day of February, 2009, by and between Flagstar Bancorp, Inc. (the "Company"), a corporation organized under the laws of the State of Michigan, with its principal offices at 5151 Corporate Drive, Troy, Michigan 48098-2639 and MP Thrift Investments L.P., a Delaware limited partnership (the "Purchaser").

WHEREAS, the Company entered into an Investment Agreement dated as of December 17, 2008 with the Purchaser (the "Investment Agreement"), pursuant to which the Purchaser purchased from the Company 250,000 shares of the Company’s Convertible Participating Voting Preferred Stock, Series B (the "Series B Preferred Stock"), at a purchase price of $1,000 per share, with each share convertible into common stock, par value $0.01 per share, of the Company (the "Common Stock"), at the liquidation preference divided by $0.80;

WHEREAS, all capitalized terms used in this Agreement, but which are not defined herein, shall have the definition that is ascribed to them under the Investment Agreement;

WHEREAS, in connection with the issuance of the Series B Preferred Stock, the Company entered into an Amendment and Waiver Agreement dated as of January 30, 2009 with the Purchaser (the "Closing Agreement"), pursuant to which, subject to the terms and conditions set forth therein, the Company agreed to issue and sell, and, the Purchaser agreed to purchase: (i) 50,000 shares of the Company’s preferred stock with terms substantially identical to the Series B Preferred Stock at a purchase price of $1,000 per share, with each share convertible into Common Stock, at the liquidation preference divided by $0.80 (the "Conversion Shares"), and (ii) $50 million of trust preferred securities with a 10% coupon, both as described in the Closing Agreement.

IN CONSIDERATION of the mutual covenants contained in this Agreement, the Company and the Purchaser agree as follows:


SECTION 1.	Agreement to Sell and Purchase the Shares. At the Closing (as defined in Section 3), the Company will, subject to the terms and conditions of this Agreement, issue and sell to the Purchaser and the Purchaser will buy from the Company, upon the terms and conditions hereinafter set forth, 25,000 shares of Series B Preferred Stock (the "Additional Shares") at $1,000 per share (the "Purchase Price").


SECTION 2.	Delivery of the Shares at the Closing.

2.1

The completion of the purchase and sale of the Additional Shares (the "Closing") shall occur on February 17, 2008 at the offices of Sullivan & Cromwell LLP located at 125 Broad Street, New York, New York 10004 or such other date or location as agreed by the parties, but not prior to the date that the conditions for Closing set forth below have been satisfied or waived by the appropriate party (the "Closing Date").

2.2

At the Closing, the Purchaser shall deliver, in immediately available funds, the full amount of the Purchase Price for the Additional Shares being purchased hereunder to an account designated by the Company and the Company shall deliver to the Purchaser the Additional Shares evidenced by one or more share certificates incorporating the terms set forth in the certificate of designations of the Series B Preferred Stock bearing an appropriate legend referring to the fact that the Series B Preferred Stock were sold in reliance upon the exemption from registration under the Securities Act of 1933, as amended (the "Securities Act"), provided by Section 4(2) thereof and Rule 506 thereunder as more further described in Section 3.5.


SECTION 3.	Representations, Warranties and Covenants of the Purchaser. The Purchaser represents and warrants to, and covenants with, the Company that:


3.1	Experience. (i) The Purchaser is knowledgeable, sophisticated and experienced in financial and business matters, in making, and is qualified to make, decisions with respect to investments in shares representing an investment decision like that involved in the purchase of the Additional Shares, including investments in securities issued by the Company and comparable entities, has the ability to

bear the economic risks of an investment in the Additional Shares and has reviewed carefully the information provided by the Company to the Purchaser in connection with this Agreement and the purchase of the Additional Shares hereunder, and has requested, received, reviewed and considered all information it deems relevant in making an informed decision to purchase the Additional Shares; (ii) the Purchaser is acquiring Additional Shares in the ordinary course of its business and for its own account for investment only and with no present intention of distributing any of the Additional Shares or any arrangement or understanding with any other persons regarding the distribution of such Additional Shares (this representation and warranty not limiting the Purchaser’s right to sell pursuant to a registration statement or in compliance with the Securities Act and the rules and regulations promulgated thereunder (the "Rules and Regulations")); (iii) the Purchaser will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Additional Shares, nor will the Purchaser engage in any short sale that results in a disposition of any of the Additional Shares by the Purchaser, except in compliance with the Securities Act and the Rules and Regulations and any applicable state securities laws; (iv) the Purchaser is an "accredited investor" within the meaning of Rule 501(a) of Regulation D promulgated under the Securities Act.

3.2

Reliance on Exemptions. The Purchaser understands that the Additional Shares are being offered and sold to it in reliance upon specific exemptions from the registration requirements of the Securities Act, the Rules and Regulations and state securities laws and that the Company is relying upon the truth and accuracy of, and the Purchaser’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of the Purchaser to acquire the Additional Shares.

3.3

Investment Decision. The Purchaser understands that nothing in the Agreement or any other materials presented to the Purchaser in connection with the purchase and sale of the Additional Shares, constitutes legal, tax or investment advice. The Purchaser has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of the Additional Shares.

3.4

Risk of Loss. The Purchaser understands that its investment in the Additional Shares involves a significant degree of risk, including a risk of total loss of the Purchaser’s investment, and the Purchaser has full cognizance of and understands all of the risk factors related to the Purchaser’s purchase of the Securities. The Purchaser understands that the market price of the Common Stock into which the Additional Shares is convertible has been volatile, and that no representation is being made as to the future value of the Additional Shares.


3.5	Legend. The Purchaser understands that, until such time as a registration statement has been declared effective or the Additional Shares may be sold pursuant to Rule 144 under the Securities Act without any restriction as to the number of securities as of a particular date that can then be immediately sold, the Additional Shares will bear a restrictive legend in substantially the following form:

"THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS.

THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO TRANSFER AND OTHER RESTRICTIONS SET FORTH IN AN INVESTMENT AGREEMENT, DATED AS OF DECEMBER 17, 2008, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE ISSUER."


3.6	Transfer Restrictions. Consistent with the legend set forth in Section 3.5, the Additional Shares may only be disposed of in compliance with state and federal securities laws and the transfer and other restrictions set forth in the Investment Agreement as if they were "Securities" thereunder.


SECTION 4.	Representations, Warranties and Covenants of the Company. The Company represents and warrants to, and covenants with, the Purchaser that:


4.1	Organization and Standing. The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Michigan.

4.2

Execution and Delivery; Enforceability. The execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby have been duly authorized by the Board of Directors. This Agreement has been duly and validly executed and delivered by the Company and, assuming due authorization, execution and delivery by Purchaser, is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms (except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and similar laws of general applicability relating to or affecting creditors’ rights or by general equity principles). No other corporate proceedings are necessary for the execution and delivery by the Company of this Agreement, the performance by it of its obligations hereunder or the consummation by it of the transactions contemplated hereby, subject, in the case of the authorization of the Conversion Shares, to receipt of the Stockholder Approvals identified in the Certificate of Designations.

4.3

Due Authorization. The Additional Shares have been duly authorized and, when issued and delivered against receipt of consideration therefore as provided in this Agreement, will be validly issued, fully paid and non-assessable, will not be issued in violation of or subject to preemptive rights of any other stockholder of the Company and will not result in the violation or triggering of any price-based antidilution adjustments under any agreement to which the Company is a party. The voting rights of the holders of the Additional Shares will be enforceable in accordance with the terms of the Certificate of Designations. The Certificate of Designations has been filed with the Secretary of State of the state of Michigan and, as of the Closing Date, will be in full force and effect and enforceable against the Company in accordance with its terms.

4.4

Governmental Consents. No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental agency or body is required for the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement, except for compliance with the Blue Sky laws and federal securities laws applicable to the offering of the Shares and such consents, approvals, authorizations or other orders as have been obtained and are in full force and effect.

4.5

No Conflicts. Neither the execution and delivery by the Company of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance by the Company with any of the provisions hereof (including, without limitation, the conversion provisions of the Convertible Preferred Stock), will (A) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or result in the loss of any benefit or creation of any right on the part of any third party under, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of any liens, charges, adverse rights or claims, pledges, covenants, title defects, security interests and other encumbrances of any kind upon any of the material properties or assets of the Company or any Subsidiary under any of the terms, conditions or provisions of (i) subject in the case of the authorization and issuance of the Conversion Shares to receipt of the approval by the Company’s stockholders of the Stockholder Proposals, its Certificate of Incorporation or bylaws (or similar governing documents) or the certificate of incorporation, charter, bylaws or other governing instrument of any Subsidiary or (ii) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company or any Subsidiary is a party or by which it may be bound, or to which the Company or any Subsidiary or any of the properties or assets of the Company or any Subsidiary may be subject, or (B) violate any law, statute, ordinance, rule, regulation, permit, concession, grant, franchise or any judgment, ruling, order, writ, injunction or decree applicable to the Company or any Subsidiary or any of their respective properties or assets.


SECTION 5.	Registration Rights. The Purchaser shall have the right to have the Additional Shares (including the Conversion Shares) registered for resale under the Securities Act, and related indemnification rights, as

set forth in Section 4.7 of the Investment Agreement, as if the Additional Shares (including the Conversion Shares) were "Registrable Securities" thereunder.


SECTION 6.	New York Stock Exchange Listing. The Company shall promptly use its reasonable best efforts to cause the Conversion Shares to be approved for listing of the New York Stock Exchange or such other nationally recognized securities exchange on which the Common Stock may be listed, subject to official notice of issuance.


SECTION 7.	Notices. All notices, requests, consents and other communications hereunder shall be in writing, shall be mailed by first-class registered or certified airmail, e-mail, confirmed facsimile or nationally recognized overnight express courier postage prepaid, and shall be deemed given when so mailed and shall be delivered as addressed as follows:


(a)	if to the Company, to:

Flagstar Bancorp, Inc.

5151 Corporate Drive,

Troy, Michigan 48098-2639

Attention: Mr. Paul Borja

Facsimile: (248) 312-6833

E-mail: paul.borja@flagstar.com

with a copy to:

Kutak Rock LLP

1101 Connecticut Avenue, N.W.

Suite 1000

Washington, DC 20036-4374

Attention: Jeremy Johnson, Esq.

Facsimile: (202) 828-2488

E-mail: jeremy.johnson@KutakRock.com

or to such other person at such other place as the Company shall designate to the Purchaser in writing; and


(b)	if to a Purchaser, to:

MP Thrift Investments L.P.

520 Madison Avenue

New York, New York 10022

Attention: Robert H. Weiss, General Counsel

Facsimile: (212) 651-4014

with a copy to:

Sullivan & Cromwell LLP

125 Broad Street

New York, New York 10004

Attention: Mitchell S. Eitel, Esq.

George J. Sampas, Esq.

Facsimile: (212) 558-3588

or at such other address or addresses as may have been furnished to the Company in writing.


SECTION 8.	Changes. This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Company and the Purchaser. Any amendment or waiver effected in accordance with this Section 6 shall be binding upon the Purchaser and the Company.


SECTION 9.	Headings. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement.


SECTION 10.	Severability. In case any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.

SECTION 11.

Governing Law; Venue. This Agreement is to be construed in accordance with and governed by the federal law of the United States of America and the internal laws of the State of New York without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of New York to the rights and duties of the parties, except that the parties hereto intend that the provisions of Sections 5-1401 and 5-1402 of the New York general obligations law shall apply to this Agreement. Each of the Company and the Purchaser submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Agreement and the transactions contemplated hereby. Each of the Company and the Purchaser irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum.


SECTION 12.	Counterparts; Facsimile. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. Facsimile signatures shall be deemed original signatures.

SECTION 13.

Entire Agreement. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Purchaser makes any representation, warranty, covenant or undertaking with respect to such matters. Each party expressly represents and warrants that it is not relying on any oral or written representations, warranties, covenants or agreements outside of this Agreement.


SECTION 14.	Further Assurances. Each party agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and to give such further written assurance as may be reasonably requested by any other party to evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement.

[Remainder of Page Left Intentionally Blank]

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written.



		FLAGSTAR BANCORP, INC.

		By:	/s/ Matthew Roslin
		Name:	Matthew Roslin
		Title:	EVP


		MP THRIFT INVESTMENTS L.P.

		By:	MP (Thrift) Global Partners III LLC,
			its General Partner

			/s/ Robert H. Weiss
		Name:	Robert H. Weiss
		Title:	General Counsel

EXHIBIT 10.8

SECOND PURCHASE AGREEMENT

THIS SECOND PURCHASE AGREEMENT (this "Agreement") is effective as of the 27th day of February, 2009, by and between Flagstar Bancorp, Inc. (the "Company"), a corporation organized under the laws of the State of Michigan, with its principal offices at 5151 Corporate Drive, Troy, Michigan 48098-2639 and MP Thrift Investments L.P., a Delaware limited partnership (the "Purchaser").

WHEREAS, all capitalized terms used in this Agreement, but which are not defined herein, shall have the definition that is ascribed to them under the Investment Agreement;

WHEREAS, in connection with the Closing Agreement, the Company entered into a Purchase Agreement dated as of February 17, 2009 with the Purchaser, pursuant to which the Purchaser purchased from the Company 25,000 shares of the Series B Preferred Stock, at a purchase price of $1,000 per share, with each share convertible into Common Stock, at the liquidation preference divided by $0.80;

IN CONSIDERATION of the mutual covenants contained in this Agreement, the Company and the Purchaser agree as follows:

SECTION 1.

Agreement to Sell and Purchase the Shares. At the Closing (as defined in Section 3), the Company will, subject to the terms and conditions of this Agreement, issue and sell to the Purchaser and the Purchaser will buy from the Company, upon the terms and conditions hereinafter set forth, 25,000 shares of Series B Preferred Stock (the "Further Additional Shares") at $1,000 per share (the "Purchase Price").


SECTION 2.	Delivery of the Shares at the Closing.

2. 1

The completion of the purchase and sale of the Further Additional Shares (the "Closing") shall occur on February 27, 2008 at the offices of Sullivan & Cromwell LLP located at 125 Broad Street, New York, New York 10004 or such other date or location as agreed by the parties, but not prior to the date that the conditions for Closing set forth below have been satisfied or waived by the appropriate party (the "Closing Date").

2. 2

At the Closing, the Purchaser shall deliver, in immediately available funds, the full amount of the Purchase Price for the Further Additional Shares being purchased hereunder to an account designated by the Company and the Company shall deliver to the Purchaser the Further Additional Shares evidenced by one or more share certificates incorporating the terms set forth in the certificate of designations of the Series B Preferred Stock bearing an appropriate legend referring to the fact that the Series B Preferred Stock were sold in reliance upon the exemption from registration under the Securities Act of 1933, as amended (the "Securities Act"), provided by Section 4(2) thereof and Rule 506 thereunder as more further described in Section 3.5.


SECTION 3.	Representations, Warranties and Covenants of the Purchaser. The Purchaser represents and warrants to, and covenants with, the Company that:

3.1

Experience. (i) The Purchaser is knowledgeable, sophisticated and experienced in financial and business matters, in making, and is qualified to make, decisions with respect to investments in shares representing an investment decision like that involved in the purchase of the Further Additional Shares, including investments in securities issued by the Company and comparable entities, has the ability to bear the economic risks of an investment in the Further Additional Shares and has reviewed carefully the information provided by the Company to the Purchaser in connection with this Agreement and the purchase of the Further Additional Shares hereunder, and has requested, received, reviewed and considered all information it deems relevant in making an informed decision to purchase the Further Additional Shares; (ii) the Purchaser is acquiring Further Additional Shares in the ordinary course of its business and for its own account for investment only and with no present intention of distributing any of the Further Additional Shares or any arrangement or understanding with any other persons regarding the distribution of such Further Additional Shares (this representation and warranty not limiting the Purchaser’s right to sell pursuant to a registration statement or in compliance with the Securities Act and the rules and regulations promulgated thereunder (the "Rules and Regulations")); (iii) the Purchaser will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Further Additional Shares, nor will the Purchaser engage in any short sale that results in a disposition of any of the Further Additional Shares by the Purchaser, except in compliance with the Securities Act and the Rules and Regulations and any applicable state securities laws; (iv) the Purchaser is an "accredited investor" within the meaning of Rule 501(a) of Regulation D promulgated under the Securities Act.

3.2

Reliance on Exemptions. The Purchaser understands that the Further Additional Shares are being offered and sold to it in reliance upon specific exemptions from the registration requirements of the Securities Act, the Rules and Regulations and state securities laws and that the Company is relying upon the truth and accuracy of, and the Purchaser’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of the Purchaser to acquire the Further Additional Shares.

3.3

Investment Decision. The Purchaser understands that nothing in the Agreement or any other materials presented to the Purchaser in connection with the purchase and sale of the Further Additional Shares, constitutes legal, tax or investment advice. The Purchaser has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of the Further Additional Shares.

3.4

Risk of Loss. The Purchaser understands that its investment in the Further Additional Shares involves a significant degree of risk, including a risk of total loss of the Purchaser’s investment, and the Purchaser has full cognizance of and understands all of the risk factors related to the Purchaser’s purchase of the Securities. The Purchaser understands that the market price of the Common Stock into which the Further Additional Shares is convertible has been volatile, and that no representation is being made as to the future value of the Further Additional Shares.

3.5

Legend. The Purchaser understands that, until such time as a registration statement has been declared effective or the Further Additional Shares may be sold pursuant to Rule 144 under the Securities Act without any restriction as to the number of securities as of a particular date that can then be immediately sold, the Further Additional Shares will bear a restrictive legend in substantially the following form:


3.6	Transfer Restrictions. Consistent with the legend set forth in Section 3.5, the Further Additional Shares may only be disposed of in compliance with state and federal securities laws and the transfer and other restrictions set forth in the Investment Agreement as if they were "Securities" thereunder.


SECTION 4.	Representations, Warranties and Covenants of the Company. The Company represents and warrants to, and covenants with, the Purchaser that:


4.1	Organization and Standing. The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Michigan.

4.2

4.3

Due Authorization. The Further Additional Shares have been duly authorized and, when issued and delivered against receipt of consideration therefore as provided in this Agreement, will be validly issued, fully paid and non-assessable, will not be issued in violation of or subject to preemptive rights of any other stockholder of the Company and will not result in the violation or triggering of any price-based antidilution adjustments under any agreement to which the Company is a party. The voting rights of the holders of the Further Additional Shares will be enforceable in accordance with the terms of the Certificate of Designations. The Certificate of Designations has been filed with the Secretary of State of the state of Michigan and, as of the Closing Date, will be in full force and effect and enforceable against the Company in accordance with its terms.

4.4

4.5


SECTION 5.	Registration Rights. The Purchaser shall have the right to have the Further Additional Shares (including the Conversion Shares) registered for resale under the Securities Act, and related indemnification rights, as set forth in Section 4.7 of the Investment Agreement, as if the Further Additional Shares (including the Conversion Shares) were "Registrable Securities" thereunder.


SECTION 6.	New York Stock Exchange Listing. The Company shall promptly use its reasonable best efforts to cause the Conversion Shares to be approved for listing of the New York Stock Exchange or such other nationally recognized securities exchange on which the Common Stock may be listed, subject to official notice of issuance.


SECTION 7.	Notices. All notices, requests, consents and other communications hereunder shall be in writing, shall be mailed by first-class registered or certified airmail, e-mail, confirmed facsimile or nationally recognized overnight express courier postage prepaid, and shall be deemed given when so mailed and shall be delivered as addressed as follows:


(a)	if to the Company, to:

Flagstar Bancorp, Inc.

5151 Corporate Drive,

Troy, Michigan 48098-2639

Attention: Mr. Paul Borja

Facsimile: (248) 312-6833

E-mail: paul.borja@flagstar.com

with a copy to:

Kutak Rock LLP

1101 Connecticut Avenue, N.W.

Suite 1000

Washington, DC 20036-4374

Attention: Jeremy Johnson, Esq.

Facsimile: (202) 828-2488

E-mail: jeremy.johnson@KutakRock.com

or to such other person at such other place as the Company shall designate to the Purchaser in writing; and


(b)	if to a Purchaser, to:

MP Thrift Investments L.P.

520 Madison Avenue

New York, New York 10022

Attention: Robert H. Weiss, General Counsel

Facsimile: (212) 651-4014

with a copy to:

Sullivan & Cromwell LLP

125 Broad Street

New York, New York 10004

Attention: Mitchell S. Eitel, Esq.

George J. Sampas, Esq.

Facsimile: (212) 558-3588

or at such other address or addresses as may have been furnished to the Company in writing.


SECTION 8.	Changes. This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Company and the Purchaser. Any amendment or waiver effected in accordance with this Section 6 shall be binding upon the Purchaser and the Company.


SECTION 9.	Headings. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement.


SECTION 10.	Severability. In case any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.

SECTION 11.


SECTION 12.	Counterparts; Facsimile. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. Facsimile signatures shall be deemed original signatures.

SECTION 13.

Entire Agreement. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Purchaser makes any representation, warranty, covenant or undertaking with respect to such matters. Each party expressly represents and warrants that it is not relying on any oral or written representations, warranties, covenants or agreements outside of this Agreement.


SECTION 14.	Further Assurances. Each party agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and to give such further written assurance as may be reasonably requested by any other party to evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement.

[Remainder of Page Left Intentionally Blank]

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written.

FLAGSTAR BANCORP, INC.

By: _______________________________

Name:

Title:

MP THRIFT INVESTMENTS L.P.

By: _______________________________

MP (Thrift) Global Partners III LLC,

its General Partner

Name:

Title:

EXHIBIT 10.11

SUPERVISORY AGREEMENT

This Supervisory Agreement (Agreement) is made this 27th day of January, 2010 (Effective Date), by and through the Board of Directors (Board) of Flagstar Bancorp, Inc., Troy, Michigan, OTS Docket No. H2224 (Holding Company) and the Office of Thrift Supervision (OTS), acting by and through its Regional Director for the Central Region (Regional Director).

WHEREAS, the Holding Company is subject to examination, regulation and supervision by the OTS; and

WHEREAS, based on its August 3, 2009 examination of the Holding Company, the OTS finds that the Holding Company has engaged in unsafe or unsound practices in conducting its consolidated operations; and

WHEREAS, in furtherance of their common goal to ensure that the Holding Company addresses the unsafe or unsound practices identified by the OTS, the Holding Company and the OTS have mutually agreed to enter into this Agreement.

NOW THEREFORE, in consideration of the above premises, it is agreed as follows: Capital Plan.


1.


(a)	Within forty-five (45) days, the Holding Company shall submit to the Regional Director an acceptable written plan for enhancing the consolidated capital and earnings of the Holding Company (Capital Plan). The Capital Plan shall cover the period beginning with the quarter starting January 1, 2010 through the quarter ending December 31, 2011. At a minimum, the Capital Plan shall include:


(i)	establishment of a minimum tangible capital ratio of tangible equity capital to total tangible assets commensurate with the Holding Company’s consolidated risk profile;


(ii)	specific plans to ensure conformance with the Business Plan of the Holding Company’s wholly-owned savings association subsidiary, Flagstar Bank, FSB, Troy, Michigan, OTS Docket No. 08412 (Association), including capital levels projected by the Association;


(iii)	operating strategies to achieve net income levels that will result in profitability and adequate debt service throughout the term of the Capital Plan;


(iv)	quarterly cash flow projections for the Holding Company on a stand alone basis from the quarter starting January 1, 2010 through the quarter ending December 31, 2011 that identify both the sources of funds and the expected uses of funds without reliance on dividends from the Association;


(v)	detailed, quarterly pro forma Holding Company balance sheets and income statements, including both consolidated and consolidating entries, for the period beginning January 1, 2010 through the quarter ending December 31, 2011 that reflect maintenance throughout the period of the Board established minimum tangible equity capital ratio;


(vi)	detailed scenarios to stress-test the consolidated minimum capital targets based on continuing operating results, economic conditions and risk profile of consolidated assets; and


(vii)	detailed descriptions of all relevant assumptions and projections and the supporting documentation for all relevant assumptions and projections.

Flagstar Bancorp, Inc.

Supervisory Agreement

Page 1 of 6

(b)

Within thirty (30) days after receiving any written comments from the Regional Director, the Holding Company shall revise the Capital Plan based on such comments and the Board shall adopt the Capital Plan. The Capital Plan shall be incorporated herein by reference and become a part of this Agreement and any material deviation ¹ of the adopted Capital Plan shall be a violation of this Agreement. A copy of the Capital Plan shall be provided to the Regional Director within five (5) days after Board approval.

(c)

Once the Capital Plan is implemented, the Holding Company shall operate within the parameters of its Capital Plan. Any proposed material deviations from or changes to the Capital Plan shall be submitted for the prior, written non-objection of the Regional Director. Requests for any material deviations or changes must be submitted at least forty-five (45) days before a proposed deviation or change is implemented.


(d)	The Holding Company shall notify the Regional Director regarding any material event affecting or that may affect the consolidated balance sheet, capital, or the cash flow of the Holding Company within five (5) days after such event.


2.

(a)

On a quarterly basis, beginning with the quarter ending March 31, 2010, the Board shall review a written report that compares projected operating results contained within the Capital Plan to actual results (Capital Plan Variance Report). The Board shall review each Capital Plan Variance Report and address external and internal risks that may affect the Holding Company’s ability to successfully implement the Capital Plan. This review shall include, but not be limited to, adverse scenarios relating to asset or liability mixes, interest rates, staffing levels and expertise, operating expenses, marketing costs, and economic conditions in the markets where the Holding Company is operating. The Board shall discuss and approve corrective actions, if needed, to ensure the Holding Company’s adherence to its Capital Plan. The Board’s review of each Capital Plan Variance Report and assessment of the Holding Company’s compliance with the Capital Plan shall be fully documented in the appropriate Board meeting minutes.


(b)	Within sixty (60) days after the close of each quarter beginning with the quarter ending March 31, 2010, the Board shall provide the Regional Director with a copy of each Capital Plan Variance Report.

Dividends.

Effective immediately, the Holding Company shall not declare, make, or pay any cash dividends or other capital distributions, as that term is defined in 12 C.F.R. § 563.141, or purchase, repurchase or redeem or commit to purchase, repurchase, or redeem any Holding Company equity stock without the prior written non-objection of the Regional Director. The Holding Company shall submit its written request for non-objection to the Regional Director at least forty-five (45) days prior to the anticipated date of the proposed dividend, capital distribution, or stock transaction. The written request for such notice of non-objection shall: (a) contain current and pro forma projections regarding the Holding Company’s capital, asset quality, and earnings; and (b) address compliance with the Capital Plan required by Paragraph 1 of this Agreement.

¹ A deviation shall be considered material under this Paragraph of the Agreement if the Holding Company plans to: (a) engage in any activity that is inconsistent with the Business Plan; or (b) exceed the level of any activity contemplated in the Business Plan or fail to meet target amounts established in the Business Plan by more than ten percent (10%), unless the activity involves assets risk-weighted fifty percent (50%) or less, in which case a variance of more than twenty-five percent (25%) shall be deemed to be a material deviation.

Flagstar Bancorp, Inc.

Supervisory Agreement

Page 2 of 6

Debt Restrictions.

Effective immediately, the Holding Company shall not, directly or indirectly, incur, issue, renew, roll over, or increase any debt or commit to do so without the prior written non-objection of the Regional Director. The Holding Company shall submit its written request for non- objection to the Regional Director at least forty-five (45) days prior to the anticipated date of the proposed debt transaction. The Holding Company’s written requests for Regional Director non- objection to engage in such debt transactions, at a minimum, shall: (a) describe the purpose of the proposed debt; (b) set forth and analyze the terms of the proposed debt and covenants; (c) analyze the Holding Company’s current cash flow resources available to satisfy such debt repayment; and (d) set forth the anticipated source(s) of repayment of the proposed debt. For purposes of this Paragraph of the Agreement, the term "debt" includes, but is not limited to, loans, bonds, cumulative preferred stock, hybrid capital instruments such as subordinated debt or trust preferred securities, and guarantees of debt. For purposes of this Paragraph of the Agreement, the term "debt" does not include liabilities incurred in the ordinary course of business to acquire goods and services and that are normally recorded as accounts payable under generally accepted accounting principles.

Affiliate Transactions.

Effective immediately, the Holding Company shall not engage in transactions with any subsidiary or affiliate without the prior written nonobjection of the Regional Director, except: (a) exempt transactions under 12 C.F.R. Part 223; and (b) intercompany cost-sharing transactions identified in executed written agreements between the parties. The Holding Company shall provide thirty (30) days advance written notice to the Regional Director of any proposed affiliate transaction, include in the written notice a full description of the transaction, and ensure that the transaction complies with the requirements of 12 C.F.R. § 563.41 and Regulation W, 12 C.F.R. Part 223.

Severance and Indemnification Payments.


6.	Effective immediately, the Holding Company shall not make any golden parachute payment ² or any prohibited indemnification payment ³ unless, with respect to each such payment, the Holding Company has complied with the requirements of 12 CFR Part 359.

Directorate and Management Changes.


7.	Effective immediately, the Holding Company shall comply with the prior notification requirements for changes in directors and Senior Executive Officers ⁴ set forth in 12 C.F.R. Part 563, Subpart H .

Employment Contracts and Compensation Arrangements.

Effective immediately, the Holding Company shall not enter into, renew, extend, or revise any contractual arrangement related to compensation or benefits with any director or Senior Executive Officer of the Holding Company, unless it first provides the Regional Director with not less than thirty (30) days prior written notice of the proposed transaction. The notice to the Regional Director shall include a copy of the proposed employment contract or compensation arrangement, or a detailed written description of the compensation arrangement to be offered to such director or officer, including all benefits and perquisites. The Board shall ensure that any contract, agreement, or arrangement submitted to the Regional Director fully complies with the requirements of 12 C.F.R. Part 359.

Effective Date.


9.	This Agreement is effective on the Effective Date as shown on the first page.

² The term "golden parachute payment" is defined at 12 C.F.R. § 359.1(f).

³ The term "prohibited indemnification payment" is defined at 12 C.F.R. § 359.1(1)

⁴ The term "Senior Executive Officer" is defined at 12 C.F.R. § 563.555.

Flagstar Bancorp, Inc.

Supervisory Agreement

Page 3 of 6

Duration.


10.	This Agreement shall remain in effect until terminated, modified or suspended, by written notice of such action by the OTS, acting by and through its authorized representatives.

Time Calculations.


11.	Calculation of time limitations for compliance with the terms of this Agreement run from the Effective Date and shall be based on calendar days, unless otherwise noted.


12.	The Regional Director or an OTS authorized representative may extend any of the deadlines set forth in the provisions of this Agreement upon written request by the Holding Company that includes reasons in support for any extension. Any OTS extension shall be made in writing.

Submissions and Notices.


13.	All submissions, including progress reports, to the OTS that are required by or contemplated by the Agreement shall be submitted within the specified timeframes.


14.	Except as otherwise provided herein, all submissions, requests, communications, consents or other documents relating to this Agreement shall be in writing and sent by first class U.S. mail (or by reputable overnight carrier, electronic facsimile transmission or hand delivery by messenger) addressed as follows:


(a)	To the OTS:

Regional Director

Office of Thrift Supervision

One South Wacker Drive, Suite 2000

Chicago, Illinois 60606

Facsimile: (312) 917-5001


(b)	To the Holding Company:

Chairman of the Board

Flagstar Bancorp, Inc.

5151 Corporate Drive

Troy, Michigan 48098

Facsimile: (248) 312-6823

No Violations Authorized.


15.	Nothing in this Agreement shall be construed as allowing the Holding Company, its Board, officers or employees to violate any law, rule, or regulation.

OTS Authority Not Affected.


16.	Nothing in this Agreement shall inhibit, estop, bar or otherwise prevent the OTS from taking any other action affecting the Holding Company if at any time the OTS deems it appropriate to do so to fulfill the responsibilities placed upon the OTS by law.

Other Governmental Actions Not Affected.


17.	The Holding Company acknowledges and agrees that its execution of the Agreement is solely for the purpose of resolving the matters addressed herein, consistent with Paragraph 16 above, and does not otherwise release, discharge, compromise, settle, dismiss, resolve, or in any way affect any actions, charges against, or liability of the Holding

Flagstar Bancorp, Inc.

Supervisory Agreement

Page 4 of 6

Company that arise pursuant to this action or otherwise, and that may be or have been brought by any governmental entity other than the OTS.

Miscellaneous.


18.	The laws of the United States of America shall govern the construction and validity of this Agreement.


19.	If any provision of this Agreement is ruled to be invalid, illegal, or unenforceable by the decision of any Court of competent jurisdiction, the validity, legality, and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby, unless the Regional Director in his or her sole discretion determines otherwise.


20.	All references to the OTS in this Agreement shall also mean any of the OTS’s predecessors, successors, and assigns.


21.	The section and paragraph headings in this Agreement are for convenience only and shall not affect the interpretation of this Agreement.


22.	The terms of this Agreement represent the final agreement of the parties with respect to the subject matters thereof, and constitute the sole agreement of the parties with respect to such subject matters.

Enforceability of Agreement.


23.	This Agreement is a "written agreement" entered into with an agency within the meaning and for the purposes of 12 U.S.C. § 1818.

Signature of Directors/Board Resolution.


24.	Each Director signing this Agreement attests that he or she voted in favor of a Board Resolution authorizing the consent of the Holding Company to the issuance and execution of the Agreement. This Agreement may be executed in counterparts by the directors after approval of execution of the Agreement at a duly called board meeting.

Flagstar Bancorp, Inc.

Supervisory Agreement

Page 5 of 6

WHEREFORE, the OTS, acting by and through its Regional Director, and the Board of the Holding Company, hereby execute this Agreement.



	Accepted by:
FLAGSTAR BANCORP, INC.	Office of Thrift Supervision
Troy, Michigan

/s/ Joseph P. Campanelli	By:	/s/ Daniel T. McKee
Joseph P. Campanelli, Chairman		Daniel T. McKee
		Regional Director, Central Region

/s/ Walter N. Carter	Date:	See Effective Date on page 1
Walter N. Carter, Director

/s/ James D. Coleman
James D. Coleman, M.D., Director

/s/ Gregory Eng
Gregory Eng, Director

/s/ Lesley Goldwasser
Lesley Goldwasser, Director

/s/ Jay J. Hansen
Jay J. Hansen, Director

/s/ David J. Matlin
David J. Matlin, Director

/s/ Mark R. Patterson
Mark R. Patterson, Director

/s/ David L. Treadwell
David L. Treadwell, Director

Flagstar Bancorp, Inc.

Supervisory Agreement

Page 6 of 6

EXHIBIT 10.12

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

UNITED STATES OF AMERICA, : 12 Civ. 1392

Plaintiff, : STIPULATION AND ORDER OF SETTLEMENT AND DISMISSAL

v. :

FLAGSTAR BANK, F.S.B., Defendant. :

WHEREAS, this Stipulation and Order of Settlement and Dismissal (the "Stipulation") is entered into by and among plaintiff the United States of America (the "United States" or "Government"), by its attorney, Preet Bharara, United States Attorney for the Southern District of New York, and defendant Flagstar Bank, F.S.B., including its successors by operation of law or otherwise ("Flagstar"), by its authorized representatives;

WHEREAS, Flagstar is a federally-chartered stock savings bank that is headquartered in Troy, Michigan, and is the principal subsidiary of Flagstar Bancorp, Inc., a Michigan-based savings and loan holding company;

WHEREAS, since 1988, Flagstar has been a participant in the Direct Endorsement Lender program (the "DEL program"), a Government program administered by the Federal Housing Administration (the "FHA") of the United States Department of Urban Development ("HUD"). The DEL program authorizes private-sector mortgage lenders ("Direct Endorsement Lenders") to approve mortgage loans for insurance by the FHA;

WHEREAS, simultaneously with the filing of this Stipulation, the Government is filing a complaint against Flagstar in the United States District Court for the Southern District of New York (the "Court") pursuant to the False Claims Act, 31 U.S.C. §§ 3729, et seq ., and the common law theories of breach of fiduciary duty, gross negligence and negligence (the "Complaint");

WHEREAS, the Complaint alleges that during the period January 1, 2002, to date, Flagstar has been endorsing loans for FHA insurance in violation of DEL program rules, and has been submitting false certifications to the FHA and HUD about its underwriting practices; and

WHEREAS, the Government and Flagstar have reached a mutually-agreeable resolution addressing the claims raised in the Complaint through this Stipulation;

NOW, THEREFORE, upon the Parties’ agreement, IT IS HEREBY ORDERED that:

TERMS AND CONDITIONS


1.	Flagstar consents to the Court’s exercise of subject matter jurisdiction over this action and personal jurisdiction over it,


2.	Flagstar hereby admits, acknowledges, and accepts responsibility for the conduct alleged in the Complaint to the extent set forth below;


a.	During the period January 1, 2002, to the present (the "Covered Period"), for every mortgage loan that Flagstar endorsed for FHA insurance pursuant to the Direct Endorsement Lender program, a Direct Endorsement Underwriter ("DE Underwriter") employed by Flagstar submitted a certification to the FHA and HUD ("loan-level certification");


b.	For each loan underwritten manually, the loan-level certification stated that the DE Underwriter had "personally reviewed the appraisal report (if applicable), credit application, and all associated documents," and that the loan was eligible for mortgage insurance under the Direct Endorsement Lender program;


c.	For each loan underwritten using an automated underwriting system, the loan-level certification stated that the loan was eligible for mortgage insurance under the Direct Endorsement Lender program;


d.	Under Flagstar’s manual underwriting process (the "Manual Underwriting Process"), Flagstar utilized employees who were not DE Underwriters, called Underwriting Assistants, to review and clear conditions on

loans. These conditions had to be satisfied in order for the loans to close. Flagstar did not require DE Underwriters to approve the work performed by the Underwriting Assistants in clearing conditions or to review the documentation examined by the Underwriting Assistants in clearing conditions;


e.	As a result of the Manual Underwriting Process, notwithstanding loan-level certifications to the contrary, a Flagstar DE Underwriter did not in every instance "personally review" "all associated documents" for the loans that Flagstar manually underwrote and endorsed for FHA insurance during the Covered Period;


f.	In a number of instances, Underwriting Assistants (who were not DE Underwriters) reviewed - and were the only ones to review - documents associated with material conditions on the loans that Flagstar manually underwrote and approved for FHA insurance during the Covered Period;


g.	Additionally, in a number of instances, Underwriting Assistants cleared material conditions - without DE Underwriter supervision - relating to the borrower’s income, assets and credit;

In a number of instances, notwithstanding loan-level certifications to the contrary, loans that Flagstar underwrote and approved for FHA insurance during the Covered Period, and for which HUD has paid insurance claims, did not comply with certain underwriting requirements contained in HUD’s handbooks and Mortgagee Letters and therefore were not eligible for mortgage insurance under the Direct Endorsement Lender program; and


i.	As a result of the conduct described above in this Paragraph, Flagstar made false loan-level certifications on loans that (i) induced the FHA to accept for Government insurance loans that were not eligible for such insurance and that the FHA otherwise would not have insured, and (ii) resulted in losses to HUD when the loans defaulted.


3.	Flagstar agrees and commits that it shall comply with all relevant HUD/FHA rules applicable to Direct Endorsement Lenders in the DEL program.


4.	Flagstar further agrees that, in addition to its compliance with all relevant HUD/FHA rules applicable to Direct Endorsement Lenders in the DEL program, its continued participation in the DEL program shall be conditioned on the following:

Flagstar’s completion of a one year period during which time Flagstar’s compliance with all relevant HUD/FHA rules applicable to Direct Endorsement Lenders in the DEL program shall be monitored by a third party ("Third Party"). Such Third Party shall be selected by Flagstar and shall be approved by HUD, such approval not to be unreasonably withheld. Flagstar shall bear the cost of the Third Party’s monitoring activities.


b.	Such Third Party shall make periodic reports to HUD and Flagstar regarding Flagstar’s compliance with all relevant HUD/FHA rules applicable to Direct Endorsement Lenders in the DEL program. The form and frequency of such reports shall be decided and agreed upon in good faith between Flagstar and HUD.

The period of monitoring shall commence on the beginning of the first month from the Effective Date of this Stipulation or following the approval by HUD of the Third Party, whichever is later, and shall terminate one year from that date, provided that Flagstar’s national total company 24-month compare ratio ("Compare Ratio") remains below 100% (the "Industry Average"). Should Flagstar’s Compare Ratio exceed the Industry Average at the end of the first year, then HUD may extend the period of monitoring for a second year. If at the end of such second year, Flagstar’s Compare Ratio continues to exceed the Industry Average, then HUD may extend the period of monitoring for a third year. In no event shall the monitoring period extend beyond three years.


d.	During the monitoring period described above, Flagstar shall train all employees involved in the origination and underwriting of FHA loans regarding all relevant HUD/FHA rules applicable to Direct Endorsement Lenders in the DEL program. The form and frequency of such training shall be decided and agreed upon in good faith between Flagstar and HUD; and


e.	Flagstar shall certify to HUD that the individuals in senior leadership positions with primary responsibility for, respectively, initiating and overseeing Flagstar’s Manual Underwriting Process, as described above, are no longer employed by Flagstar.


5.	Flagstar shall pay to the Government $15 million dollars within 30 business days after the Effective Date of this Stipulation.

Flagstar shall also make additional payments to the Government in the total amount of $117,889,806 (the "Additional Payments"), if, and only if, each of the following events occurs and each of the following criteria is met, except as otherwise provided in Paragraph 19 below. Consistent with its business and regulatory requirements, Flagstar shall seek in good faith to fulfill the below conditions, and will not undertake any conduct or fail to take any action the purpose of which is to frustrate or delay its ability to fulfill any of the below conditions:


a.	Flagstar generates positive income for a continuously sustained period, such that Flagstar determines it is likely that part or all of a Deferred Tax Asset ("DTA"), which, as of December 31,2011 was $384,589,806 and which has been offset by a valuation allowance ("DTA Valuation Allowance"), shall be realized, as evidenced by the reversal of the DTA Valuation Allowance in accordance with US GAAP;


b.	Flagstar is able to include capital derived from the reversal of the DTA Valuation Allowance as an addition to its Tier 1 capital in an amount which, in accordance with regulation, is the lesser of 10% of its Tier 1 capital or the amount of the DTA that Flagstar expects to recover within one year based on financial projections;

Flagstar or its parent holding company (or its successor) has fully repaid, or otherwise settled to the satisfaction of the United States Government, the $266.7 million amount previously invested by the United States Government in Flagstar’s parent holding company under the Troubled Asset Relief Program ("TARP"), or, to the extent not fully repaid or otherwise settled to the satisfaction of the United States Government, any such remaining $266.7 million has been excluded from Tier 1 capital solely for the purpose of calculating the threshold Tier 1 Ratio as set forth in clause 6(d)(ii) below; and

Upon the occurrence of the events set forth in (a), (b) and (c) above, and within 30 business days of the occurrence of the last such event, Flagstar shall begin making annual Additional Payments to the Government, provided that (i) each such annual Additional Payment shall be the lesser of (x) $25 million or (y) the portion of the Additional Payments that remains outstanding after deducting any prior Additional Payments, and (ii) no obligation to make such Additional Payment shall arise unless Flagstar’s Recent Call Report reflects a minimum Tier 1 Ratio of 11% or such higher Tier 1 Ratio as may be imposed by the Office of the Comptroller of the Currency ("OCC," or any successor regulator under the Safety and Soundness Program) after excluding, for the purposes of this calculation only, any un-extinguished TARP investment from Tier 1 capital as referenced in clause 6(c) above. For purposes of this section, "Recent Call Report" means Flagstar’s Call Report as filed with the OCC, including any amendments thereto, for the period ending at least six months prior to the making of such Additional Payment. The $15 million payment together with the Additional Payments shall be referred to herein as the Settlement Amount,


e.	In no event shall Flagstar be required to make an Additional Payment if doing so would violate any material banking regulatory requirement or the OCC (or any successor regulator under the Safety and Soundness Program) objects in writing to the making of an Additional Payment.

Payment of the Settlement Amount pursuant to this Stipulation shall be made at http://www.pay.gov to the U.S. Department of Justice account in accordance with instructions provided by the Financial Litigation Unit of the United States Attorney’s Office for the Southern District of New York. Any amounts distributed to HUD-FHA pursuant to this Stipulation may be deposited into FHA’s Capital Reserve Account.

Subject to Flagstar’s full compliance with the terms of this Stipulation, including Flagstar’s payment of the Settlement Amount as provided herein, the Government immediately releases Flagstar and all of its current and former officers, directors, employees, affiliates, and assigns from any civil or administrative monetary or nonmonetary claim that the United States has or may have under the False Claims Act, 31 U.S.C. §§ 3729, et seq ,, the Civil Monetary Penalties Law, 42 U.S.C. § 1320a-7a, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), 12 U.S.C. § 1833a, the Program Fraud Civil Remedies Act, 31 U.S.C. §§ 3801, et seq ., the common law, or the equitable theories of fraud or mistake of fact in connection with mortgage loans that Flagstar endorsed for FHA insurance during the Covered Period; provided, however, that this release does not encompass the claims set forth in Paragraphs 9 and 10 below.


9.	Notwithstanding the release given in Paragraph 8 above, or any other term of this Stipulation, the following claims of the Government are specifically reserved and are not released by this Stipulation:


a.	any claims arising under Title 26, United States Code (Internal Revenue Code);


b.	any claims arising under Title 12, United States Code (Banks and Banking), other than FIRREA as set forth above;


c.	any criminal claims; and


d.	any liability based upon obligations created by this Stipulation.

10.

To the extent that Flagstar satisfies the commitments and undertakings under this Stipulation, including Paragraphs 3, 4, 5, and 6 above, HUD shall not refuse to pay any insurance claim or seek indemnification or other relief in connection with mortgage loans that Flagstar endorsed for FHA insurance during the Covered Period but for which no claims have yet been paid on the basis of Flagstar’s use of Underwriting Assistants as alleged in the Complaint or referenced in Paragraph 2 above. HUD may in good faith seek indemnification or other relief in connection with mortgage loans that Flagstar endorsed for FHA insurance during the Covered Period but for which no claims have yet been paid for reasons other than the fact of Flagstar’s use of Underwriting Assistants as alleged in the Complaint or referenced in Paragraph 2 above, but only to the extent seeking such indemnification or other relief is consistent with all relevant HUD/FHA rules and HUD’s generally applicable policies and practices in seeking indemnification.

11.

To the extent that Flagstar satisfies the commitments and undertakings under this Stipulation, including Paragraphs 3, 4, 5, and 6 above, HUD or its assigns shall not seek indemnification or other relief in connection with mortgage loans that Flagstar endorsed for FHA insurance during the Covered Period and for which HUD has paid insurance claims on the basis of the conduct alleged in the Complaint or referenced in Paragraph 2 above.

12.

Flagstar shall be in default of this Stipulation if it fails to comply materially with any provision of this Stipulation ("Default"). The Government shall provide written notice to Flagstar of any Default in the manner set forth in Paragraph 29 below. Flagstar shall then have an opportunity to cure the Default within fifteen (15) business days from the date of receipt of the notice of Default. In the event that a Default is not fully cured within fifteen (15) business days of the receipt of the notice of Default, Flagstar agrees that the United States, at its option, may (a) rescind this Stipulation and reinstate the Complaint; or (b) seek specific performance of this Stipulation to cure any Default. In the event that the United States opts to rescind this Stipulation pursuant to this Paragraph, Flagstar shall not plead, argue, or otherwise raise any defenses under the theories of statute of limitations, laches, estoppel, or similar theories, to any civil or administrative claims that relate to the conduct alleged in the Complaint, except to the extent such defenses were available on the Effective Date.

13.

Flagstar waives and shall not assert any defenses it may have to any criminal prosecution relating to the conduct alleged in the Complaint that may be based in whole or in part on a contention that, under the Double Jeopardy Clause of the Fifth Amendment of the Constitution, or under the Excessive Fines Clause of the Eighth Amendment of the Constitution, this Stipulation bars a remedy sought in such criminal prosecution. Nothing in this Paragraph or any other provision of this Stipulation constitutes an agreement by the United States concerning the characterization of the Settlement Amount for purposes of the Internal Revenue laws, Title 26 of the United States Code.

14.

Flagstar releases the Government, its agencies, employees, servants, and agents from any claims that Flagstar has asserted, could have asserted, or may assert in the future against the Government, its agencies, employees, servants, or agents, related to the conduct alleged in the Complaint and the Government’s investigation and prosecution thereof, except with respect to Paragraph 10 and 11 above and any continuing obligations created hereunder.


15.	This Stipulation is intended to be for the benefit of the Parties and the entities released in Paragraphs 8 and 14 above only. Pursuant to this Stipulation, the Parties are releasing only those entities released as set forth in Paragraphs 8 and 14 above and not releasing any claims against any other person or entity.

16.

Flagstar represents and warrants that it has reviewed its financial situation, that it is currently solvent within the meaning of 11 U.S.C. §§ 547(b)(3) and 548(a)(l)(B)(ii)(I), and that it reasonably believes that it shall remain solvent following its compliance with its obligations under this Stipulation, including its payment of the Settlement Amount in accordance with the parameters stated in Paragraphs 5 and 6 above. Further, the Parties warrant that, in evaluating whether to execute this Stipulation, they (a) have intended that the mutual promises, covenants, and obligations set

forth constitute a contemporaneous exchange for new value given to Flagstar, within the meaning of 11 U.S.C. § 547(c)(1); and (b) have concluded that these mutual promises, covenants, and obligations do, in fact, constitute such a contemporaneous exchange. Further, the Parties warrant that the mutual promises, covenants, and obligations set forth herein are intended to and do, in fact, represent a reasonably equivalent exchange of value that is not intended to hinder, delay, or defraud any entity to which Flagstar was or became indebted to on or after the date of this Stipulation, within the meaning of 11 U.S.C, § 548(a)(1).

17.

If within 91 days of the Effective Date of this Stipulation or any payment made under this Stipulation, Flagstar commences, or a third party commences, any case, action, or other proceeding under any law relating to bankruptcy, insolvency, reorganization, or relief of debtors (a) seeking an order for relief of Flagstar’s debts, or seeking to adjudicate Flagstar as bankrupt or insolvent; or (b) seeking appointment of a receiver, trustee, custodian, or other similar official for Flagstar or for all or part of Flagstar’s assets, Flagstar agrees as follows:

Flagstar’s obligations under this Stipulation may not be avoided pursuant to 11 U.S.C. § 547, and Flagstar shall not argue or otherwise take the position in any such case, action, or proceeding that (i) Flagstar’s obligations under this Stipulation may be avoided under 11 U.S.C. § 547; (ii) Flagstar was insolvent at the time this Stipulation was entered into; or (iii) the mutual promises, covenants, and obligations set forth in this Stipulation do not constitute a contemporaneous exchange for new value given to Flagstar.

If any of Flagstar’s obligations under this Stipulation are avoided for any reason, including, but not limited to, through the exercise of a trustee’s avoidance powers under the Bankruptcy Code or in connection with a receivership, the Government, at its option, may rescind this Stipulation and reinstate the Complaint and pursue any civil and/or administrative claim, action, or proceeding against Flagstar that would otherwise be covered by the release in Paragraph 8 above. Flagstar agrees that (i) any such claim, action, or proceeding brought by the Government would not be subject to an "automatic stay" pursuant to 11 U.S.C, § 362(a) as a result of the case, action, or proceeding described in the first clause of this Paragraph, and Flagstar shall not argue or otherwise contend that the Government’s claim, action, or proceeding is subject to an automatic stay; (ii) Flagstar shall not plead, argue, or otherwise raise any defenses under the theories of statute of limitations, laches, estoppel, or similar theories, to any claim, action, or proceeding that is brought by the Government within 60 calendar days of written notification to Flagstar that the Stipulation has been rescinded pursuant to this Paragraph, except to the extent such defenses were available on the Effective Date; and (iii) the Government has a valid claim against Flagstar for any unpaid Settlement Amount, and the Government may pursue its claim in the case, action, or proceeding described in the first clause of this Paragraph, as well as in any other case, action, or proceeding.


c.	Flagstar acknowledges that its agreements in this Paragraph are provided in exchange for valuable consideration provided in this Stipulation.

18.

If more than 90 days after the Effective Date of this Stipulation but before Flagstar has paid the Settlement Amount in full, Flagstar commences, or a third party commences, any case, action, or other proceeding under any law relating to bankruptcy, insolvency, reorganization, or relief of debtors (a) seeking an order for relief of Flagstar’s debts, or seeking to adjudicate Flagstar as bankrupt or insolvent; or (b) seeking appointment of a receiver, trustee, custodian, or other similar official for Flagstar or for all or part of Flagstar’s assets, Flagstar agrees as follows:

If any of Flagstar’s obligations under this Stipulation are avoided for any reason, including, but not limited to, through the exercise of a trustee’s avoidance powers under the Bankruptcy Code or in connection with a receivership, the Government, at its option, may rescind this Stipulation and reinstate the Complaint and pursue any civil and/or administrative claim, action, or proceeding against Flagstar that would otherwise be covered by the release in Paragraph 8 above, Flagstar agrees that (i) any such claim, action, or proceeding brought by the Government would not be subject to an "automatic stay" pursuant to 11 U.S.C. § 362(a) as a result of the case, action, or proceeding described in the first clause of this Paragraph, and Flagstar shall not argue or otherwise contend that the Government’s claim, action, or proceeding is subject to an automatic stay; (ii) Flagstar shall not plead, argue, or otherwise raise any defenses under the theories of statute of limitations, laches, estoppel, or similar theories, to any claim, action, or proceeding that is brought by the Government within 60 calendar days of written notification to Flagstar that the Stipulation has been rescinded pursuant to this Paragraph, except to the extent such defenses were available on the Effective Date; and (iii) the Government has a valid claim against Flagstar for any unpaid Settlement Amount, and the Government may pursue its claim in the case, action, or proceeding described in the first clause of this Paragraph, as well as in any other case, action, or proceeding.


b.	Flagstar acknowledges that its agreements in this Paragraph are provided in exchange for valuable consideration provided in this Stipulation.

19.

No change of control under Section 382 of the Internal Revenue Code of 1986, as amended, that limits Flagstar’s ability to realize all or part of the DTA will relieve Flagstar of its obligations to make Additional Payments hereunder. If such a change of control adversely impacts Flagstar’s ability to satisfy the conditions in either Paragraphs 6(a) or 6(b), such condition(s) will not be deemed to apply. Moreover, if Flagstar or its parent holding company are party to a business combination or other transaction following which Flagstar and its parent holding company represent less than 33.3% of the resulting company’s assets, then 12 months following such combination or other transaction, Flagstar or its successor shall commence making the Additional Payments set forth in paragraph 6(d)(i).


20.	Flagstar agrees to the following:


a.	Unallowable Costs Defined: All costs (as defined in the Federal Acquisition Regulation, 48 C.F.R. § 31.205-47) incurred by or on behalf of Flagstar, its present or former officers, directors, employees, shareholders, and agents in connection with:


(1)	the matters covered by this Stipulation;


(2)	the United States’ audit(s) and civil investigation(s) of the matters covered by this Stipulation;


(3)	Flagstar’s investigation, defense, and corrective actions undertaken in response to the United States’ audit(s) and civil investigation(s) in connection with the matters covered by this Stipulation (including attorney’s fees);


(4)	the negotiation and performance of this Stipulation;


(5)	any payments Flagstar makes to the United States pursuant to this Stipulation, including costs and attorney’s fees,

are unallowable costs for government contracting purposes (hereinafter referred to as "Unallowable Costs"). For purposes of this Paragraph, the term Unallowable Costs does not include insurance claims made in connection with mortgage loans that Flagstar endorsed for FHA insurance during the Covered Period.


a.	Future Treatment of Unallowable Costs: Unallowable Costs will be separately determined and accounted for by Flagstar, and Flagstar shall not charge such Unallowable Costs directly or indirectly to any contract with the United States.

Treatment of Unallowable Costs Previously Submitted for Payment: Within 90 days of the Effective Date of this Stipulation, Flagstar shall identify and repay by adjustment to future claims for payment or otherwise any Unallowable Costs included in payments previously sought by Flagstar or any of its subsidiaries or affiliates from the United States. The United States, including the Department of Justice and/or the affected agencies, reserves its rights to audit, examine, or reexamine Flagstar’s books and records and to disagree with any calculations submitted by Flagstar or any of its subsidiaries or affiliates regarding any Unallowable Costs included in payments previously sought by Flagstar, or the effect of any such Unallowable Costs on the amount of such payments.

21.

In connection with the negotiation of this Stipulation, Flagstar has provided the Government with certain publicly-available information about its current financial condition and regulatory requirements, and has discussed with the Government its anticipated performance, as well as the potential effect of any settlement on its business and regulatory requirements (collectively, the "Financial Information"), The Government understands that anticipated performance is uncertain and subject to change. Nevertheless, Flagstar represents that the Financial Information was prepared in good faith and was, to Flagstar’s knowledge, accurate and not misleading in any material respect. The Government has relied on the foregoing representation in entering into this Stipulation. In the event of any breach of the foregoing representation, the Government, at its option, may rescind this Stipulation and reinstate the Complaint. Based on the Financial Information, Flagstar has represented, and the parties have each concluded, that the Settlement Amount represents the maximum of Flagstar’s current ability to pay, or to agree to pay, a monetary settlement in light of its business and regulatory requirements.


22.	Each Party shall bear its own legal and other costs incurred in connection with this matter.


23.	Any failure by the Government to insist upon the material performance of any of the provisions of this Stipulation shall not be deemed a waiver of any of the provisions hereof, and the Government, notwithstanding that failure, shall have the right thereafter to insist upon material performance of any and all of the provisions of this Stipulation.

24.

This Stipulation is governed by the laws of the United States. The exclusive jurisdiction and venue for any dispute relating to this Stipulation is the United States District Court for the Southern District of New York. For purposes of construing this Stipulation, this Stipulation shall be deemed to have been drafted by all Parties to this Stipulation and shall not, therefore, be construed against any Party in any subsequent dispute.

25.

Subject to the exceptions set forth in this Stipulation, and in consideration of the obligations of Flagstar as set forth in this Stipulation, and conditioned upon Flagstar’s full compliance with the terms of this Stipulation, the Government shall dismiss with prejudice the Complaint; provided, however, that the Court shall retain jurisdiction over this Stipulation and each Party to enforce the obligations of each Party under this Stipulation.


26.	This Stipulation constitutes the complete agreement between the Parties with respect to the subject matter hereof. This Stipulation may not be amended except by written consent of the Parties.


27.	The undersigned counsel represent and warrant that they are fully authorized to execute this Stipulation on behalf of the persons and entities indicated below.


28.	This Stipulation may be executed in counterparts, each of which constitutes an original and all of which constitute one and the same Stipulation. Facsimiles of signatures shall constitute acceptable, binding signatures for purposes of this Stipulation.


29.	Any notices pursuant to this Stipulation shall be in writing and shall be delivered by hand, express courier, or facsimile transmission followed by postage-prepaid mail, and shall be addressed as follows:

IF TO THE UNITED STATES:

Christopher B. Harwood

Assistant United States Attorney

United States Attorney’s Office

Southern District of New York

86 Chambers Street, Third Floor

New York, New York 10007

Facsimile: (212) 637-2786

IF TO FLAGSTAR:

Veronica E. Rendon

Craig A. Stewart

Arnold & Porter LLP

399 Park Avenue

New York, New York 10022

Facsimile: (212) 715-1399

and

Chief Executive Officer

Chief Legal Officer

Flagstar Bank, F.S.B.

5151 Corporate Drive

Troy, MI 48098

Facsimile: (800) 858-7542


30.	The Effective Date of this Stipulation is the date upon which this Stipulation is entered by the Court.

Agreed to by:

THE UNITED STATES OF AMERICA

Dated: New York, New York

February 24, 2012

PREET BHARARA

United States Attorney for the

Southern District of New York

By: /s/ Christopher B. Harwood

CHRISTOPHER B. HARWOOD

Assistant United States Attorney

86 Chambers Street, Third Floor

New York, New York 10007

Telephone: (212) 637-2728

Facsimile: (212) 637-2786

Attorneys for the United States of America

FLAGSTAR BANK, F.S.B.

Dated: New York, New York

February 24, 2012

By: /s/ Craig A. Stewart

VERONICA E. RENDON

CRAIG A. STEWART

Arnold & Porter LLP

399 Park Avenue

New York, New York 10022

Telephone: (212) 715-1000

Facsimile: (212) 715-1399

Attorneys for Flagstar Bank, F.S.B.

Dated: New York, New York

February 24, 2012

By: /s/ Joseph P. Campanelli

Title: Chairman, CEO, President

Flagstar Bank, F.S.B.

SO ORDERED: Feb. 24, 2012

By: /s/ Katherine B. Forrest

UNITED STATES DISTRICT JUDGE

Katherine B. Forrest

EXHIBIT 12

Statement of Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends



	For the Year Ended December 31,
	2016		2015		2014			2013			2012
	(Dollars in millions)
Income (loss) from continuing operations, before income tax	$	258	$	240	$	(103	)	$	(149	)	$	53
Fixed charges:
Interest on short-term borrowings	$	5	$	1	$	—		$	—		$	2
Interest on long-term debt	43		25		9			102			112
Combined fixed charges, excluding interest on deposits	48		26		9			102			114
Interest on deposits	46		42		30			42			70
Combined fixed charges, including interest on deposits	$	94	$	68	$	39		$	144		$	184
Ratio of earnings to combined fixed charges and preferred stock dividend requirements:
Excluding interest on deposits	6.38		10.23		(1		)	(1		)	1.46
Including interest on deposits	3.74		4.53		(2		)	(2		)	1.29


(1)	Earnings were insufficient to cover fixed charges excluding deposits and preferred stock dividends by approximately $94 million and $47 million for the years ended December 31, 2014 and 2013, respectively.


(2)	Earnings were insufficient to cover fixed charges including deposits and preferred stock dividends by approximately $64 million and $5 million for the years ended December 31, 2014 and 2013, respectively.

On July 29, 2016, we completed the previously announced $267 million redemption of our Series C Preferred Stock. This transaction reduced stockholders equity by approximately $372 million with a $267 million reduction in Preferred Stock and a $105 million reduction related to the payment of deferred dividends.

For the purpose of computing the consolidated ratio of earnings to fixed charges, "earnings" consist of income before income taxes and extraordinary items plus fixed charges. "Fixed charges" consist of interest on short-term and long-term debt and where indicated, interest on deposits. The ratios are based solely on historical financial information, and no pro forma adjustments have been made thereto.

EXHIBIT 21

Subsidiaries of Registrant

(As of December 31, 2016 )



		State or Jurisdiction of Incorporation or Organization
Name		State or Jurisdiction of Incorporation or Organization
Douglas Insurance Agency, Inc.		Michigan
Flagstar Bank, FSB		United States of America
Flagstar Real Estate Holdings, Inc.		Michigan
Flagstar Reinsurance Company		Vermont
Flagstar Capital Markets Corporation		Delaware
Flagstar ABS, LLC		Delaware
Flagstar Statutory Trust II		Connecticut
Flagstar Statutory Trust III		Delaware
Flagstar Statutory Trust IV		Delaware
Flagstar Statutory Trust V		Delaware
Flagstar Statutory Trust VI		Delaware
Flagstar Statutory Trust VII		Delaware
Flagstar Statutory Trust VIII		Delaware
Flagstar Statutory Trust IX		Delaware
Flagstar Statutory Trust X		Delaware
Long Lake REIT		Maryland
Long Lake MSR, Inc.		Maryland
Paperless Office Solutions, Inc.		Michigan

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements on Form S‑8 (File No. 333‑26157, File No. 333‑68682, File No. 333‑77501, File No. 333‑89420, File No. 333‑134554, File No. 333‑160197, File No. 333-174572, File No. 333-198320 and File No. 333-211558) of our report dated March 16, 2015, except for Note 23, as to which the date is October 7, 2016 relating to the consolidated financial statements of Flagstar Bancorp, Inc. and subsidiaries included in the Annual Report on Form 10‑K for the year ended December 31, 2016.

/s/ Baker Tilly Virchow Krause, LLP

Southfield, Michigan

March 13, 2017

EXHIBIT 23.2

Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference in the Registration Statements on Form S‑8 (No. 333‑26157, No. 333‑68682, No. 333‑77501, No. 333‑89420, No. 333‑134554, No. 333‑160197, No. 333-174572 and No. 333-198320, and No. 333-211558) of Flagstar Bancorp, Inc. of our report dated March 13, 2017 relating to the financial statements and the effectiveness of internal control over financial reporting which appears in this Form 10‑K.

/s/ PricewaterhouseCoopers, LLP

Detroit, Michigan

March 13, 2017

EXHIBIT 31.1

SECTION 302 CERTIFICATION

I, Alessandro P. DiNello, certify that:


1)	I have reviewed this annual report on Form 10-K of Flagstar Bancorp, Inc. (the "registrant");


2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;


c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	disclosed in this report any change in the registrants’ internal control over financial reporting that occurred during the registrants’ most recent fiscal quarter (the registrants’ fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5)	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):


a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.




Dated: March 13, 2017		/s/ Alessandro P. DiNello
		Alessandro P. DiNello President and Chief Executive Officer (Principal Executive Officer)

EXHIBIT 31.2

SECTION 302 CERTIFICATION

I, James K. Ciroli, certify that:


1)	I have reviewed this annual report on Form 10-K of Flagstar Bancorp, Inc. (the "registrant");


2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;


c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	disclosed in this report any change in the registrants’ internal control over financial reporting that occurred during the registrants’ most recent fiscal quarter (the registrants’ fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5)	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):


a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.




Dated: March 13, 2017		/s/ James K. Ciroli
		James K. Ciroli Executive Vice President and Chief Financial Officer (Principal Financial Officer)

EXHIBIT 32.1

SECTION 906 CERTIFICATION

In connection with the annual report of Flagstar Bancorp, Inc. (the "Company") on Form 10-K for the year ended December 31, 2016 , as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Alessandro P. DiNello, President and Chief Executive Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:


(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.




Dated: March 13, 2017		/s/ Alessandro P. DiNello
		Alessandro P. DiNello President and Chief Executive Officer (Principal Executive Officer)

EXHIBIT 32.2

SECTION 906 CERTIFICATION

In connection with the annual report of Flagstar Bancorp, Inc. (the "Company") on Form 10-K for the year ended December 31, 2016 , as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James K. Ciroli, Chief Financial Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:


(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.




Dated: March 13, 2017		/s/ James K. Ciroli
		James K. Ciroli Executive Vice President and Chief Financial Officer (Principal Financial Officer)