1174735--8/2/2007--ACCREDITED_HOME_LENDERS_HOLDING

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Risks Related to Our Business We face significant challenges due to adverse conditions in the non-prime mortgage industry, and we cannot assure you that we will continue to operate as a going concern. The non-prime lending industry is experiencing increases in mortgage loan defaults and sharp declines in the market for mortgages originated, which have led us to experience losses on the loans we originate and significant reductions in our liquidity, and have required us to obtain waivers of compliance with certain covenants under our credit facilities. Our credit facilities are subject to margin calls based on the lender s opinion of the value of our related collateral. An unanticipated large margin call could severely harm our liquidity. We may not meet the continued listing criteria for the NASDAQ Capital Market, which could materially and adversely affect the price and liquidity of our common stock, our business and our financial condition. Repurchases of defective mortgage loans such as loans that experience Early Payment Defaults may harm our business. We may not be able to continue to sell and securitize our mortgage loans. We face steeply declining employee morale, and our inability to retain qualified employees could significantly harm our business. We rely, to a significant degree, on a few key executives. As a result of the merger with Aames, we acquired deferred tax assets that we may not be able to realize. Our business requires a significant amount of cash and if it is not available our business will be significantly harmed. We have operated under waivers provided by lenders with respect to certain covenants in our credit facilities. A failure to obtain waivers or renewals of such waivers to their covenants can result in the lenders ability to immediately accelerate repayment. Our credit facilities contain covenants that restrict our operations and may impact our ability to fund mortgage loans, grow our business and increase revenues. A failure to obtain waivers to these covenants could result in immediate acceleration and loss of liquidity. Material adverse change covenants and cross default provisions magnify the consequences of any failure to maintain full compliance with all covenants. As a result of our merger with Aames, our management has been and may continue to be distracted from their focus on our business and operations in order to attend to merger-related matters. Failure to successfully integrate Aames into Accredited s operations could reduce our profitability. The pledge of the mortgage loans, servicing assets and the economic residual interests that we retain may limit our ability to obtain additional sources of financing. Our use of repurchase agreements to borrow funds may give our lenders greater rights in the event that either we or a lender files for bankruptcy. REIT is bound by certain covenants in connection with its Series A Preferred Shares and if REIT breaches such covenants, no dividends can be paid on REIT s common shares which are held by us, which may adversely affect our liquidity. Significant losses on the economic residual interests from securitizations that we retain in our REIT subsidiaries will reduce our earnings, negatively affect our liquidity, and otherwise negatively affect our business. We finance borrowers with lower credit ratings. The non-prime mortgage loans we originate generally have higher delinquency and default rates than prime mortgage loans, which could result in losses on mortgage loans that we hold or that we are required to repurchase, the loss of our servicing rights and damage to our reputation as a mortgage loan servicer. We may change our policies in ways that harm our financial condition or results of operations. A sustained reduction of our mortgage origination volume could harm us financially. Our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require management to make estimates about matters that are inherently uncertain. We face intense competition that could adversely impact our market share and our revenues. Any future economic slowdown could increase delinquencies, defaults and foreclosures and reduce our ability to originate mortgage loans. A future increase in interest rates could result in a reduction in our mortgage loan origination volumes, an increase in delinquency, default and foreclosure rates and a reduction in the value of, and income from, our mortgage loans. Our business may be significantly harmed by a slowdown in the economy or a natural disaster in the states of California or Florida, where we conduct a significant amount of business. Our hedging strategies may not be successful in mitigating our risks associated with interest rates. Our rights to cash flow from our securitized mortgage loans held for investment subject to portfolio-based accounting are subordinate to senior interests and may fail to generate any cash flow for us if the mortgage loan payment stream only generates enough cash flow to pay the senior interest holders. If we do not manage the size of operations effectively, our financial performance could be harmed. An interruption in, or breach of, our information systems may result in lost business. The success and growth of our business will be affected by our ability to adapt to and implement technological changes. AHL s mortgage lending and servicing licenses may be suspended or revoked in one or more states or provinces if the filing of AHL s audited financial statements is significantly delayed. If we are unable to maintain and expand our network of independent brokers, our mortgage loan origination business will decrease. Our financial results fluctuate as a result of seasonality and other timing factors, which makes it difficult to predict our future performance and may affect the price of our common stock. We are subject to losses due to fraudulent and negligent acts on the part of mortgage loan applicants, mortgage brokers, other vendors and our employees. We may be required to conform to the standards of the recent Ameriquest settlement, which could harm our business. Various legal proceedings are pending and more may be filed in the future which could adversely affect our financial condition or results of operations. If the prepayment rates for our mortgage loans are different than expected, our results of operations may be significantly harmed. Our interest-only mortgage loans may have a higher risk of default than our fully-amortizing mortgage loans and, therefore, may be considered less valuable than other types of mortgage loans in the sales and securitization process. Decreasing home prices or increasing interest rates may reduce our earnings in connection with our reliance on cash-out refinancings as a significant source of our origination volume. If many of our borrowers become subject to the Servicemembers Civil Relief Act of 2003, our cash flows from our residual securities and our securitizations structured as financings may be harmed. We are exposed to environmental liabilities, with respect to properties that we take title to upon foreclosure, that could increase our costs of doing business and harm our results of operations. The scope of our operations exposes us to risks of noncompliance with an increasing and inconsistent body of complex laws and regulations at the federal, state and local levels. Stockholder refusal to comply with regulatory requirements may interfere with our ability to do business in certain states. We may be subject to fines or other penalties based upon the conduct of our independent brokers. The increasing number of federal, state and local anti-predatory lending laws may restrict our ability to originate, or increase our risk of liability with respect to, certain mortgage loans and could increase our cost of doing business. Risks Related to Our Capital Structure Our guarantee of the Series A preferred shares of the REIT is senior to claims of our common stockholders. Our right to participate in distribution of assets of our subsidiaries upon the latter s liquidation or reorganization will be subject to proper claims of the subsidiary s creditors. If the REIT fails to maintain its status as a real estate investment trust, the REIT will be subject to federal and state income tax on taxable income at regular corporate rates, and the value of our common stock may be adversely impacted as a result. The market price of our common stock has been and in the future may be volatile. Some provisions of our certificate of incorporation and bylaws may deter takeover attempts, which may limit the opportunity of our stockholders to sell their shares at a favorable price. Risk Factors Related to the Proposed Merger Our businesses may be adversely impacted by the pending merger with Lone Star and if the pending merger is not consummated.

Full 10-K form ▸

1174735--8/2/2007--ACCREDITED_HOME_LENDERS_HOLDING_CO