HEADLANDS MORTGAGE CO, S-1/A, 1998-01-08

HEADLANDS MORTGAGE CO
S-1/A, 1998-01-08
MORTGAGE BANKERS & LOAN CORRESPONDENTS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 8, 1998
REGISTRATION NO. 333-38267
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------------

AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

----------------
HEADLANDS MORTGAGE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

CALIFORNIA 6162 94-2851992
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)

----------------
1100 LARKSPUR LANDING CIRCLE, SUITE 101 LARKSPUR, CALIFORNIA 94939 (415) 461-
6790
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)

----------------
PETER T. PAUL
PRESIDENT HEADLANDS MORTGAGE COMPANY 1100 LARKSPUR LANDING CIRCLE, SUITE 101
LARKSPUR, CALIFORNIA 94939 (415) 461-6790
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES TO:

PHILLIP R. POLLOCK, ESQ. PETER T. HEALY, ESQ.
TOBIN & TOBIN O'MELVENY & MYERS LLP
ONE MONTGOMERY STREET, 15TH FLOOR 275 BATTERY STREET, 26TH FLOOR
SAN FRANCISCO, CALIFORNIA 94104 SAN FRANCISCO, CALIFORNIA 94111
(415) 433-1400 (415) 984-8833

----------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED JANUARY 8, 1998

8,000,000 SHARES

HEADLANDS MORTGAGE COMPANY

COMMON STOCK

Of the 8,000,000 shares of common stock (the "Common Stock") offered hereby
(the "Offering"), 4,500,000 shares are being sold by Headlands Mortgage Company
(the "Company" or "Headlands") and 3,500,000 shares are being sold by certain
non-executive and non-employee shareholders of the Company (the "Selling
Shareholders"). The Company will not receive any of the net proceeds from the
sale of Common Stock by the Selling Shareholders. In addition, previously
earned and undistributed taxable income (approximately $18.8 million at
September 30, 1997) will be paid to existing stockholders from the Company's
net proceeds in connection with the termination of the Company's S corporation
status and additional net proceeds will be used to repay certain notes and
accrued and unpaid interest due to current stockholders (approximately $10.5
million at September 30, 1997). Prior to the Offering, there has been no public
market for the Common Stock of the Company. It is currently estimated that the
initial public offering price will be between $14.00 and $16.00 per share of
Common Stock. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price.

The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "HDLD."

Investors purchasing shares in the Offering will be subject to immediate
substantial dilution of $10.10 per share in net tangible book value.

SEE "RISK FACTORS" COMMENCING ON PAGE 13 FOR A DISCUSSION OF MATERIAL RISKS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

-----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount (1) Company (2) Shareholders
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<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
Total (3)....................... $ $ $ $
</TABLE>
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(1) For information regarding indemnification of the Underwriters, see
"Underwriting."

(2) Before deducting expenses of the Offering estimated at $800,000, payable by
the Company.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
1,200,000 additional shares of Common Stock on the same terms and
conditions as set forth above, solely to cover overallotments, if any. If
such options are exercised in full, the total Price to Public will be $ ,
Underwriting Discount will be $ , and Proceeds to Company will be $ .

The shares of Common Stock are offered by the Underwriters named herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of the certificates
representing such shares will be made against payment therefor at the offices
of NationsBanc Montgomery Securities LLC on or about , 1998.

NationsBanc Montgomery Securities llc

BT Alex. Brown
UBS Securities

, 1998
<PAGE>

----------------
CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS CONSTITUTES "FORWARD-LOOKING
STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "BELIEVE," "ESTIMATE" OR
"CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY. THE STATEMENTS IN "RISK FACTORS" CONSTITUTE CAUTIONARY STATEMENTS
IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, WITH
RESPECT TO SUCH FORWARD-LOOKING STATEMENTS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS.

----------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

[MAP OF HEADLANDS OFFICE LOCATIONS]

MAP OF UNITED STATES. MARKINGS INDICATE BRANCH OFFICE LOCATIONS AND SALES
OFFICES.
LARGE MARKING INDICATES HEADQUARTERS IN LARKSPUR, CALIFORNIA
<PAGE>

PROSPECTUS SUMMARY

The following summary does not purport to be complete and is qualified in its
entirety by the more detailed information and the consolidated financial
statements and related notes appearing elsewhere in this Prospectus. In
addition to the other information in this Prospectus, the factors set forth
under "Risk Factors" below should be considered carefully in evaluating an
investment in the Common Stock offered hereby. Unless otherwise indicated, all
information in this Prospectus (i) assumes that the Underwriters' over-
allotment option will not be exercised and (ii) reflects a 14,000-for-1 stock
split to be effected immediately prior to the Offering. See Note 18 to the
Consolidated Financial Statements. See the "Index of Defined Terms" on page 78
for the location of definitions of capitalized and other terms used herein.

OVERVIEW

Headlands Mortgage Company (the "Company" or "Headlands") is a specialty
mortgage banking company in the business of originating, selling, securitizing
and servicing mortgage loans secured by one- to four-family residences. The
Company was incorporated in California and commenced its mortgage banking
business in 1986. As a specialty mortgage lender, the Company's strategy is to
focus on specialized mortgage loan products for primarily high credit quality
borrowers. The Company generally places an emphasis on credit scores obtained
from three major credit bureaus to evaluate the credit quality of borrowers.
The Company considers "high credit quality borrowers" to be those whose credit
scores equal or exceed levels required for the sale or exchange of their
mortgage loans through Fannie Mae or Freddie Mac. The specialized mortgage
loans targeted by the Company provide a relatively greater "spread" (i.e.,
greater interest and other income to the originator relative to the costs
associated with funding and selling the mortgage loans) compared to other
mortgage loans that present a similar credit risk. The Company believes that
its wholesale lending channel (which generates a majority of its total
originations), supported by its correspondent and retail lending channels,
provides an efficient and responsive origination system for the types of
mortgage loans it seeks to originate. The Company seeks the most efficient
method of execution for sales of its mortgage loans and in recent years has
increasingly utilized securitization in addition to traditional whole loan
sales.

The Company's business objective is to increase mortgage loan originations
through geographic expansion and by providing a diversified range of mortgage
loan products through its wholesale, correspondent and retail lending channels.
During the year ended December 31, 1996, the Company originated $2.3 billion of
residential mortgage loans, 77% in California and 23% in other states. During
the nine months ended September 30, 1997, the Company originated $2.5 billion
of residential mortgage loans, 74% in California and 26% in other states.
According to National Mortgage News (October 6, 1997), for the six months ended
June 30, 1997 the Company was ranked as the second largest wholesale originator
in the United States that is not publicly owned or affiliated with a public
company, and ranked 14th among all wholesale originators. As of September 30,
1997, the Company's mortgage loan servicing portfolio totaled $4.0 billion of
mortgage loan principal balances.

The Company is led by President Peter T. Paul, the founder and major
shareholder of the Company. Mr. Paul has 25 years of experience in the
residential mortgage industry. Mr. Paul and the Chief Financial Officer of the
Company have worked together since 1987, and various other members of the
executive management team have worked together for more than six years. See
"Management--Directors and Executive Officers."

BUSINESS STRATEGY

MORTGAGE LOAN ORIGINATION

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<PAGE>

fail to satisfy one or more of the standardized criteria (other than credit
quality of the borrower) required for sale or exchange through one of the
national government-sponsored mortgage entities such as Fannie Mae or Freddie
Mac ("Agencies") or one of the national privately-sponsored mortgage conduits.
To date, the Company has tailored its loan products primarily for high credit
quality borrowers as described above.

The Company's secondary marketing department identifies a variety of new
mortgage loan products that it believes will respond to consumer needs and that
in many cases are not being widely offered by competitors. Such new mortgage
loan products may be created by the Company itself or may be introduced by a
competitor and identified by the Company as attractive for origination. The
Company generally requires that all of its mortgage loan products be readily
saleable through the Company's securitization programs or to secondary market
investors.

The Company presently has under development and review a variety of mortgage
loan products that it expects to promote in 1998. Among the products that the
Company intends to launch on a pilot basis is a mortgage loan for high credit
quality borrowers that permits a higher loan-to-value ratio than is permitted
in mortgage loans currently being originated by the Company. Another product to
be introduced is a mortgage loan that is designed primarily for lower credit
quality borrowers which will require more extensive mortgage insurance than is
required on the Company's other loan products. All new mortgage loan products
introduced by the Company are carefully pre-tested in the market over a period
of time to assess both marketability to consumers and performance of the
mortgage loan product as an investment for secondary market investors.

Current Mortgage Loan Products. The Company presently offers a broad range of
mortgage loan products in order to provide maximum flexibility to borrowers and
third-party mortgage brokers and other entities through which it originates
mortgage loans (the "Mortgage Sources").

The Company's current mortgage loan products can be categorized as follows:

. Agency Mortgage Loans. These mortgage loans satisfy the underwriting
criteria for sale or exchange through one of the Agencies.

. Non-agency Mortgage Loans. These mortgage loans fail to satisfy the
criteria to be Agency mortgage loans for one or more reasons. Certain of
these mortgage loans ("Jumbos") generally meet the Agency criteria but
exceed the maximum loan size (currently $227,150 for single-family, one-
unit mortgage loans in the continental United States). Jumbos are
generally eligible for sale to one of the national privately-sponsored
mortgage conduits.

Certain other non-agency mortgage loans may fail to satisfy other elements
of the Agency underwriting criteria, such as those relating to
documentation, employment history, income verification, loan-to-value
ratios, qualifying ratios or required borrower net worth. Beginning in
1995, the Company began to emphasize the origination of mortgage loans
which failed to satisfy one or more of the Agency and national conduit
underwriting criteria but which, from a credit risk standpoint (as
determined primarily by credit score), presented a comparable risk
profile. The Company refers to this category of mortgage loans generally
as "Alternative A" mortgage loans. The Company focuses on an applicant's
credit score, in conjunction with other factors, in underwriting its
Alternative A mortgage loans. While some Alternative A mortgage loans
exceed the maximum loan size eligible for sale through one of the
Agencies, many have principal balances within the Agency limits.

. Home Equity Mortgage Loans. Home equity mortgage loans are generally
secured by second liens on the related property. Home equity mortgage
loans can take the form of a home equity line of credit ("HELOC") or a
closed-end loan. Both types of home equity mortgage loans are designed
primarily for high credit quality borrowers and are underwritten according
to the Company's criteria for second-lien mortgage loans. Home equity
mortgage loans are originated in some instances in conjunction with the
Company's origination of a first-lien mortgage loan on the related
property.

4
<PAGE>

. Other Mortgage Loans. This category consists of mortgage loans for
borrowers who have impaired or limited credit profiles or higher debt-to-
income ratios than would be acceptable for sale of such mortgage loans to
one of the Agencies. Such mortgage loans may also fail to satisfy the
Agency underwriting criteria in other ways. The Company categorizes these
mortgage loans as "A-" or "B" loans and believes they would generally be
considered "subprime" mortgage loans in the secondary mortgage market. The
Company does not originate mortgage loans that it would categorize as "C"
or "D" loans.

In 1994, the Company originated a substantial volume of non-agency mortgage
loans in the form of Jumbos which it sold to national mortgage conduits and
other private investors. In 1995, the Company's volume of Jumbo originations
declined with the general decrease nationwide in the origination volume of
residential mortgage loans and the general increase in competition that reduced
the spread available for this mortgage loan product. The increase in
originations of non-agency mortgage loans and home equity mortgage loans in
1996 reflects the Company's successful development of its Alternative A
mortgage loan products and its HELOC and closed-end second-lien products and
the commencement of the Company's securitization programs for such mortgage
loan products. The following table summarizes the Company's originations of the
above categories of mortgage loans:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Agency Mortgage Loans
Number of mortgage loans................ 4,978 4,546 7,093 5,852 3,815
Volume of mortgage loans................ $ 643,770 $ 562,778 $ 885,050 $ 734,114 $ 475,473
Percent of total volume................. 26.71% 41.51% 38.75% 44.66% 18.81%
Non-agency Mortgage Loans
Number of mortgage loans................ 8,212 4,380 6,068 3,994 8,759
Volume of mortgage loans................ $1,736,830 $ 695,253 $1,137,572 $ 747,922 $1,625,080
Percent of total volume................. 72.06% 51.29% 49.81% 45.50% 64.31%
Home Equity Mortgage Loans
Number of mortgage loans................ 262 1,767 5,482 3,443 8,359
Volume of mortgage loans................ $ 12,110 $ 72,580 $ 234,308 $ 141,467 $ 400,782
Percent of total volume................. 0.50% 5.35% 10.26% 8.60% 15.86%
Other Mortgage Loans
Number of mortgage loans................ 137 214 250 174 221
Volume of mortgage loans................ $ 17,690 $ 24,993 $ 26,910 $ 20,346 $ 25,825
Percent of total volume................. 0.73% 1.84% 1.18% 1.24% 1.02%
Total Mortgage Loans
Number of mortgage loans................ 13,589 10,907 18,893 13,463 21,154
Volume of mortgage loans................ $2,410,400 $1,355,604 $2,283,840 $1,643,849 $2,527,160
Average principal balance............... $ 177 $ 124 $ 121 $ 122 $ 119
</TABLE>

Mortgage Loan Origination Channels. The Company originates mortgage loans
through its wholesale, correspondent and retail lending channels.

Wholesale Lending. The Company's wholesale lending channel, established
in 1986, obtains its mortgage loan volume through a network of
approximately 5,060 independent mortgage brokers approved by the Company
(of which approximately 4,420 submitted mortgage loans in 1996). Mortgage
brokers are qualified to participate in the Company's wholesale program
after a formal application process, administered by the Company's Quality
Assurance Department. The responsibilities of the Quality Assurance
Department include the review of licensing, financial statements and
resumes of key personnel and credit and reference investigations to
determine the history, reputation and general lending expertise of the
applicant. Approved mortgage brokers are monitored by the Company's
wholesale account executive staff and the broker management division within
the Quality Assurance Department. The Company underwrites each mortgage
loan application obtained from its mortgage brokers and funds those
mortgage loans which meet the Company's underwriting criteria.

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<PAGE>

The Company believes that its wholesale lending channel is well-suited to
originate the types of mortgage loans that the Company seeks to originate.
The wholesale lending channel permits the Company to respond quickly to
changes in market conditions and consumer preferences. The Company can move
quickly to introduce a new mortgage loan product by disseminating it
throughout the broker network. By revising the terms on which it will fund
mortgage loans submitted by its mortgage brokers, the Company may also move
quickly to increase the level of origination of certain mortgage loan
products or to decrease originations of other mortgage loan products that,
due to market or other changes, may no longer meet the Company's targeted
rate of return or other origination objectives. The Company believes that
its flexibility would be reduced if it maintained a large retail branch
system with the attendant fixed investment and overhead costs.

The wholesale lending channel also permits the Company to obtain non-
agency and other types of mortgage loans from mortgage brokers that
generally only originate Agency mortgage loans. The Company builds its
relationship with those mortgage brokers by providing access to specialized
mortgage loan products.

Correspondent Lending. The correspondent lending program is designed to
allow the Company to acquire closed mortgage loans on terms similar to
those it acquires on a wholesale basis from its mortgage brokers. The
correspondent benefits by gaining access to the Company's broad range of
innovative mortgage loan products. The correspondent lending program is
designed to provide attractive mortgage loan products for small- to medium-
sized mortgage companies, banks and thrifts located throughout the U.S.
which may have limited access to the capital markets.

MORTGAGE LOAN SALES

As a mortgage banker, the Company originates all of its mortgage loans with
the intent of selling such loans. A primary component of the Company's business
strategy is to seek the most efficient method of selling its mortgage loans. In
recent years, the Company has developed the capacity to access the capital
markets by securitizing its mortgage loans in addition to selling them in whole
loan sale transactions. The Company evaluates the sale of each mortgage loan
type and compares prices available for each alternative method of sale, given
current market conditions at the time and the risk characteristics of the
mortgage loan type to determine which method of sale to utilize.

The following table shows the method of sale for the Company's mortgage loans
for the periods indicated:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------- ---------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loans sold
through
securitization......... $ 295,290 $ -- $ 597,965 $ 175,923 $1,442,468
Whole loan sales........ 2,502,396 1,330,484 1,532,119 1,323,468 1,031,351
---------- ---------- ---------- ---------- ----------
Total................. $2,797,686 $1,330,484 $2,130,084 $1,499,391 $2,473,819
========== ========== ========== ========== ==========
</TABLE>

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<PAGE>

and issuing securities such as mortgage pass-throughs or collateralized
mortgage bonds or notes. The Company uses the cash generated from these
transactions to fund originations of its mortgage loan products and to repay
borrowings under its warehouse facilities.

The Company believes that its ability to access the capital markets through
securitization is important to its overall business strategy in several ways.
Securitization is a very efficient method of selling the Company's non-agency
and home equity mortgage loans. Under the non-agency mortgage loan
securitization program, the Company generally sells the more senior classes of
the securities produced by the securitization for cash and retains one or more
of the subordinated classes. Such securities are carried on the balance sheet
at their estimated fair market value (based on market prices for similar
securities) under the line item "retained interests in securitizations." Due to
the relatively high credit quality of the mortgage loans in these
securitizations, the amount of subordinated securities taken back by the
Company represents a relatively small percentage (generally less than 2%) of
the total principal of the mortgage loans securitized. In addition, the market
value of the classes of securities sold generally permits the Company to
receive cash in an amount equal to or greater than its cost of funding the
mortgage loans. As a result, the securitization of the Company's non-agency
mortgage loans to date has not required a substantial amount of the Company's
available cash. In the future, the Company may elect to retain additional
classes of securities in such securitizations, which would require additional
funds.

Under the home equity mortgage loan securitization program, the Company
generally sells the home equity mortgage loan securities for cash and a
retained trust interest that represents (i) an interest (which is subordinated
to payment on the securities sold) in the principal of the mortgage loans
securitized (the "Principal Amount") and (ii) the right to the excess of future
expected interest payments to be received on the mortgage loans securitized
over the future interest payments required to be made on the securities sold
(the "Interest-only Residual"). The estimated values of the Principal Amount
and the Interest-only Residual are shown on the balance sheet under the line
item "retained interests in securitizations." The securitizations of the
Company's home equity mortgage loans generate negative cash flow compared to
the cost of the mortgage loans securitized. The Company to date has elected to
mitigate the extent of negative cash flow by selling a portion of the Interest-
only Residual in connection with the home equity mortgage loan securitizations.
In the future the Company may elect to retain the full amount of the Interest-
only Residual in order to receive the future cash flows generated thereby. In
such event, the negative cash flow at the time of effecting the securitization
would be increased.

Securitization also supports the Company's wholesale origination channel by
increasing its flexibility in competing for non-agency mortgage loans. The
parameters of mortgage loan characteristics that may be included in a pool to
be securitized are generally broader than would be the case if the pool were to
be sold in a traditional whole loan sale to a financial institution. Mortgage
loan characteristics in securitizations are subject to the requirements of the
rating agencies and of any third-party credit enhancer that may be involved,
such as a monoline insurance company. The Company believes, however, that these
requirements generally provide more flexibility in originating mortgage loans
than would be the case under a traditional whole loan sale method. This
additional flexibility enables the Company to compete more aggressively for
mortgage loans and provide better service to its Mortgage Sources.

Whole Loan Sales and Exchanges. Sales of mortgage loans and exchanges of
mortgage loans for securities are conducted by the Company's Secondary
Marketing Department. The Company's whole loan sales and exchanges of mortgage
loans are generally made without recourse to the Company. The Company sells or
exchanges substantially all of its Agency mortgage loans through normal
secondary channels. The Company also generally sells its closed-end home equity
mortgage loans in whole loan sales rather than in the home equity mortgage loan
securitization program when the price received from whole loan sales is more
attractive to the Company. From time to time the Company sells qualifying
Jumbos to one of the privately-sponsored national mortgage conduit programs;
such Jumbos are also included at times in the Company's non-agency mortgage
loan

7
<PAGE>

securitization program along with the Alternative A mortgage loans. The Company
sells substantially all of its other mortgage loans (i.e., subprime mortgage
loans) on a whole loan basis (servicing released) in order to avoid the credit
risk associated with such mortgage loans.

OPERATIONS AND INFORMATION SERVICES

The Company's focus on providing premium service to its Mortgage Sources and
offering a broad range of conventional and specialized mortgage loan products
demands the timely delivery of such mortgage loan products to the branches and
the careful monitoring and tracking of the origination of such mortgage loan
products through delivery to the ultimate investor. For this reason, the
Company places great emphasis on its operations and technology capabilities.
The Company uses a mortgage loan origination and administrative computer system
that has largely eliminated many of the manual efforts associated with the
Company's processing operations. The Information Services Department is
dedicated to implementing, supporting and improving the software and hardware
technology employed by the Company. The Company believes that its emphasis on
operations and technology enables it to be an efficient originator and servicer
of both conventional and specialized mortgage loan products.

MORTGAGE LOAN SERVICING

The Company also engages in mortgage loan servicing, which includes the
processing of mortgage loan payments and the administration of mortgage loans.
The Company's primary source of servicing rights is mortgage loans it has
originated and sold, and for which it has retained the right to service. As of
September 30, 1997, the Company's mortgage loan servicing portfolio consisted
of approximately 36,985 one- to four-family residential mortgage loans with an
aggregate principal balance of $4.0 billion. The Company can realize the value
embedded in its mortgage loan servicing portfolio immediately by selling its
mortgage loan servicing rights or, alternatively, it can realize the value
gradually over the life of the mortgage loan servicing portfolio through the
receipt of monthly mortgage loan servicing fees. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview." The
Company intends to increase its mortgage loan servicing portfolio over time,
although the Company may sell portions of its mortgage loan servicing portfolio
on a strategic basis from time to time. The Company believes its Servicing
Center, which became fully operational in 1994, has the capacity to
substantially increase the number of mortgage loans that it services, thereby
allowing the Company to achieve certain economies of scale. See "Business--
Mortgage Loan Servicing--General" and "Business--Mortgage Loan Servicing--
Purchase and Sale of Mortgage Servicing Rights."

The delinquency rates (including foreclosures pending) for the Company's
mortgage loan servicing portfolio were 1.48%, 2.10% and 1.96% at September 30,
1997, December 31, 1996 and December 31, 1995, respectively, as compared to
national industry averages for all mortgage loans (including government-insured
mortgage loans) of 5.35%, 5.40% and 5.13% at June 30, 1997, December 31, 1996
and 1995, respectively, according to the Mortgage Bankers Association of
America (the "MBA"). The Company believes the low delinquency rates for its
mortgage loan servicing portfolio are primarily a result of the credit quality
of the mortgage loans it originates and the relative age of mortgage loans it
services. Higher delinquency rates generally lead to higher servicing costs and
reduce the value of the mortgage loan servicing portfolio.

TERMINATION OF S CORPORATION STATUS

Since inception of operations in 1986, the Company has elected to be treated
for federal income tax purposes as an S corporation under Subchapter S of the
Internal Revenue Code (the "Code"). On the closing of the Offering, the
Company's S corporation status will be terminated and the Company will become
fully subject to federal and state income taxes as a C corporation. In
connection with the termination of S corporation status, certain payments in
respect of previously earned and undistributed taxable income (the
"Shareholders Distribution Amount") will be made from the net proceeds of the
Offering to the Company's existing shareholders (the "Existing Shareholders")
and certain accounting adjustments will be made. See "Risk Factors--Possible
Liability Under Tax Indemnification Agreement" and "Termination of S
Corporation Status."

8
<PAGE>

The principal executive office of the Company is located at 1100 Larkspur
Landing Circle, Suite 101, Larkspur, California 94939, and its telephone number
is (415) 461-6790.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by
The Company............................ 4,500,000 shares
The Selling Shareholders............... 3,500,000 shares
Common Stock to be outstanding after the
Offering(1)............................. 18,500,000 shares
Use of Proceeds.......................... The net proceeds of the Offering
will be used (i) to pay the
Shareholders Distribution Amount,
(ii) to pay the full amount due
under the Company's outstanding
notes to stockholders, (iii) to
support increased mortgage loan
origination capacity, (iv) to
support securitizations, and (v) for
general corporate purposes. Pending
such use, the net proceeds may be
used to retire warehouse
indebtedness or make short-term
investments. See "Termination of S
Corporation Status" and Notes 10 and
12 to the Consolidated Financial
Statements.
Proposed Nasdaq National Market Symbol... "HDLD"
</TABLE>
- --------
(1) Excludes 518,000 shares of Common Stock issuable upon exercise of stock
options granted under the Company's Stock Option Plan (the "Stock Option
Plan"). See "Management--Stock Option Plan."

RISK FACTORS

Prospective investors should carefully consider the information set forth
under the caption "Risk Factors" and all other information set forth in this
Prospectus before making any investment in the Common Stock.

9
<PAGE>

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Net gain on sales of
mortgage loans........ $ 5,061 $ 26,163 $ 6,131 $ 12,307 $ 25,599 $ 10,816 $ 45,010
Loan administration in-
come.................. 6,036 8,027 14,737 13,427 11,120 8,281 7,196
Gain from sale of mort-
gage servicing
rights................ 10,848 11,438 7,449 8,836 11,083 11,041 9,375
Production income...... 8,788 14,107 6,044 3,832 5,830 4,442 6,223
Net interest income.... 206 1,797 2,709 1,814 5,624 3,496 8,826
Net unrealized gain in
valuation of retained
interests in
securitizations....... -- -- -- -- -- -- 668
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues......... 30,939 61,532 37,070 40,216 59,256 38,076 77,298
Operating Expenses:
Personnel.............. 16,604 20,363 19,610 15,515 20,545 14,670 20,799
General and administra-
tive.................. 6,730 11,220 10,584 10,900 13,458 8,659 10,978
Depreciation and amor-
tization.............. 704 1,373 2,965 3,484 2,919 2,245 1,983
Amortization and im-
pairment of OMSR...... -- -- -- 958 2,093 635 3,600
Occupancy and rents.... 897 3,341 2,591 2,136 1,941 1,436 1,659
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating ex-
penses................ 24,935 36,297 35,750 32,993 40,956 27,645 39,019
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before taxes.... 6,004 25,235 1,320 7,223 18,300 10,431 38,279
Net income............. $ 5,862 $ 24,667 $ 1,270 $ 6,971 $ 17,660 $ 10,016 $ 36,936
========== ========== ========== ========== ========== ========== ==========
Pro Forma Information:
Income before taxes.... $ 6,004 $ 25,235 $ 1,320 $ 7,223 $ 18,300 $ 10,431 $ 38,279
Pro forma income tax-
es(1)................. 2,462 10,599 541 3,034 7,686 4,381 16,077
Pro forma net in-
come(1)............... 3,542 14,636 779 4,189 10,614 6,050 22,202
Pro forma net income
per share(1)(2)....... $ 0.68 $ 1.42
Pro forma weighted av-
erage number of shares
outstanding(1)(2)..... 15,631 15,631
Supplemental pro forma
net income per
share(1)(2)(3)........ $ 0.68 $ 1.38
Supplemental pro forma
weighted average num-
ber of shares out-
standing(1)(2)(3)..... 15,923 16,331
OPERATING DATA:
Loan Origination Volume
(in thousands):
Agency................. $1,737,357 $2,317,692 $ 643,770 $ 562,778 $ 885,050 $ 734,114 $ 475,473
Non-agency............. 1,233,585 2,310,237 1,736,830 695,253 1,137,572 747,922 1,625,080
Home equity loans...... 4,976 970 12,110 72,580 234,308 141,467 400,782
Other.................. -- -- 17,690 24,993 26,910 20,346 25,825
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total.................. $2,975,918 $4,628,899 $2,410,400 $1,355,604 $2,283,840 $1,643,849 $2,527,160
========== ========== ========== ========== ========== ========== ==========
Loan Origination Volume
(in units):
Agency................. 12,637 17,432 4,978 4,546 7,093 5,852 3,815
Non-agency............. 4,690 8,608 8,212 4,380 6,068 3,994 8,759
Home equity loans...... 86 17 262 1,767 5,482 3,443 8,359
Other.................. -- -- 137 214 250 174 221
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total.................. 17,413 26,057 13,589 10,907 18,893 13,463 21,154
========== ========== ========== ========== ========== ========== ==========
Loan Servicing Portfolio
(at end of period)(4).. $2,956,000 $4,283,168 $4,779,411 $4,149,305 $4,386,814 $3,971,822 $4,003,079
Weighted average inter-
est rate.............. 7.99% 6.94% 7.10% 7.80% 8.10% 7.95% 8.34%
Weighted average matu-
rity (months)......... 317 301 299 284 278 272 265
Weighted average serv-
ice fee rate.......... 0.27% 0.26% 0.31% 0.29% 0.29% 0.29% 0.28%
Total delinquencies in-
cluding foreclo-
sures(5).............. 3.12% 1.73% 1.81% 1.96% 2.10% 1.87% 1.48%
Average mortgage loan
size.................. $ 148 $ 162 $ 164 $ 152 $ 128 $ 133 $ 108
</TABLE>

10
<PAGE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ---------------------------
PRO FORMA
1992 1993 1994 1995 1996 1996 1997 1997(7)
------- -------- ------- -------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT
END OF PERIOD):
Retained interests in
securitizations........ $ -- $ -- $ 768 $ 585 $ 15,128 $ 5,263 $ 32,670 32,670
Mortgage loans held for
sale, pledged.......... -- 321,536 74,623 97,088 238,172 218,559 262,296 262,296
Originated mortgage
servicing rights,
net(6)................. -- -- -- 7,083 20,276 16,453 25,209 25,209
Total assets............ 12,550 349,198 98,730 147,432 288,990 256,654 349,998 349,998
Warehouse and other
operating debt......... -- 307,566 76,278 91,234 241,343 220,015 254,712 254,712
Notes payable to
stockholders........... -- -- -- -- 9,670 9,670 9,670 9,670
Total liabilities....... 5,315 322,297 79,827 121,558 259,846 235,153 283,918 321,449
Total stockholders'
equity................. 7,235 26,901 18,904 25,874 29,144 21,501 66,080 28,549
</TABLE>
- --------
(1) Prior to the closing of the Offering, the Company will be treated as an S
corporation for federal and state income tax purposes. See "Termination of
S Corporation Status." The pro forma presentation reflects the provision
for income taxes as if the Company had always been fully subject to federal
and state taxes as a C corporation at the tax rates effective for the
periods presented (41% for 1992 and 1994; 42% for 1993, and 1995 through
1997).
(2) Pro forma net income per share has been computed by dividing pro forma net
income by the pro forma weighted average number of shares outstanding. The
pro forma weighted average number of shares includes all options issued
below the estimated initial public offering price within one year prior to
the filing of the Registration Statement for the initial public offering
and is calculated using the treasury stock method. The pro forma weighted
average number of shares also includes the effect of the assumed issuance
of 1,253,334 shares of Common Stock to generate sufficient cash to pay the
Shareholders Distribution Amount of $18.8 million at September 30, 1997.
The assumed issuance of Common Stock was based on an assumed price of
$15.00, the midpoint of the estimated range of the Offering price.
Historical earnings per share is not presented because it is not indicative
of the ongoing entity.
(3) Supplemental pro forma net income per share reflects further adjustment for
the effect of the add back, net of tax, of interest expense recorded since
July 1996, the inception of the notes, to be repaid from the proceeds of
the Offering. In that calculation, weighted average shares outstanding
include the effect of the assumed issuance of 700,000 shares of Common
Stock in July 1996 to retire the notes payable to stockholders and related
accrued and unpaid interest ($10.5 million at September 30, 1997).
(4) The Company's mortgage loan servicing portfolio for the years 1992 and 1993
was subserviced for the Company by another servicing entity. See "Certain
Management Transactions and Business Relationships--History of Arrangements
with FCMC."
(5) Represents the mortgage loan balances past due 30 days or more (including
those in foreclosure) as a percentage of the total mortgage loan servicing
portfolio.
(6) At September 30, 1997, the Company's mortgage loan servicing portfolio
totaled $4.0 billion of mortgage loans, including $1.7 billion for which no
capitalized balance sheet value has been recorded.

(7) Gives effect to the following which will reduce stockholders' equity upon
closing of the Offering: (i) a distribution to the Existing Shareholders of
the Shareholders Distribution Amount in the aggregate amount of $18.8
million (calculated as of September 30, 1997), and (ii) the creation of a
deferred tax liability in the amount of $18.7 million (calculated as of
September 30, 1997) arising in connection with the Company's termination of
S corporation status. Does not give effect to use of proceeds from the
Offering. See "Termination of S Corporation Status," "Use of Proceeds,"
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operation."

11
<PAGE>

RECENT DEVELOPMENTS

OPERATING DATA

The Company originated $1.2 billion in mortgage loans during the three months
ended December 31, 1997, of which $1.1 billion were generated through the
wholesale lending channel. The mortgage loan originations for the year ended
December 31, 1997 totalled $3.8 billion, consisting of $689 million of agency
mortgage loans, $2,485 million of non-agency mortgage loans, $552 million of
home equity mortgage loans and $30 million other mortgage loans.

The Company's mortgage loan servicing portfolio increased $0.5 billion or 13%
to $4.5 billion at December 31, 1997 from $4.0 billion at September 30, 1997.
The Company has capitalized the relative fair value relating to $2.8 billion of
mortgage loans in accordance with SFAS 122 and SFAS 125. The Company also owns
$1.7 billion of mortgage servicing rights relating to loans originated prior to
1995 for which no value has been recorded on the Company's balance sheet as of
December 31, 1997. Loans in the mortgage loan servicing portfolio which were
delinquent, including those loans in foreclosure, represented 1.91% of the
servicing portfolio at December 31, 1997.

SECURITIZATION DATA

The Company issued two mortgage-backed securities during the three months
ended December 31, 1997, one with an outstanding mortgage pool balance of $233
million and the second with an outstanding mortgage pool balance of $283
million.

12
<PAGE>

RISK FACTORS

In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered in evaluating the
Company and its business before purchasing any of the Common Stock offered
hereby. This Prospectus contains forward-looking statements. Discussions
containing such forward-looking statements may be found in the material set
forth under "Summary," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business" as
well as within the Prospectus generally. Actual results could differ
materially from those described in the forward-looking statements as a result
of the risks and uncertainties set forth below and within the Prospectus
generally.

CONTROL OF CERTAIN STOCKHOLDERS

Peter T. Paul and his family will beneficially own 45.4% (and will have
voting power pursuant to a Voting Trust with respect to 56.8%) of the
outstanding shares of Common Stock following the closing of the Offering.
Accordingly, Mr. Paul, who is the President of the Company, will have
effective control of the Company, with the likely ability to approve certain
fundamental corporate transactions (including mergers, consolidations and
sales of assets) and to elect a majority of the members of the Board of
Directors. See "Principal and Selling Shareholders."

IMMEDIATE DILUTION TO STOCKHOLDERS PURCHASING IN THE OFFERING

The initial public offering price is higher than the net tangible book value
per share of Common Stock in the Offering. Investors purchasing shares of
Common Stock in the Offering will be subject to immediate dilution of $10.10
per share in net tangible book value. See "Dilution."

INTEREST RATE FLUCTUATIONS MAY ADVERSELY AFFECT RESULTS OF OPERATIONS

The Company's Mortgage Loan Origination and Sale Business May Be Adversely
Affected by Changes in Interest Rates. Changes in interest rates can have a
variety of effects on the Company's mortgage loan origination business. The
market value of fixed-rate mortgage loans has a greater sensitivity to changes
in market interest rates than adjustable-rate mortgage loans. To the extent an
interest rate is established for a mortgage loan in process prior to the time
such mortgage loan is funded (a "locked pipeline loan"), a gain or loss on the
sale of such mortgage loan may result from changes in interest rates during
the period between the time the interest rate is established and the time the
mortgage loan is committed for sale. In order to hedge this interest rate
risk, the Company sells (on a forward basis) a portion of its locked pipeline
loans (or an equivalent amount of the mortgage-backed securities into which
such mortgage loans may be converted). Since 1992, the Company has utilized
Tuttle & Co., an unaffiliated advisory and information services company based
in Mill Valley, California, for exposure analysis of its mortgage loan
pipeline. The Company determines the number of such forward sales it will make
based upon a daily probability analysis as to the principal amount of locked
pipeline loans that are likely to be funded by the Company. To the extent that
the probability analysis utilized by the Company differs from actual
experience, the resultant mismatching of commitments to fund mortgage loans at
certain interest rates and forward sales of mortgage loans with certain
interest rates may have a material adverse effect on the Company's results of
operations. See "Business--Hedging Activities."

In addition to the interest rate risk discussed above, the Company's
origination of mortgage loans that are ineligible for Agency programs ("non-
agency mortgage loans") involves risk to the extent the Company has not
obtained investor commitments to purchase such mortgage loans on a forward or
current basis at the time interest rates are established for such mortgage
loans (whether at mortgage loan funding or prior thereto). Specifically, until
such forward purchase commitments are obtained, the Company, in most cases,
hedges such non-agency mortgage loans with (i) forward sales of Fannie Mae
mortgage-backed securities or (ii) forward whole loan sales. The Company
determines which alternative provides the best execution in the secondary
market. To the extent movements in the interest rates on such securities do
not match the current pricing for non-agency mortgage loans in the secondary
market, the Company may recognize gains or losses upon the sale of such
mortgage loans.

13
<PAGE>

Non-agency, home equity and other non-conforming mortgage loans made up 81.2%
of the Company's mortgage loan originations during the nine months ended
September 30, 1997 and 61.3% of mortgage loan originations during the year
ended December 31, 1996.

In addition to the foregoing, the Company's results of operations from its
origination of mortgage loans can be adversely affected to the extent rising
interest rates decrease the volume of mortgage loan originations and the
revenue derived therefrom.

The Company's Servicing Operations May Be Adversely Affected by Changes in
Interest Rates. The Company's servicing operations are also affected by
interest rate levels. As mortgage interest rates fall, an increasing number of
borrowers can be expected to refinance and prepay their mortgage loans.
Prepayments of mortgage loans serviced by the Company result in termination of
the Company's future stream of servicing fees from such mortgage loans. In
addition, the Company capitalizes servicing rights on mortgage loans that it
originates based upon the net present value of future cash flows. If the rate
of prepayment of the related mortgage loans exceeds the rate assumed by the
Company, due to a significant reduction in interest rates or otherwise, the
value of the mortgage loan servicing portfolio will decrease, which could
adversely affect the Company's results of operations. Interest rate changes
can also adversely affect the ability of the Company to sell mortgage loan
servicing rights to a third party . The Company does not presently hedge its
mortgage loan servicing portfolio.

FAILURE TO EFFECTIVELY USE LEVERAGE TO FINANCE MORTGAGE LOAN ORIGINATIONS MAY
ADVERSELY AFFECT RESULTS OF OPERATIONS

Unavailability of Funding Sources May Adversely Affect Results of
Operations. The Company funds substantially all of the mortgage loans which it
purchases and originates through borrowings under warehouse financing
facilities, repurchase agreements and internally generated funds. The
Company's borrowings are in turn repaid with the proceeds received by the
Company from selling such mortgage loans through securitizations or whole loan
sales. The Company is currently and may in the future be dependent upon a few
lenders to provide the primary credit facilities for its mortgage loans. In
addition, the Company's specialized mortgage loan products are often not
familiar to warehouse lenders. As new mortgage loan products are introduced,
such lenders must be familiarized with the loans and their marketability
before they determine whether such mortgage loans are eligible for financing
under the warehouse facilities. Any failure to renew or obtain adequate
funding under these facilities, or any substantial reduction in the size of or
pricing in the market for the Company's mortgage loans, could have a material
adverse effect on the Company's operations.

Increased Cost of Borrowing May Adversely Affect Results of Operations. If
the return on the mortgage loans originated or acquired by the Company with
borrowed funds fails to cover the cost of the borrowing, the Company will
experience net interest losses and may experience net losses. In addition, the
cost of such borrowings can vary depending upon the lender, the nature and
liquidity of the underlying collateral, the movement of interest rates, the
availability of financing in the market and other factors. Further, the
Company may not be able to achieve the degree of leverage it believes to be
optimal, which may cause the Company to be less profitable than it might be
otherwise.

Changes in Interest Rates May Adversely Affect Results of
Operations. Profitability may be directly affected by the levels of and
fluctuations in interest rates, which affect the Company's ability to earn a
spread between interest received on its mortgage loans and the cost of
borrowing. The profitability of the Company is likely to be adversely affected
during any period of unexpected or rapid changes in interest rates. For
example, a substantial or sustained increase in interest rates could adversely
affect the ability of the Company to originate and acquire mortgage loans and
could reduce the interest rate differential between newly originated mortgage
loans and the Company's cost of borrowing. A significant decline in interest
rates could decrease the size of the Company's mortgage loan servicing
portfolio by increasing the level of mortgage loan prepayments. While the
Company monitors the interest rate environment and generally will earn a
positive spread between interest paid on borrowed funds and interest earned on
mortgage loans, there can be no assurance that the profitability of the
Company would not be adversely affected during any period of changes in
interest rates. See "Risk Factors--Negative Effects of Interest Rate
Fluctuations."

14
<PAGE>

Failure to Refinance Outstanding Borrowings May Adversely Affect Results of
Operations. While the Company expects to be able to maintain existing
financing arrangements, or to obtain replacement financing as its lending
arrangements mature, there can be no assurance that such financing will be
obtainable on favorable terms. To the extent that the Company is not
successful in maintaining or replacing existing financing, it may have to
curtail its mortgage loan production activities, which could have a material
adverse effect on the Company's operations.

Decline in Market Value of Mortgage Assets and Margin Calls May Adversely
Affect Results of Operations. A decline in the market value of the Company's
portfolio of mortgage loans may limit the Company's ability to borrow or
result in lenders initiating margin calls (i.e., requiring a pledge of cash or
additional mortgage loans to re-establish the ratio of the amount of the
borrowing to the value of the collateral). The Company could be required to
sell mortgage loans under adverse market conditions in order to maintain
liquidity. Such sales may be effected by the Company when deemed by it to be
necessary in order to preserve the capital base of the Company. If these sales
were made at prices lower than the amortized cost of the mortgage loans, the
Company would experience losses. A default by the Company under its
collateralized borrowings could also result in a liquidation of the
collateral, including any cross-collateralized assets, and a resulting loss of
the difference between the value of the collateral and the amount borrowed.

DEPENDENCE ON SECURITIZATIONS FOR SUCCESSFUL OPERATIONS

The Company plans to pool and sell through securitizations substantially all
of its non-agency mortgage loans and HELOC home equity mortgage loans and
expects that the gain recognized from such securitizations will continue to
represent a significant portion of the Company's future revenues and net
earnings. Further, the Company is dependent on the cash generated from such
securitizations to fund its future originations and repay borrowings under its
warehouse facilities. The Company's ability to complete securitizations of its
mortgage loans will depend on a number of factors, including conditions in the
securities markets generally, conditions in the mortgage-backed securities
market specifically, the performance of the Company's previous securitizations
or the securitizations of others and the Company's ability to obtain credit
enhancement. Adverse changes in the securitization market could impair the
Company's ability to sell mortgage loans through securitizations on a
favorable or timely basis and could have a material adverse effect upon the
Company's results of operations and financial condition. Furthermore, because
management of the Company expects that an important component of the Company's
income will be gain on sale, the Company's quarterly operating results may
fluctuate significantly as a result of the timing and level of
securitizations. If securitizations do not close when expected, the Company's
results of operations may be materially adversely affected for that period.

In addition, in order to gain access to the HELOC securitization market, the
Company expects to continue to rely upon credit enhancements provided by one
or more monoline insurance carriers to enable it to obtain an AAA/Aaa rating
for the senior portion of its mortgage-backed securities. Any substantial
increase in the price charged by, or the required level of protection to be
provided to, the insurance companies, or any unwillingness of insurance
companies to guarantee these senior securities in the Company's mortgage loan
pools, could have a material adverse effect upon the Company's results of
operations and financial condition.

ESTIMATED VALUE OF RETAINED INTERESTS IN SECURITIZATIONS MAY BE REDUCED,
ADVERSELY IMPACTING RESULTS OF OPERATIONS

The Company derives a substantial portion of its revenue and earnings by
recognizing gains on the sale of mortgage loans through securitizations.
Securitization is the process of pooling mortgage loans that the Company has
originated or purchased and issuing securities backed by such mortgage loan
pools. The Company generally sells the more senior classes of the securities
for cash and retains one or more of the subordinated classes. In its non-
agency mortgage loan securitizations, the retained subordinated classes of
securities generally have a stated principal amount and earn a fixed interest
rate. Management believes that it has made reasonable estimates of the market
value of such retained subordinated classes of securities on its balance
sheet, based on market prices for similar securities. If the mortgage loans
underlying such retained securities should experience delinquencies or losses
at rates greater than anticipated, the value of such securities would have to
be written-down with a

15
<PAGE>

corresponding charge to income. In its home equity mortgage loan
securitizations, the Company retains a trust interest that includes an
Interest-only Residual. To value the Interest-only Residual for the balance
sheet, the Company projects the expected cash flows over the life of such
retained interest, using prepayment and default assumptions that market
participants would use for similar financial instruments that are subject to
prepayment, credit and interest rate risks. The Company then determines the
present value of these cash flows using an interest rate which it believes is
commensurate with the risks involved. If the Company's actual experience
differs materially from the assumptions used in the determination of the
present value of such retained interests, future cash flows and results of
operations could be adversely affected. The Company could also be required to
reduce the fair value of its retained interests on its balance sheet. To the
Company's knowledge, there is currently no active market for the sale of these
retained interests. No assurance can be given that the retained interests
could be sold at their stated value, if at all.

INTENSE COMPETITION IN THE MORTGAGE LENDING INDUSTRY

The Company faces intense competition, primarily from commercial banks,
savings and loans and other mortgage lenders. If the Company expands into
particular geographic markets, it will face competition from mortgage lenders
with established positions in such markets. There can be no assurance that the
Company will be able to successfully compete with these mortgage lenders.
Competition can take place on various levels, including convenience in
obtaining a mortgage loan, service, marketing, origination channels and
pricing. Many of the Company's competitors in the financial services business
are substantially larger and have more capital and other resources than the
Company. Many of the Company's competitors are well established in the
specialty mortgage loan market and a number of others are recent entrants into
that market seeking the relatively attractive profit margins currently
associated with specialty mortgage loan products. Fannie Mae and Freddie Mac
are currently developing technologies and business practices that will expand
the scope of mortgage loans eligible to be Agency mortgage loans to include
some Alternative A and subprime mortgage loans. To the extent market pricing
for the Company's mortgage loan products becomes more competitive, it may be
more difficult to originate and purchase mortgage loans with attractive yields
in sufficient volume to maintain profitability. There can be no assurance that
the Company will be able to compete successfully in this market environment
and any failure in this regard could have a material adverse effect on the
Company's results of operations and financial condition.

DEPENDENCE ON WHOLESALE BROKERS FOR SUCCESSFUL OPERATIONS

The Company depends primarily on independent mortgage brokers and, to a
lesser extent, on correspondent lenders, for the origination and purchase of
its wholesale mortgage loans, which constitute a significant portion of the
Company's mortgage loan production. These independent mortgage brokers deal
with multiple lenders for each prospective borrower. The Company competes with
these lenders for the independent brokers' business on the basis of price,
service, loan fees, costs and other factors. The Company's competitors also
seek to establish relationships with such brokers, who are not obligated by
contract or otherwise to do business with the Company. The Company's future
results of operations and financial condition may be vulnerable to changes in
the volume and costs of its wholesale mortgage loans resulting from, among
other things, competition from other lenders and purchasers of such mortgage
loans.

PERMITTING UNDERWRITING EXCEPTIONS MAY ADVERSELY IMPACT RESULTS OF OPERATIONS

On a case-by-case basis, the Company's underwriters may determine that a
prospective borrower warrants an exception from its underwriting guidelines.
Such exceptions may include a debt service-to-income ratio exception, a loan-
to-value exception or an exception from certain documentation requirements of
a particular mortgage loan program. An underwriting exception will generally
be allowed if the application reflects one or more compensating factors, such
as a high credit score, a low loan-to-value ratio, cash reserves, stable
employment, or a particularly long length of residency in the property.
Accordingly, the Company may fund mortgage loans that do not satisfy all of
the criteria for a particular mortgage loan program being offered by the
Company. The Company's historical experience in making such exceptions is
limited and, therefore, its historical

16
<PAGE>

delinquency and foreclosure rates to date may not be indicative of future
levels of performance. By permitting underwriting exceptions, the Company may
diminish the consistency and control inherent in the strict application of
underwriting guidelines. In addition, if such mortgage loans cannot be
included in a planned securitization or other expected method of sale, the
Company may be required to dispose of these mortgage loans at a lower price
than contemplated at the time of origination.

RELIANCE UPON MORTGAGE LOAN PRODUCT DEVELOPMENT FOR SUCCESSFUL OPERATIONS

The Company plans to expand and refine its mortgage loan products in order
to maintain a variety of mortgage loan products with relatively attractive
"spreads" which are (i) responsive to the needs of consumers, originating
brokers and the secondary markets and (ii) available in the marketplace sooner
than similar mortgage loan products offered by its competitors. There can be
no assurance that the Company can continue to expand and refine its mortgage
loan product mix on a timely basis and the failure to do so could have a
material adverse effect on the Company's results of operations, financial
condition and business prospects.

POTENTIAL CREDIT LOSSES ON MORTGAGE LOANS MAY ADVERSELY AFFECT RESULTS OF
OPERATIONS

The Company bears the risk of credit losses on mortgage loans held for sale
and on certain retained interests in securitizations which the Company has
elected or is required to hold. The Company has until recently sold its
mortgage loans on a non-recourse basis. Accordingly, the Company has no
significant historical experience with retention of risk of loss due to
mortgage loan defaults. Potential losses can arise from many factors as
summarized below:

Real Estate Security and the Foreclosure Process. Many of the risks of
mortgage lending reflect the risks of investing directly in the real estate
securing the mortgage loans. In the event of a default on the underlying
mortgage loan, the ultimate extent of the loss, if any, may only be determined
after a foreclosure of the mortgage encumbering the property and, if the
lender takes title to the property, upon liquidation of the property. Factors
such as the title to the property or its physical condition (including
environmental considerations) may make a third-party unwilling to purchase the
property at a foreclosure sale or at a price sufficient to satisfy the
obligations of the related mortgage loan. Foreclosure laws in various states
may cause a protracted foreclosure process. In addition, the condition of a
property may deteriorate during the period of foreclosure proceedings. Certain
borrowers on underlying mortgage loans may become subject to bankruptcy
proceedings, in which case the amount and timing of amounts due may be
materially adversely affected. Even assuming that the underlying property
provides adequate security for the mortgage loan, substantial delays could be
encountered in connection with the liquidation of a defaulted mortgage loan
and a corresponding delay in the receipt and reinvestment of principal and
interest payments could occur.

Adverse Real Estate Market Conditions May Affect Value of Collateral. The
Company's business may be adversely affected by periods of economic slowdown
or recession which may be accompanied by declining property values. Any
material decline in property values reduces the ability of borrowers to use
equity in the property to support borrowings and increases the loan-to-value
ratios of mortgage loans previously made, thereby weakening collateral
coverage and increasing the possibility of a loss in the event of default. In
addition, delinquencies, foreclosures and losses generally increase during
economic slowdowns and recessions.

Non-agency, Home Equity and Other Mortgage Loans May Have Higher Delinquency
and Foreclosure Rates. Credit risks associated with non-agency, home equity
and other mortgage loans may be greater than those associated with Agency
mortgage loans. In originating such non-agency loans, the Company generally
places an emphasis on credit scores obtained from three major credit bureaus
to evaluate the credit quality of the borrowers. Such non-agency loans may
differ from Agency loans with respect to loan-to-value ratios, the credit and
income history of the borrowers, the documentation required for approval of
the borrowers, the types of properties securing the mortgage loans, mortgage
loan sizes and the borrowers' occupancy status with respect to the mortgaged
property. As a result of these and other factors, the interest rates charged
on the non-agency categories of mortgage loans are often higher than those
charged for Agency mortgage loans. The combination

17
<PAGE>

of different underwriting criteria and higher rates of interest may lead to
higher delinquency rates and/or credit losses for these categories of mortgage
loans as compared to Agency mortgage loans. Further, to the extent the Company
develops mortgage loan products for lower credit quality borrowers, there may
be a higher risk of delinquency and foreclosure than with mortgage loans made
to high credit quality borrowers. Any failure by the Company to adequately
address the higher delinquency and foreclosure rates could have a material
adverse effect on the Company.

Lack of Geographic Diversification. During the nine months ended September
30, 1997 and the year ended December 31, 1996, 74% and 77%, respectively, of
the Company's mortgage loan originations (as measured by principal balances)
were secured by property located in California. To the extent that properties
underlying such mortgage loans are located in the same geographic region, such
mortgage loans may be subject to a greater risk of delinquency or default in
the event of adverse economic, political or business developments and natural
hazard risks that may affect such region. If the region's real estate market
should experience an overall decline in property values, the rates of
delinquency, foreclosure, bankruptcy and loss on the mortgage loans may be
expected to increase substantially, as compared to such rates in a stable or
improving real estate market.

Potential Environmental Liabilities. Certain properties securing mortgage
loans may be contaminated by hazardous substances. As a result, the value of
the property may be diminished. In the event that the Company is forced to
foreclose on a defaulted mortgage loan on that property, the Company may be
subject to environmental liabilities regardless of whether the Company was
responsible for the contamination. While the Company intends to exercise due
diligence to discover potential environmental liabilities prior to the
acquisition of any property through foreclosure, hazardous substances or
wastes, contaminants, pollutants or sources thereof (as defined by state and
federal laws and regulations) may be discovered on properties during the
Company's ownership or after a sale thereof to a third party. If such
hazardous substances are discovered on a property, the Company may be required
to remove those substances or sources and clean up the property at substantial
expense. The Company may also be liable to tenants and users of neighboring
properties. In addition, the Company may find it difficult or impossible to
sell the property prior to or following any such clean-up.

QUARTERLY FLUCTUATIONS IN EARNINGS

The Company's revenues and net earnings have fluctuated in the past and are
expected to fluctuate in the future as a result of a number of factors,
including the size and timing of securitizations and whole loan sales,
expansion costs incurred by the Company and the volume of mortgage loan
originations and purchases. If the Company were unable to securitize
profitably a sufficient number of its mortgage loans in a particular quarter,
or were unable to complete a sufficient number of whole loan sales, then the
Company's revenues for such quarter would decline, which could result in lower
earnings or a loss reported for such quarter and have a material adverse
effect on the Company's results of operations, financial condition and
business prospects.

INABILITY TO SUSTAIN AND MANAGE GROWTH

Although the Company has experienced rapid and substantial growth in
mortgage loan originations and total revenues in recent years, there can be no
assurance that the Company can sustain these rates of growth or that it will
be able to create an infrastructure or recruit and retain sufficient personnel
to keep pace with a prolonged period of growth. The inability of the Company
to sustain or keep pace with its rate of growth would have a material adverse
effect on the Company's results of operations, financial condition and
business prospects. Additionally, in light of such growth, the historical
financial performance of the Company may be of limited relevance in predicting
future performance.

GENERAL ECONOMIC AND FINANCIAL CONDITIONS MAY AFFECT RESULTS OF OPERATIONS

The Company's results of operation will depend on, among other things, the
level of net interest income generated by the Company's mortgage loans, the
market value of such mortgage loans and the supply of and demand for such
mortgage loans. Prepayment rates, interest rates, borrowing costs and credit
losses depend upon

18
<PAGE>

the nature and terms of the mortgage loans, the geographic location of the
properties securing the mortgage loans, conditions in financial markets, the
fiscal and monetary policies of the United States government and the Board of
Governors of the Federal Reserve System, international economic and financial
conditions, competition and other factors, none of which can be predicted with
any certainty.

LEGISLATION AND REGULATION

The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and will be
subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on part or all of its operations. Regulated
matters include, without limitation, mortgage loan origination marketing
efforts, credit application and underwriting activities, maximum finance and
other charges, disclosure to customers, certain rights of rescission on
mortgage loans, closing and servicing mortgage loans, collection and
foreclosure procedures, qualification and licensing requirements for doing
business in various jurisdictions and other trade practices. Mortgage loan
origination activities are subject to the laws and regulations in each of the
states in which those activities are conducted. Activities as a lender are
also subject to various federal laws. The Truth in Lending Act ("TILA") and
Regulation Z promulgated thereunder, as both are amended from time to time,
contain disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of
mortgage loans and credit transactions in order to give them the ability to
compare credit terms. TILA also guarantees consumers a three-day right to
cancel certain credit transactions. TILA also imposes disclosure, underwriting
and documentation requirements on mortgage loans, known as "Section 32 loans,"
with (i) total points and fees upon origination in excess of 8% of the
mortgage loan amount or (ii) an annual percentage rate 10% higher than
comparably maturing U.S. treasury securities. The Company is also required to
comply with the Equal Credit Opportunity Act of 1974, as amended ("ECOA"),
which prohibits creditors from discriminating against applicants on the basis
of race, color, sex, age or marital status. Regulation B promulgated under
ECOA restricts creditors from obtaining certain types of information from
mortgage loan applicants. It also requires certain disclosures by the lender
regarding consumer rights and requires lenders to advise applicants of the
reasons for any credit denial. In instances where the applicant is denied
credit or the rate or charge for a mortgage loan increases as a result of
information obtained from a consumer credit agency, the Fair Credit Reporting
Act of 1970, as amended, requires the lender to supply the applicant with a
name and address of the reporting agency. The Company is also subject to the
Real Estate Settlement Procedures Act ("RESPA") and the Debt Collection
Practices Act and will be required to file an annual report with the
Department of Housing and Urban Development ("HUD") pursuant to the Home
Mortgage Disclosure Act ("HMDA"). The Company is also subject to the rules and
regulations of, and examinations by, HUD, Fannie Mae, Freddie Mac and state
regulatory authorities with respect to originating, processing, underwriting,
selling and servicing mortgage loans. Failure to comply with these
requirements can lead to loss of approved status, termination or suspension of
servicing contracts without compensation to the servicer, demands for
indemnifications or mortgage loan repurchases, certain rights of rescission
for mortgage loans, class action lawsuits and administrative enforcement
actions. There can be no assurance that the Company will maintain compliance
with these requirements in the future without additional expenses, or that
more restrictive local, state or federal laws, rules and regulations will not
be adopted or that existing laws and regulations will not be interpreted in a
more restrictive manner, which would make compliance more difficult and more
expensive for the Company.

The laws and regulations described above are subject to legislative,
administrative and judicial interpretation, and certain of these laws and
regulations have been infrequently interpreted or only recently enacted.
Infrequent interpretations of these laws and regulations or an insignificant
number of interpretations of recently enacted regulations can result in
ambiguity with respect to permitted conduct under these laws and regulations.
Any ambiguity under the regulations to which the Company is subject may lead
to regulatory investigations or enforcement actions and private causes of
action, such as class action lawsuits, with respect to the Company's
compliance with the applicable laws and regulations. The Company may also be
subject to regulatory enforcement actions and private causes of action from
time to time with respect to its compliance with applicable laws and
regulations.

19
<PAGE>

ELIMINATION OF LENDER PAYMENTS TO BROKERS

Class-action lawsuits have been filed against a number of mortgage lenders
alleging that such lenders have violated RESPA by making certain payments to
independent mortgage brokers. These lawsuits have generally been filed on
behalf of a purported nationwide class of borrowers and allege that payments
made by a lender to a broker in addition to payments made by the borrower to a
broker are prohibited by RESPA, and are therefore illegal. If these cases are
resolved against the lenders, it may cause an industry-wide change in the way
independent mortgage brokers are compensated. The Company's broker
compensation programs permit such payments. Future regulatory interpretations
or judicial decisions may require the Company to change its broker
compensation programs or subject it to material monetary judgments or other
penalties. Any such changes or penalties may have a material adverse effect on
the Company's results of operations, financial condition and business
prospects. See "Risk Factors--Legislation and Regulation."

DEPENDENCE UPON KEY PERSONNEL FOR SUCCESSFUL OPERATIONS

The Company's operations will depend heavily upon the contributions of Mr.
Peter T. Paul and the Company's other executive officers, Becky S. Poisson,
Gilbert J. MacQuarrie and Steven M. Abreu, each of whom would be difficult to
replace. The loss of any of these individuals or of other key personnel could
have a material adverse effect upon the Company's business and results of
operations. See "Management--Directors and Officers."

FUTURE REVISIONS IN POLICIES AND STRATEGIES AT THE DISCRETION OF THE BOARD OF
DIRECTORS

The Company has established the operating policies and strategies set forth
in this Prospectus as the operating policies and strategies of the Company.
However, these policies and strategies may be modified or waived by the Board
of Directors without stockholder approval. The ultimate effect of these
changes may be positive or negative.

POSSIBLE LIABILITY UNDER THE TAX INDEMNIFICATION AGREEMENT

The Company and the Existing Shareholders have entered into a tax
indemnification agreement (the "Tax Agreement") relating to their respective
income tax liabilities. Because the Company will be fully subject to corporate
income taxation after the termination of the Company's S corporation status,
any reallocation of income and deductions between the period during which the
Company was treated as an S corporation and the period during which the
Company will be subject to corporate income taxation may increase the taxable
income of one party while decreasing that of another party. The Tax Agreement
generally provides that, if an adjustment is made to the taxable income of the
Company for a year in which it was treated as an S corporation, the Company
will indemnify the Existing Shareholders (up to an agreed maximum amount
described below) against any increase in the Existing Shareholder's income tax
liability (including interest and penalties and related costs and expenses)
with respect to such tax year to the extent such increase results in a related
decrease in the income tax liability of the Company (whether with respect to
the year of the adjustment or over future years). Additionally, the Existing
Shareholders will not be responsible for any portion of any deferred tax
liability recorded on the balance sheet of the Company upon the termination of
the S corporation status. The Company will also indemnify the Existing
Shareholders for all taxes imposed upon them as the result of an
indemnification payment under the Tax Agreement. In no event, however, will
the Company be obligated to make indemnification payments under the Tax
Agreement if such payments, together with the aggregate of prior payments,
would exceed the amount of the deferred tax liability which may be recorded by
the Company on the balance sheet of the Company at the time of the termination
of the Company's S corporation status ($18.7 million at September 30, 1997).
The Tax Agreement is not binding on the Internal Revenue Service and any
payment made by the Company to the Existing Shareholders as aforesaid may be
considered by the Internal Revenue Service or state taxing authorities to be
non-deductible by the Company for income tax purposes. Any payment obligation
of the Company under the Tax Agreement on the part of the Company, or the
amount thereof, is uncertain at this time; however, any such payment may be
material if an indemnification payment obligation arises. See "Termination of
S Corporation Status."

20
<PAGE>

ABSENCE OF ACTIVE PUBLIC TRADING MARKET

There is currently no trading market for the Common Stock and there can be
no assurance that an active trading market for the Common Stock will develop
or that, if developed, it will be sustained. The initial public offering price
of the Common Stock offered hereby was determined by negotiations among the
Company and representatives of the Underwriters and may not be indicative of
the price at which the Common Stock will trade after the closing of the
Offering. See "Underwriting." Consequently, there can be no assurance that the
market price for the Common Stock will not fall below the initial public
offering price.

POSSIBLE VOLATILITY OF STOCK PRICE

In the event an active trading market for the Common Stock does develop, the
market price of the Common Stock may experience fluctuations unrelated to the
operating performance of the Company. In particular, the price of the Common
Stock may be affected by general market price movements as well as
developments specifically related to the mortgage finance industry such as
interest rate movements and credit quality trends.

SECURITIES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF
COMMON STOCK

Following the closing of the Offering (and assuming that the Underwriters'
over-allotment option is not exercised), there will be outstanding 18,500,000
shares of Common Stock, of which (i) 8,000,000 shares of Common Stock are
being offered hereby and (ii) 10,500,000 shares of Common Stock are held by
current shareholders and subject to a 180-day "lock-up" period following the
closing of the Offering. See "Underwriting." The shares of Common Stock not
being offered in the Offering are "restricted securities" within the meaning
of Rule 144 ("Rule 144") under the Securities Act. Such restricted securities
will be available for resale pursuant to Rule 144 following a holding period
ending one year from the date of issuance, (subject to the volume and other
limitations imposed by Rule 144) and, unless held by affiliates of the Company
will become unrestricted two years from the date of issuance. In addition,
upon termination or waiver of the lock-up period, such restricted securities
may be sold at any time through an effective registration statement. Future
sales of restricted securities could have an adverse effect on the market
price of the Common Stock. The holders of the currently restricted shares of
Common Stock have certain registration rights with respect to such shares of
Common Stock. See "Shares Eligible for Future Sale" and "Description of
Capital Stock--Registration Rights."

As of September 30, 1997, options to purchase 518,000 shares of Common Stock
were outstanding under the Company's Stock Option Plan, which will vest on
various dates extending through 2001. The Company will file a Form S-8
registration statement approximately 90 days following the closing of the
Offering to permit shares issued pursuant to the options to be sold.

POTENTIAL ISSUANCE OF PREFERRED STOCK

The Company's Articles of Incorporation authorize the Board of Directors to
issue shares of Preferred Stock designated in one or more classes or series.
The Preferred Stock may be issued from time to time with such designations,
rights and preferences as shall be determined by the Board of Directors.
Preferred Stock would be available for possible future financing of, or
acquisitions by, the Company and for general corporate purposes without any
legal requirement that further stockholder authorization for issuance be
obtained. The issuance of Preferred Stock could have the effect of making an
attempt to gain control of the Company more difficult by means of a merger,
tender offer, proxy contest or otherwise. The Preferred Stock, if issued, may
have a preference on dividend payments which could affect the ability of the
Company to make dividend distributions to the holders of Common Stock. As of
the date of this Prospectus, no shares of Preferred Stock have been issued and
the Company does not intend to issue any Preferred Stock prior to the closing
of the Offering.

21
<PAGE>

TERMINATION OF S CORPORATION STATUS

From inception of operations, the Company has elected to be treated for
federal income tax purposes as an S corporation under Subchapter S of the
Code, and as an S corporation for certain state corporate income tax purposes
under certain comparable state laws. As a result, the Company's historical
earnings have been taxed directly to the Company's shareholders, at their
individual federal and state income tax rates, rather than to the Company
(except for certain state taxes). Upon the issuance of shares of Common Stock
on the closing of the Offering, the Company's S corporation status will be
terminated and the Company will become fully subject to federal and state
income taxes. At that time, the Company will record a deferred tax liability
on its balance sheet, the amount of which will depend upon timing differences
between tax and book accounting relating principally to recognition of gains
on sales of mortgage loans. If the S corporation status had been terminated as
of September 30, 1997, the amount of the deferred tax liability would have
been approximately $18.7 million. See "Capitalization."

Since inception, the Company has made distributions to its shareholders of a
portion of the Company's income to permit the shareholders to pay their taxes
on such income. The aggregate amount of distributions to shareholders,
however, has been less than the aggregate amount of taxable income of the
Company during this period. The amount of this previously earned and
undistributed taxable income (including estimated taxable income up to the
closing of the Offering, with provision for adjustment based on final numbers)
(the "Shareholders Distribution Amount") will be distributed to the Existing
Shareholders out of the net proceeds of the Offering promptly following the
closing of the Offering. The Shareholders Distribution Amount as of September
30, 1997 would have been approximately $18.8 million.

The Company and the Existing Shareholders have entered into a tax
indemnification agreement (the "Tax Agreement") relating to their respective
income tax liabilities. Because the Company will be fully subject to corporate
income taxation after the termination of the Company's S corporation status,
any reallocation of income and deductions between the period during which the
Company was treated as an S corporation and the period during which the
Company will be subject to corporate income taxation may increase the taxable
income of one party while decreasing that of another party. Accordingly, the
Tax Agreement is intended to assure that taxes are borne either by the Company
or the Existing Shareholders to the extent that such parties received the
related income. The Tax Agreement generally provides that, if an adjustment is
made to the taxable income of the Company for a year in which it was treated
as an S corporation, each party will indemnify the other against any increase
in the indemnified party's income tax liability (including interest and
penalties and related costs and expenses) with respect to such tax year to the
extent such increase results in a related decrease in the income tax liability
of the indemnifying party (whether with respect to the year of the adjustment
or over future years). However, the Tax Agreement specifically provides that
the Existing Shareholders will not be responsible for any portion of any
deferred tax liability recorded on the balance sheet of the Company upon
termination of the S corporation status. The Company will also indemnify the
Existing Shareholders for all taxes imposed upon them as the result of an
indemnification payment under the Tax Agreement. In no event, however, will
the Company be obligated to make indemnification payments under the Tax
Agreement if such payments, together with the aggregate of prior payments,
would exceed the amount of the deferred tax liability which may be recorded by
the Company on the balance sheet of the Company at the time of the termination
of the Company's S corporation status. Any payment made by the Company to the
Existing Shareholders pursuant to the Tax Agreement may be considered by the
Internal Revenue Service or state taxing authorities to be non-deductible by
the Company for income tax purposes. Neither parties' obligations under the
Tax Agreement are secured, and, as such, there can be no assurance that the
Existing Shareholders or the Company will have funds available to make any
payments which may become due under the Tax Agreement. A copy of the Tax
Agreement has been filed by the Company as an exhibit to the Registration
Statement of which this Prospectus is a part. See "Risk Factors--Possible
Liability Under the Tax Indemnification Agreement."

22
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 4,500,000 shares of
Common Stock offered by the Company hereby are estimated to be $61,975,000
after deducting the Underwriting Discounts and estimated offering expenses
($78,715,000 if the Underwriters' over-allotment option granted by the Company
is exercised in full), assuming an initial public offering price of $15.00 per
share of Common Stock. No proceeds will be realized by the Company from the
sale of shares of Common Stock by the Selling Shareholders.

The Company will first use a portion of the net proceeds of the Offering to
pay the Shareholders Distribution Amount ($18.8 million calculated as of
September 30, 1997). The Company will next use the net proceeds to pay in full
the outstanding principal and interest on the stockholder notes beneficially
owned by Peter T. Paul and Jessica M. Paul. As of September 30, 1997, the
amount outstanding under the stockholder notes was $9.7 million plus accrued
interest to date of payment. The stockholder notes bear interest at a variable
rate equal to the one-year LIBOR plus 5%. Any remaining net proceeds (and the
net proceeds from any exercise of the Underwriters' overallotment option to
purchase up to another 1,200,000 shares of Common Stock) will be used as
follows: 50% to support increased mortgage loan origination capacity
(including through geographic expansion), 45% to support securitization
transactions and 5% for general corporate purposes.

Pending their ultimate application, the net proceeds from the Offering will
be used temporarily to pay down outstanding balances under the Company's
warehouse credit facilities or to invest in short-term, investment-grade,
interest-bearing securities and deposit accounts.

DIVIDEND POLICY

The Company expects that it will retain all available earnings generated by
its operations for the development and growth of its business and does not
anticipate paying any cash dividends in the foreseeable future. The payment of
dividends by the Company is restricted under the terms of its Warehouse
Facility and other credit agreements. For a brief description of such
restrictions, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and Note 10 to
the Consolidated Financial Statements. Any future determination as to dividend
policy will be made at the discretion of the Board of Directors of the Company
and will depend on a number of factors, including the future earnings, capital
requirements, financial condition and future prospects of the Company and such
other factors as the Board of Directors may deem relevant.

23
<PAGE>

CAPITALIZATION

The following table sets forth, as of September 30, 1997, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the
company as adjusted to give effect to the conversion of the Company from an S
corporation and the recognition of the Shareholders Distribution Amount and
creation of a deferred tax liability, and (iii) the pro forma capitalization
of the Company as adjusted to give effect to the conversion of the Company
from an S corporation and to the sale of the 4,500,000 shares of Common Stock
offered by the Company hereby at an assumed initial offering price of $15.00
per share and the application of the estimated net proceeds therefrom to pay
the Shareholders Distribution Amount and the stockholder notes. This table
should be read in conjunction with the Company's financial statements and the
notes thereto. See "Termination of S Corporation Status" and "Use of
Proceeds."

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------
AS ADJUSTED FOR
TERMINATION OF AS ADJUSTED FOR
ACTUAL S CORPORATION OFFERING
------ --------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Debt:
Notes payable ...................... $254.7 $254.7 $254.7
Notes payable to stockholders....... 9.7 9.7 --
Distributions Payable............... -- 18.8 --
Deferred tax liability.............. -- 18.7 18.7
------ ------ ------
Total debt........................ 264.4 301.9 273.4
Stockholders' equity:
Common Stock; 14,700,000 shares au-
thorized and 50,000,000 shares au-
thorized as adjusted; 14,000,000
issued and outstanding and
18,500,000 issued and outstanding
as adjusted(1)(2).................. -- 28.6 90.6
Retained earnings(2)................ 66.1 -- --
------ ------ ------
Total stockholders' equity........ 66.1 28.6 90.6
------ ------ ------
Total capitalization............ $330.5 $330.5 $364.0
====== ====== ======
</TABLE>
- --------
(1) Excludes 518,000 shares of Common Stock subject to options. See
"Management--Stock Option Plan."
(2) Gives pro forma effect to (i) a distribution to the Existing Shareholders
of the Shareholders Distribution Amount in the aggregate amount of $18.8
million (calculated as of September 30, 1997), and (ii) the creation of a
deferred tax liability in the amount of $18.7 million (calculated as of
September 30, 1997) arising in connection with the Company's termination
of S corporation status. See "Termination of S Corporation Status," "Use
of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operation."

24
<PAGE>

DILUTION

The net tangible book value of the Common Stock as of September 30, 1997 was
$66.1 million, or $4.72 per share of Common Stock. Net tangible book value per
share of Common Stock represents the amount of the Company's stockholders'
equity, less intangible assets, divided by the number of shares of Common
Stock outstanding. Dilution per share of Common Stock represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in the Offering made hereby and the pro forma net tangible book value
per share of Common Stock immediately after the closing of the Offering. After
(i) giving effect to the sale of 4,500,000 shares of Common Stock offered
hereby by the Company at the assumed initial public offering price of $15.00
per share, (ii) deducting the Underwriting Discount and estimated offering
expenses payable by the Company, (iii) giving effect to the S corporation
distribution to the Existing Shareholders of an aggregate of $18.8 million
(calculated as of September 30, 1997) in payment of the Shareholders
Distribution Amount, and (iv) the creation of a deferred tax liability in the
amount of $18.7 million (calculated as of September 30, 1997) arising in
connection with the Company's termination of its S corporation status, the pro
forma net tangible book value of the Company as of September 30, 1997 would
have been $90.6 million or $4.90 per share of Common Stock. This represents an
immediate increase in pro forma net tangible book value per share to the
Existing Shareholders of $0.18 and an immediate dilution of $10.10 to new
public investors purchasing Common Stock in the Offering, as illustrated in
the following table:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $15.00
Net tangible book value per share at September 30, 1997..... $ 4.72
Decrease attributable to payment of Shareholders Distribu-
tion Amount.............................................. $(1.34)
Decrease due to deferred tax liability.................... $(1.34)
Increase in tangible book value per share attributable to
new public investors..................................... $ 2.86
======
Pro forma net tangible book value per share after the
Offering................................................... $ 4.90
======
Dilution per share to new public investors.................. $10.10
======
</TABLE>

The following table sets forth on a pro forma basis as of September 30, 1997
the difference between Existing Shareholders and the purchasers of shares in
the Offering with respect to the number of shares purchased from the Company,
the total consideration paid and the average price paid per share of Common
Stock:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
------------------ ------------------- PER SHARE
NUMBER PERCENT NUMBER PERCENT OF COMMON STOCK
---------- ------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing
shareholders(1)........ 14,000,000 75.7% $28,600,000 29.8% $ 2.04
New public investors.... 4,500,000 24.3% $67,500,000 70.2% $15.00
---------- ----- ----------- ----- ------
Total................. 18,500,000 100.0% $96,100,000 100.0% $ 5.19
========== ===== =========== ===== ======
</TABLE>
- --------
(1) The sale of shares by the Selling Shareholders in the Offering will reduce
the number of shares held by Existing Shareholders to 10,500,000 shares,
or 56.8% of the total shares of Common Stock outstanding, and will
increase the number of shares held by new investors to 8,000,000, or 43.2%
of the total shares of Common Stock outstanding after the Offering.

The information and tables above exclude the effect of (i) 518,000 shares of
Common Stock subject to options and (ii) options to purchase up to an
additional 182,000 shares of Common Stock available for issuance under the
Stock Option Plan. The calculations also assume no exercise of the
Underwriters' overallotment option. See "Management--Stock Option Plan,"
"Description of Capital Stock" and "Underwriting."

25
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data for the years ended
December 31, 1992 through 1996 are derived from the Company's audited
financial statements. The selected financial data for the nine months ended
September 30, 1996 and September 30, 1997 are unaudited and, in the opinion of
the management of the Company, include all adjustments, consisting of normal
accruals, necessary for a fair presentation. The results of operations for the
nine-month period ended September 30, 1997 are not necessarily indicative of
the results expected to be achieved during the entire year. The data set forth
below should be read in conjunction with the consolidated financial statements
of the Company and the notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere herein.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Net gain on sales of
mortgage loans........ $ 5,061 $ 26,163 $ 6,131 $ 12,307 $ 25,599 $ 10,816 $ 45,010
Loan administration in-
come.................. 6,036 8,027 14,737 13,427 11,120 8,281 7,196
Gain from sale of mort-
gage servicing
rights................ 10,848 11,438 7,449 8,836 11,083 11,041 9,375
Production income...... 8,788 14,107 6,044 3,832 5,830 4,442 6,223
Net interest income.... 206 1,797 2,709 1,814 5,624 3,496 8,826
Net unrealized gain in
valuation of retained
interests in
securitizations....... -- -- -- -- -- -- 668
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues......... 30,939 61,532 37,070 40,216 59,256 38,076 77,298
Operating Expenses:
Personnel.............. 16,604 20,363 19,610 15,515 20,545 14,670 20,799
General and administra-
tive.................. 6,730 11,220 10,584 10,900 13,458 8,659 10,978
Depreciation and amor-
tization.............. 704 1,373 2,965 3,484 2,919 2,245 1,983
Amortization and im-
pairment of OMSR...... -- -- -- 958 2,093 635 3,600
Occupancy and rents.... 897 3,341 2,591 2,136 1,941 1,436 1,659
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating ex-
penses................ 24,935 36,297 35,750 32,993 40,956 27,645 39,019
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before taxes.... 6,004 25,235 1,320 7,223 18,300 10,431 38,279
Net income............. $ 5,862 $ 24,667 $ 1,270 $ 6,971 $ 17,660 $ 10,016 $ 36,936
========== ========== ========== ========== ========== ========== ==========
Pro Forma Information:
Income before taxes.... $ 6,004 $ 25,235 $ 1,320 $ 7,223 $ 18,300 $ 10,431 $ 38,279
Pro forma income tax-
es(1)................. 2,462 10,599 541 3,034 7,686 4,381 16,077
Pro forma net in-
come(1)............... 3,542 14,636 779 4,189 10,614 6,050 22,202
Pro forma net income
per share(1)(2)....... $ 0.68 $ 1.42
Pro forma weighted av-
erage number of shares
outstanding(1)(2)..... 15,631 15,631
Supplemental pro forma
net income per
share(1)(2)(3)........ $ 0.68 $ 1.38
Supplemental pro forma
weighted average num-
ber of shares out-
standing(1)(2)(3)..... 15,923 16,331
OPERATING DATA:
Loan Origination Volume
(in thousands):
Agency................. $1,737,357 $2,317,692 $ 643,770 $ 562,778 $ 885,050 $ 734,114 $ 475,473
Non-agency............. 1,233,585 2,310,237 1,736,830 695,253 1,137,572 747,922 1,625,080
Home equity loans...... 4,976 970 12,110 72,580 234,308 141,467 400,782
Other.................. -- -- 17,690 24,993 26,910 20,346 25,825
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total.................. $2,975,918 $4,628,899 $2,410,400 $1,355,604 $2,283,840 $1,643,849 $2,527,160
========== ========== ========== ========== ========== ========== ==========
Loan Origination Volume
(in units):
Agency................. 12,637 17,432 4,978 4,546 7,093 5,852 3,815
Non-agency............. 4,690 8,608 8,212 4,380 6,068 3,994 8,759
Home equity loans...... 86 17 262 1,767 5,482 3,443 8,359
Other.................. -- -- 137 214 250 174 221
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total.................. 17,413 26,057 13,589 10,907 18,893 13,463 21,154
========== ========== ========== ========== ========== ========== ==========
Loan Servicing Portfolio
(at end of period)(3).. $2,956,000 $4,283,168 $4,779,411 $4,149,305 $4,386,814 $3,971,822 $4,003,079
Weighted average inter-
est rate.............. 7.99% 6.94% 7.10% 7.80% 8.10% 7.95% 8.34%
Weighted average matu-
rity (months)......... 317 301 299 284 278 272 265
Weighted average serv-
ice fee rate.......... 0.27% 0.26% 0.31% 0.29% 0.29% 0.29% 0.28%
Total delinquencies in-
cluding foreclo-
sures(4).............. 3.12% 1.73% 1.81% 1.96% 2.10% 1.87% 1.48%
Average mortgage loan
size.................. $ 148 $ 162 $ 164 $ 152 $ 128 $ 133 $ 108
</TABLE>

26
<PAGE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ----------------------------
PRO FORMA
1992 1993 1994 1995 1996 1996 1997 1997(7)
------- -------- ------- -------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT
END OF PERIOD):
Retained interests in
securitizations........ $ -- $ -- $ 768 $ 585 $ 15,128 $ 5,263 $ 32,670 $32,670
Mortgage loans held for
sale, pledged.......... -- 321,536 74,623 97,088 238,172 218,559 262,296 262,296
Originated mortgage
servicing rights,
net(6)................. -- -- -- 7,083 20,276 16,453 25,209 25,209
Total assets............ 12,550 349,198 98,730 147,432 288,990 256,654 349,998 349,998
Warehouse and other
operating debt......... -- 307,566 76,278 91,234 241,343 220,015 254,712 254,712
Notes payable to
stockholders........... -- -- -- -- 9,670 9,670 9,670 9,670
Total liabilities....... 5,315 322,297 79,827 121,558 259,846 235,153 283,918 321,449
Total stockholders'
equity................. 7,235 26,901 18,904 25,874 29,144 21,501 66,080 28,549
</TABLE>
- --------
(1) Prior to the closing of the Offering, the Company will be treated as an S
corporation for federal and state income tax purposes. See "Termination of
S Corporation Status." The pro forma presentation reflects the provision
for income taxes as if the Company had always been fully subject to
federal and state taxes as a C corporation at the tax rates effective for
the periods presented (41% for 1992 and 1994; 42% for 1993 and 1995
through 1997).
(2) Pro forma net income per share has been computed by dividing pro forma net
income by the pro forma weighted average number of shares outstanding. The
pro forma weighted average number of shares includes all options issued
below the estimated initial public offering price within one year prior to
the filing of the Registration Statement for the initial public offering
and is calculated using the treasury stock method. The pro forma weighted
average number of shares also includes the effect of the assumed issuance
of 1,253,334 shares of Common Stock to generate sufficient cash to pay the
Shareholders Distribution Amount of $18.8 million at September 30, 1997.
The assumed issuance of Common Stock was based on an assumed price of
$15.00, the midpoint of the estimated range of the Offering price.
Historical earnings per share is not presented because it is not
indicative of the ongoing entity.
(3) Supplemental pro forma net income per share reflects further adjustment
for the effect of the add back, net of tax, of interest expense recorded
since July 1996, the inception of the notes, to be repaid from the
proceeds of the Offering. In that calculation, weighted average shares
outstanding include the effect of the assumed issuance of 700,000 shares
of Common Stock in July 1996 to retire the notes payable to stockholders
and related accrued and unpaid interest ($10.5 million at September 30,
1997).
(4) The Company's mortgage loan servicing portfolio for the years 1992 and
1993 was subserviced for the Company by another servicing entity. See
"Certain Management Transactions and Business Relationships--History of
Arrangements with FCMC."
(5) Represents the mortgage loan balances past due 30 days or more (including
those in foreclosure) as a percentage of the total mortgage loan servicing
portfolio.
(6) At September 30, 1997, the Company's mortgage loan servicing portfolio
totaled $4.0 billion of mortgage loans, including $1.7 billion for which
no capitalized balance sheet value has been recorded.
(7) Gives effect to the following which will reduce stockholders' equity upon
closing of the Offering (i) a distribution to the Existing Shareholders of
the Shareholders Distribution Amount in the aggregate amount of $18.8
million (calculated as of September 30, 1997), and (ii) the creation of a
deferred tax liability in the amount of $18.7 million (calculated as of
September 30, 1997) arising in connection with the Company's termination
of S corporation status. Does not give effect to use of proceeds from the
Offering. See "Termination of S Corporation Status," "Use of Proceeds,"
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operation."

27
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company is primarily engaged in the origination, purchase, sale,
securitization and servicing of mortgage loans secured by one- to four-family
residential units. The Company's total income represents revenues derived from
net gain from sales of mortgage loans, loan administration income, gain from
sales of mortgage servicing rights, production income, net interest income and
net unrealized gains in valuation of retained interests in securitizations.
The net gain from sales of mortgage loans consists of two components: (i) gain
on sale of mortgage loans sold through securitizations, which is recognized
based on the sum of the selling price of the portion sold and the value of the
portion retained less the carrying value of the mortgage loans sold; and (ii)
net gain on mortgage loans sold through whole loan transactions, which is
recognized based upon the difference between the selling price and the
carrying value of the mortgage loans sold. If a whole loan is sold servicing
released, the servicing release premium is included in the net gain on the
sale of the mortgage loan. Loan administration income includes fees earned as
servicer for mortgage loans owned by investors, net of fees paid to the
subservicer. The Company recognizes gain on the sale of mortgage servicing
rights which are sold separately from the mortgage loans, based upon the
difference between the selling price, net of selling expenses, and the
carrying value of the mortgage loan servicing rights. Production income
includes fees paid to the Company by borrowers for the preparation,
documentation and underwriting of mortgage loans. Net interest income consists
of the net spread between interest received by the Company on its mortgage
loans held for sale and interest paid by the Company under its credit
facilities. It also includes interest earned on retained interests in
securitizations net of interest expenses for the related investment financing.

Prior to July 1, 1993, the Company's originated mortgage loans were arranged
through its Mortgage Sources and funded by, and in the name of, First
California Mortgage Company ("FCMC"), a related party of the Company. On July
1, 1993, the Company began originating mortgage loans in its own name as an
authorized seller/servicer with FCMC acting as subservicer for the Company
with respect to newly originated mortgage loans. By February 1994, the
Company's Servicing Center became operational, and all of the servicing
functions were transferred from FCMC to the Servicing Center by June 30, 1994.
See "Certain Management Transactions and Business Relationships--History of
Arrangement with FCMC."

As of the date of this Prospectus, the Company had eight wholesale branches
and a network of approximately 5,060 mortgage brokers. In addition, the
Company initiated its correspondent and retail lending divisions in 1994 to
access new mortgage loan origination markets. These strategies were designed
to expand and diversify the Company's mortgage loan origination network and
decrease the Company's reliance on the California real estate market.

The Company has experienced significant growth in the last few years,
particularly since April 1, 1995. Management believes that this growth is
primarily attributable to (i) its changing mortgage loan product mix, (ii) the
Company's geographic expansion, (iii) the Company's further penetration into
its established markets, and (iv) the Company's increased access to additional
funding sources which has enabled the Company to accumulate larger pools of
mortgage loans for sales through securitizations.

In connection with its growth, the Company has continued to focus its
resources on developing mortgage loan production from borrowers, brokers and
correspondents by designing mortgage loan products to meet the evolving needs
of these customers. Any future growth will be limited by, among other things,
the Company's need for continued funding sources, access to capital markets,
sensitivity to economic slowdowns, ability to attract and retain qualified
personnel, fluctuations in interest rates and competition from other mortgage
lenders and from new market entrants. See "Business--Competition."

The Company's primary source of mortgage loan servicing rights is from
mortgage loans originated or acquired and sold by the Company. Of the
Company's $4.0 billion of mortgage loans serviced at September 30, 1997, $3.5
billion were serviced for others and $0.5 billion were mortgage loans held for
sale by the Company.

28
<PAGE>

Of the mortgage loans serviced for others, approximately $1.5 billion were
mortgage loans serviced for Fannie Mae or Freddie Mac, $1.7 billion were
mortgage loans included in securities created by the Company, and $0.4 billion
were mortgage loans serviced for private investors. Of the total mortgage
loans serviced for others (excluding mortgage loans held for sale or
investment) at September 30, 1997, December 31, 1996 and 1995, respectively,
1.2%, 1.5% and 1.4% were 30 days or more delinquent. As of September 30, 1997
and December 31, 1996 and 1995, the Company had not purchased mortgage loan
servicing rights and, while from time to time it may consider purchasing
mortgage loan servicing rights, the Company has no immediate plans to do so.

TERMINATION OF S CORPORATION STATUS AND INCOME TAXES

On the closing of the Offering, the Company's status as an S corporation
will terminate. In connection with the termination of the Company's S
corporation status, the Company will distribute the Shareholders Distribution
Amount. The Shareholders Distribution Amount would have been $18.8 million
calculated as of September 30, 1997. See "Use of Proceeds" and "Termination of
S Corporation Status."

As an S corporation, the Company's income, whether or not distributed, was
taxed at the shareholder level for federal and state tax purposes. Upon
termination of its S corporation status, the Company will be fully subject to
federal and state income taxes and will record a deferred tax liability on its
balance sheet. The amount of the deferred tax liability to be recorded as of
the date of termination of the S corporation status will depend upon timing
differences between tax and book accounting relating principally to
recognition of gains on sale of mortgage loans. If the S corporation status
had been terminated as of September 30, 1997, the amount of the deferred tax
liability would have been approximately $18.7 million. The pro forma provision
for income taxes in the selected consolidated financial data shows results as
if the Company had always been fully subject to federal and state taxes at the
tax rates effective for the periods presented.

RESULTS OF OPERATION

Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996

Summary. The financial results for the nine months ended September 30, 1997
reflect not only the growth in the Company's mortgage loan originations, but
also its ability to successfully securitize and market the mortgage loans in
the capital markets. Refinancing activity accounted for approximately 54% of
the mortgage loans originated by the Company during the nine months ended
September 30, 1997, compared to 56% during the same period in 1996.

Net income for the nine months ended September 30, 1997 increased $26.9
million, or 269% to $36.9 million compared to $10.0 million for the same
period in the prior year. The percentage increase in net income was higher
than the percentage increase in revenue due to a relatively lower increase in
operating expenses for the first nine months of 1997 from the first nine
months of 1996.

Revenue. Revenue for the nine months ended September 30, 1997 increased
$39.2 million, or 103% to $77.3 million as compared to $38.1 million for the
same period of 1996.

Net gain from sales of mortgage loans increased $34.2 million, or 317%, to
$45.0 million for the nine months ended September 30, 1997 compared to $10.8
million for the same period of the previous year. The increase was the result
of increased mortgage loan originations and purchases as well as the
corresponding increase in mortgage loans sold through securitizations and on a
whole loan basis. During the nine months ended September 30, 1997, mortgage
loan originations increased $883.4 million, or 54%, to $2,527.2 million
compared to $1,643.8 million in the comparable period in 1996. Mortgage loans
either sold or securitized during the nine months ended September 30, 1997
increased $974.4 million, or 65%, to $2,473.8 million from $1,499.4 million
during the comparable period in 1996, with a weighted average net gain on sale
as a percentage of mortgage loans sold or securitized of 1.8% and 0.7%,
respectively. The increase in net gain on sale percentage is primarily due to
the Company's ability to obtain improved pricing by securitizing pools of
mortgage loans. Additionally, the Company completed a HELOC securitization
during the nine months ended September 30, 1997, which has improved pricing
over the non-agency securitizations. The Company retains 100% of the servicing
rights on mortgage loans it sells through securitizations. See Note 2(b) to
the Consolidated Financial Statements.

29
<PAGE>

Loan administration income decreased $1.1 million, or 13%, to $7.2 million
for the nine months ended September 30, 1997 from $8.3 million for the nine
months ended September 30, 1996. The decrease was due primarily to a 5%
decrease in the average monthly balance outstanding in the mortgage loan
servicing portfolio from $3.9 billion to $3.7 billion. The decrease in the
average mortgage loan servicing portfolio is primarily due to the timing of
bulk mortgage loan servicing sales which occurred at the beginning of the nine
months ended September 30, 1997, in contrast to the middle of the nine months
ended September 30, 1996. Even though the average mortgage loan servicing
portfolio decreased, the outstanding mortgage loan servicing portfolio remained
at $4.0 billion at September 30, 1997 from September 30, 1996.

The Company sold mortgage servicing rights relating to $1.8 billion and $1.0
billion of mortgage loan principal balances during the nine months ended
September 30, 1997 and September 30, 1996, respectively, resulting in a pre-tax
gain of $9.4 million and $11.0 million, respectively. These gains represent a
52 basis point and 110 basis point gain based on the outstanding principal
balance of the underlying mortgage loans for the nine months ended September
30, 1997 and 1996, respectively. The decrease in gain is due to a lower book
value related to the mortgage servicing rights sold in the prior period, as
well as a decrease in the price of the sale to 1.11% for the nine months ended
September 30, 1997 from 1.23% for the nine months ended September 30, 1996. In
general, the decision to sell, buy or retain mortgage servicing rights is based
upon the market for and value of mortgage servicing rights, the Company's
current financial needs and objectives, including, among other things, its cash
and/or capital requirements and its debt-to-equity and other financial ratios.
The Company's ability to sell its mortgage servicing rights under its various
mortgage loan servicing agreements with investors is generally subject to the
consent of the investors. In addition, under the mortgage loan servicing
provisions governing the Company's securitizations, the successor servicer is
subject to prior approval of the rating agencies rating the subject securities.
See "Risk Factors--Sale of Mortgage Servicing Rights" and "Use of Proceeds."

Production income increased $1.8 million, or 41%, to $6.2 million for the
nine months ended September 30, 1997, as compared to $4.4 million for the
comparable period in 1996. The increase is due primarily to the growth in
origination volume.

Net interest income increased $5.3 million, or 151%, to $8.8 million during
the nine months ended September 30, 1997 from $3.5 million during the
comparable period in 1996. The increase in net interest income was due to
several factors: (i) a higher average balance of mortgage loans held for sale
during the nine months ended September 30, 1997 than the comparable period of
1996; (ii) earnings on subordinate certificates retained by the Company
relating to securitizations; and (iii) the Company's ability to obtain a wider
spread between mortgage coupons and borrowing rates primarily relating to home
equity lines of credit. These increases are offset by an additional expense of
$0.6 million during the nine months ended September 30, 1997 relating to
interest on the stockholders note payable of $9.7 million.

Net unrealized gain in valuation of retained interests in securitizations was
$0.7 million for the nine months ended September 30, 1997. This gain was the
result of an increase in the market value of retained interests in
securitizations from December 31, 1996 to September 30, 1997.

Expenses. Operating expenses increased $11.4 million or 41% to $39.0 million
during the nine months ended September 30, 1997 from $27.6 million for the same
period in 1996. The increase in expense was primarily the result of additional
personnel required for the greater volume of mortgage loan originations, higher
operating expenses related to the increase in mortgage loan originations and an
increase in amortization and impairment of originated mortgage servicing rights
relating to the increase in the capitalized asset during the nine months ended
September 30, 1997 as compared to the nine months ended September 30, 1996.

Personnel expense increased $6.1 million or 41% to $20.8 million during the
nine months ended September 30, 1997 from $14.7 million for the comparable
period in 1996. The increase in personnel expense was due primarily to
increased staffing in the Company's mortgage loan originations area. As of
September 30, 1997, the Company employed 616 people compared to 476 people at
September 30, 1996, a 29% increase.

30
<PAGE>

General and administrative expenses increased $2.3 million or 26% to $11.0
million during the nine months ended September 30, 1997 from $8.7 million for
the comparable period in 1996. The increase in general and administrative
expenses is due primarily to expenses incurred in connection with the increase
in loan originations, and includes such items as office supplies, telephone,
computers and postage.

Amortization and impairment of originated mortgage loan servicing rights
increased $3.0 million or 500% to $3.6 million for the nine months ended
September 30, 1997, as compared to $0.6 million for the nine months ended
September 30, 1996. The increase in amortization and impairment of originated
mortgage loan servicing rights was due to an increase in the related asset.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Summary. The financial results for the year ended December 31, 1996
principally reflect the growth in the Company's mortgage loan originations.
The total volume of mortgage loans originated increased $0.9 billion or 64% to
$2.3 billion for 1996 compared to $1.4 billion in 1995. This increase reflects
both the expansion of the Company's mortgage loan origination network and the
market for its specialized mortgage loan products. During 1996, refinancing
activity accounted for approximately 56% of the mortgage loans originated by
the Company compared to approximately 55% during 1995.

Net income for the year ended December 31, 1996 increased $10.7 million or
153% to $17.7 million as compared to $7.0 million for the prior year. The
percentage increase in net income was higher than the percentage increase in
revenue due to a relatively lower increase in operating expenses from 1995 to
1996.

Revenue. Revenue for the year ended December 31, 1996 increased $19.1
million or 48% to $59.3 million as compared to $40.2 million for the same
period in 1995.

Net gain from sales of mortgage loans increased $13.3 million or 108% to
$25.6 million for the year ended December 31, 1996 as compared to $12.3
million for the previous year. The increase was attributable to the following
factors: (i) an increase in the volume of mortgage loans sold of $0.8 million
or 62% to $2.1 million, as compared to mortgage loans sold of $1.3 million
during 1995; and (ii) the Company's ability to obtain improved pricing by
securitizing pools of mortgage loans as compared to whole loan sales.

Loan administration income for the year ended December 31, 1996 decreased
$2.3 million or 17% to $11.1 million as compared to $13.4 million for the
previous year. The change resulted from a 12% decrease in the average balance
outstanding in the mortgage loan servicing portfolio for the year ended
December 31, 1996 from the year ended December 31, 1995, and a decrease in the
average principal balance per loan during the same period. See "Business--
Mortgage Loan Servicing."

The Company sold mortgage servicing rights relating to $1.0 billion of
mortgage loan balances during 1996, resulting in a pre-tax gain of $11.1
million. The Company sold mortgage loan servicing rights relating to $0.9
billion of mortgage loan principal balances in the previous year, resulting in
a pre-tax gain of $8.8 million.

Production income increased $2.0 million or 53% to $5.8 million for the year
ended December 31, 1996 from $3.8 million for the previous year, due to the
growth in mortgage loan origination volume.

Net interest income increased $3.8 million or 211% to $5.6 million for the
year ended December 31, 1996 from $1.8 million in the prior year. This
increase is primarily attributable to the increase in average mortgage loans
outstanding, as well as improved borrowing rates obtained by the Company.

Expenses. Operating expenses increased $6.9 million or 21% to $39.9 million
for the year ended December 31, 1996 from $33.0 million in 1995. This increase
resulted from growth in the Company's base operations primarily in personnel,
and from costs incurred by the Company for the negotiation and resolution of
all prior business activity with affiliates (the "Settlement Agreement"). See
"Certain Management Transactions and Business Relationships--Settlement
Agreements."

31
<PAGE>

Personnel expenses increased $5.0 million or 32% to $20.5 million for the
year ended December 31, 1996 as compared to $15.5 million in 1995. This
increase was attributable to a 27% increase in the number of employees to 512
at December 31, 1996 from 403 at the end of 1995. This increase was primarily
necessary to support the growth in the Company's mortgage loan origination
sale and servicing businesses.

General and administrative expense increased $2.6 million or 24% to $13.5
million for 1996, as compared to $10.9 million for 1995. The increase was
primarily the result of the increase in mortgage loan originations and costs
relating to the Settlement Agreement between the Company and its affiliates,
including telephone, legal, computer services and miscellaneous expenses.

Occupancy expense decreased $0.2 million or 10% to $1.9 million for the year
ended December 31, 1996 as compared to $2.1 million for 1995. This decrease is
the result of costs incurred during 1995 related to branches which were closed
in 1994.

Depreciation and amortization expense decreased $0.6 million or 17% to $2.9
million for the year ended December 31, 1996 as compared to $3.5 million for
the same period in 1995. This decrease resulted from a 14% decrease in
property, equipment and leasehold improvements.

Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994

Summary. The mortgage industry experienced a significant decline during
1994. The yield of the 30-year treasury bond went from 6.23% at January 3,
1994 to 7.91% at December 31, 1994. This influenced the demand for mortgage
loan refinancings, causing a decrease in new loan volume production
nationwide.

During this period of decline, the Company sold Jumbo mortgage loans to
conduits at larger profit margins than those obtained by selling to the
Agencies. Additionally, because of the Company's position in the niche Jumbo
mortgage loan market, it was able to sustain high levels of origination volume
for several months after the end of the "refinance boom" of 1993.

Total revenues increased $3.1 million or 8% to $40.2 million in 1995 from
$37.1 million in 1994. During the same period, the Company's total expenses
decreased $2.7 million or 8% to $33.0 million in 1995 from $35.7 million in
1994. As a result, the Company's net income increased $5.7 million or 439% to
$7.0 million in 1995 from $1.3 million in 1994.

Revenue. Revenue increased as a result of increases in net gain from sales
of mortgage loans and gain from sales of mortgage servicing rights, partially
offset by decreases in loan administration income, production income and net
interest income.

Net gain from sales of mortgage loans increased $6.2 million or 102% to
$12.3 million for the year ended December 31, 1995 compared to $6.1 million
for the year ended December 31, 1994. The increase is due primarily to the
adoption of SFAS No. 122 which was issued by the Financial Accounting
Standards Board for implementation in 1995. Without the gain recorded by the
Company in 1995 in relation to SFAS No. 122 of $8.0 million, net gain from
sales of mortgage loans decreased $1.8 million or 30%.

Loan administration income decreased $1.3 million or 9% to $13.4 million for
the year ended December 31, 1995 compared to $14.7 million for the year ended
December 31, 1994. This decrease was the result of a decrease in the average
servicing portfolio of $537.5 million or 11% to $4,577.0 million for the year
ended December 31, 1995 compared to $5,114.5 million for the year ended
December 31, 1994.

Gain from sales of mortgage servicing rights increased $1.4 million or 19%
to $8.8 million for the year ended December 31, 1995 from $7.4 million for the
year ended December 31, 1994. This increase is the result of an increase in
the volume of mortgage loan servicing sold of $205.0 million or 28% to $941.2
million for the year ended December 31, 1995 compared to $736.2 million for
the year ended December 31, 1994.

Production income decreased $2.2 million or 37% to $3.8 million for the year
ended December 31, 1995 compared to $6.0 million for the year ended December
31, 1994. This decrease was the result of a decrease in

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mortgage loan production of $1,054.8 million or 44% to $1,355.6 million for
the year ended December 31, 1995 compared to $2,410.4 million for the year
ended December 31, 1994.

Net interest income decreased $895.4 million or 33% to $1,813.9 million for
the year ended December 31, 1995 compared to $2,709.3 million for the year
ended December 31, 1994. This decrease was the result of a decrease in the
average balance of mortgage loans held for sale during the year.

Expenses. Operating expenses decreased primarily as a result of a decrease
in personnel expense, offset by the additional expense of amortization and
impairment of originated mortgage servicing rights.

Personnel expense decreased $4.1 million or 21% to $15.5 million for the
year ended December 31, 1995 compared to $19.6 million for 1994. This decrease
was due to a decrease in the average number of employees by 94 or 21% to 358
for the year ended December 31, 1995 compared to 452 for the year ended
December 31, 1994.

The Company incurred $1.0 million in amortization and impairment expense
relating to originated mortgage servicing rights. This was an additional
expense beginning with the year ended December 31, 1995, and was due to the
implementation of SFAS No. 122.

FINANCIAL POSITION

September 30, 1997 Compared to December 31, 1996

The balance of mortgage loans held for sale is affected by the timing of
securitizations and whole loan sales. Mortgage loans held for sale increased
$24.1 million or 10% to $262.3 million at September 30, 1997 from
$238.2 million at December 31, 1996. The increase in mortgage loans held for
sale resulted primarily from mortgage loan originations and purchases of
$2,527.2 million during the nine months ended September 30, 1997, partially
offset by sales into securities of $1,442.5 million, whole loan sales of
$1,031.4 million and unused HELOC credit line capacity of $15.0 million.

Borrowings under warehouse lines of credit increased $13.4 million or 5.6%
to $254.7 million at September 30, 1997 from $241.3 million at December 31,
1996, reflecting the mortgage loan origination, purchase and sale activity
described above. The percentage increase in the borrowings under warehouse
lines of credit was less than the percentage increase in the mortgage loans
held for sale due to a combination of the Company's investment in the mortgage
loans held for sale and the practice of investing any available cash in the
warehouse lines of credit to reduce interest expense. Additionally, the
Company repaid the $12.0 million balance outstanding under the servicing
secured line of credit during the nine months ended September 30, 1997.

Retained interests in securitizations increased $17.6 million or 117% to
$32.7 million at September 30, 1997 from $15.1 million at December 31, 1996.
The increase is due to four factors: (i) the Company retained subordinate
tranches in the five securities it issued during the first nine months of 1997
with an estimated market value of $20.6 million; (ii) the transferor interest
in the asset-backed security issued by the Company in December 1996 increased
by $1.9 million in the form of overcollateralization created as a result of
the excess cash flows of the security; (iii) the Company recorded an
unrealized gain in the aggregate market value of $0.7 million relating to the
retained interests it holds; (iv) the Company's reduction in its non-
subordinated net interest in the same asset-backed security of $0.9 million;
and (v) the sale of certain retained interest with a net book value at sale of
$4.7 million.

Accounts receivable increased $9.0 million or 118% to $16.6 million at
September 30, 1997 from $7.6 million at December 31, 1996. The increase
resulted primarily from an increase in servicing advances of $2.9 million or
63%, and an increase in accrued interest receivable of $0.7 million or 64%.
The increase in servicing advances was due to a decrease in borrowers who made
monthly payments in advance, which offset the borrowers with delinquent
payments, as well as servicing advances required at the close of the Company's
HELOC security during the nine months ended September 30, 1997. The increase
in accrued interest receivable was primarily due to the increase in mortgage
loans held for sale.

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Accounts payable increased $7.3 million or 166% to $11.7 million at
September 30, 1997 from $4.4 million at December 31, 1996. The increase
resulted primarily from capital leases entered into by the Company relating to
fixed asset purchases of $4.9 million, an increase in interest payable on
warehouse lines of $1.6 million, as well as a general increase due to the
Company's increased mortgage loan production.

Originated mortgage servicing rights increased $4.9 million or 24% to $25.2
million at September 30, 1997 from $20.3 million at December 31, 1996. The
increase in originated mortgage servicing rights resulted from the sale of
mortgage loans with servicing rights retained with a relative fair value of
$18.4 million during the nine months ended September 30, 1997, partially
offset by amortization and impairment recorded of $3.6 million and capitalized
servicing sold with a net book value of $9.8 million.

Property, equipment and leasehold improvements, net, increased $4.0 million
or 133% to $7.0 million at September 30, 1997 from $3.0 million at December
31, 1996. As a result of the Company's ongoing commitment to modern
technology, this growth reflects the purchase of upgraded computer equipment
of $4.5 million, upgraded office equipment of $1.3 million and additional
furniture of $0.2 million. These increases were offset by depreciation and
amortization of $2.0 million.

Accrued liabilities increased $3.5 million or 80% to $7.9 million at
September 30, 1997 from $4.4 million at December 31, 1996. The increase was
primarily due to the following factors: (i) deferred revenue was recorded by
the Company in the amount of $1.5 million in connection with the building of
the asset-backed security's overcollateralization as described above; (ii) the
contingency reserve increased $1.2 million as a result of the Company
recording a provision for contingencies of $2.4 million and sustaining actual
losses of $1.2 million; and (iii) miscellaneous accrued liabilities increased
$0.8 million.

Stockholders' equity increased $37.0 million or 127% to $66.1 million at
September 30, 1997 from $29.1 million at December 31, 1996, due to net income
for the nine months ended September 30, 1997 of the same such amount.

December 31, 1996 Compared to December 31, 1995

Mortgage loans held for sale increased $141.1 million or 145% to $238.2
million at December 31, 1996 from $97.1 million at December 31, 1995. The
increase in mortgage loans held for sale resulted from mortgage loan
originations and purchases of $2,283.8 million during the year ended December
31, 1996, partially offset by sales into securities of $598.0 million, whole
loan sales of $1,532.1 million and unfunded HELOC credit line capacity of $6.0
million.

Borrowings under warehouse lines of credit increased $150.1 million or 165%
to $241.3 million at December 31, 1996 from $91.2 million at December 31,
1995, reflecting the mortgage loan origination, purchase and sale activity
described above. The percentage increase in the borrowings under warehouse
lines of credit was higher than the percentage increase in the mortgage loans
held for sale primarily due to the Company's borrowings against the servicing
security line of credit. Such borrowings increased to $12.0 million at
December 31, 1996 from no outstandings at December 31, 1995.

Cash and cash equivalents decreased $26.2 million or 91% to $2.7 million at
December 31, 1996 from $28.9 million at December 31, 1995. This decrease is
primarily the result of the Company's discontinued use of a $25.0 million
arbitrage line of credit whereby borrowed funds were invested in higher
yielding cash equivalents. This decrease in cash and cash equivalents is
directly related to the $25.0 million decrease in the bank line of credit.

Retained interests in securitizations increased $14.5 million or 2,417% to
$15.1 million at December 31, 1996 from $0.6 million at December 31, 1995. The
increase is the result of the Company's retention of subordinate tranches in
the mortgage-backed securities it issued during 1996. The Company also
retained a principal interest and an interest-only residual interest created
by the HELOC asset-backed security issued by the Company in 1996. The
interest-only residual interest is calculated based on the present value of
estimated future cash flows, using market prepayment and discount rates. Prior
to 1996, the Company issued one REMIC security and retained a subordinate
tranche, which is represented by the $0.6 million balance at December 31,
1995. See "Risk Factors--Retained Interests in Securitization."

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Originated mortgage servicing rights increased $13.2 million or 186% to
$20.3 million at December 31, 1996 from $7.1 million at December 31, 1995. The
increase in originated mortgage servicing rights resulted from the sale of
mortgage loans with servicing rights retained with a relative fair value of
$15.2 million during the year ended December 31, 1996, partially offset by
amortization and impairment reserves recorded of $1.0 million and capitalized
servicing sold with a net book value of $1.0 million.

Notes payable to stockholders increased $9.7 million at December 31, 1996
from the zero balance at December 31, 1995. This payable was the result of
funds borrowed by the Company out of distributions made to such stockholders.
See "Certain Management Transactions and Business Relationships--Settlement
Agreement."

Accounts receivable increased $5.7 million or 300% to $7.6 million at
December 31, 1996 from $1.9 million at December 31, 1995. The increase
resulted primarily from an increase in servicing advances of $3.3 million or
255%, and a receivable relating to loans sold under a purchase and sale
agreement of $1.7 million at December 31, 1996.

Accounts receivable from related parties decreased $3.4 million or 97% to
$0.1 million at December 31, 1996. The decrease was the result of the
Company's negotiation and settlement with FCMC which occurred during 1996
relating to prior activity. See "Certain Management Transactions and Business
Relationships--Settlement Agreement."

Accounts payable increased $2.2 million or 100% to $4.4 million at December
31, 1996 from $2.2 million at December 31, 1995. The increase resulted
primarily from a general increase in outstanding invoices due to the Company's
increased mortgage loan production.

Note receivable from related parties decreased 100% from the December 31,
1995 balance of $1.4 million. This decrease was the result of the note
receivable becoming due and payable, and the Company receiving payment in full
of the outstanding amount. Payment was received in conjunction with the
payment on the account receivable from FCMC. See "Certain Management
Transactions and Business Relationships--Settlement Agreement."

Accrued liabilities increased $1.2 million or 38% to $4.4 million at
December 31, 1996 from $3.2 million at December 31, 1995. This increase
primarily reflects the contingency reserve recorded by the Company during 1996
of $3.6 million, partially offset by actual losses incurred of $2.6 million.

Property, equipment and leasehold improvements, net, decreased $0.8 million
or 21% to $3.0 million at December 31, 1996 from $3.8 million at December 31,
1995. This decrease reflects the Company's purchase of property and equipment
of $2.1 million, offset by depreciation and amortization of $2.9 million.

Real estate owned, net, decreased $0.8 million or 47% to $0.9 million at
December 31, 1996 from $1.7 million at December 31, 1995. This decrease
reflects the acquisition of four properties by the Company through the
foreclosure process, and the sale of the eight properties owned by the Company
at December 31, 1995.

Mortgage loans held for investment, net, decreased $0.4 million or 36% to
$0.7 million at December 31, 1996 from $1.1 million at December 31, 1995. The
decrease is primarily due to the Company's ability to sell a portion of the
portfolio in the secondary market.

Stockholders' equity increased $3.2 million or 12% to $29.1 million at
December 31, 1996 from $25.9 million at December 31, 1995. This increase
reflects net income of the Company for the year ended December 31, 1996 of
$17.7 million, partially offset by distributions to stockholders of $14.4
million. See "Certain Management Transactions and Business Relationships--
Settlement Agreement."

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal liquidity requirements include the funding or
payment of: (i) mortgage loan originations and purchases; (ii) investments and
overcollateralization requirements in connection with its securitization
program; (iii) fees and expenses incurred in connection with securitizations;
(iv) advances of delinquent principal and interest payments and escrow
balances required to be made as a mortgage loan servicer; and (v) ongoing
administrative and other operating expenses.

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<PAGE>

The Company must be able to sell mortgage loans and obtain adequate credit
facilities and other sources of funding in order to continue to originate and
purchase mortgage loans. As a result of increased loan originations and
purchases as well as an increase in its securitization program, the Company
during 1995, 1996, and the nine months ended September 30, 1997, used cash of
approximately $12.0 million, $147.0 million, and $7.2 million, respectively.

The Company utilizes short-term warehouse facilities and repurchase
agreements to fund mortgage loan originations and purchases. Increased loan
production resulted in cash provided by financing activities of $40.0, $120.4,
and $13.4 million during 1995, 1996, and the nine months ended September 30,
1997, respectively.

In October 1993, the Company entered into a mortgage loan warehousing
agreement (the "Warehouse Facility"). Under the terms of the Warehouse
Facility, the Company has available a $215 million warehouse line of credit
secured by the mortgage loans the Company originates or purchases. The
facility extends through November 4, 1999. The Company is required to comply
with various operating and financial covenants in the Warehouse Facility. Such
covenants include restrictions on (i) changes in the Company's business that
would materially and adversely affect the Company's ability to perform its
obligations under the facility, (ii) selling any asset other than in the
ordinary course of business, and (iii) maximum debt and distributions allowed.
Such covenants also contain requirements for (i) minimum net worth and
mortgage loan servicing portfolio balances, and (ii) maximum leverage ratios.
The Company's Warehouse Facility restricts the Company's ability to pay
dividends in any fiscal year to an amount not to exceed 25% of adjusted net
income for such fiscal year. Adjusted net income is generally defined to mean
net income less gain (loss) on sale of mortgages and decrease in deferred tax
liability and plus service release premiums, amortization of servicing rights,
net book value of servicing assets sold and increase in deferred tax lability.
At September 30, 1997, the outstanding balance under the Warehouse Facility
was $133.9 million.

In addition to the Warehouse Facility, the Company makes regular use of
certain uncommitted lines of credit, short-term credit facilities and purchase
and sale agreements (such as repurchase or "gestation" agreements) provided by
major investment banks and a major corporation. These facilities permit the
Company to diversify its borrowing resources, while accelerating the turnover
of mortgage loans in inventory, reducing interest costs and permitting greater
origination volumes.

The Company currently has two uncommitted whole loan repurchase agreements
with major investment banks. Under the terms of these agreements, the Company
may pledge mortgage loans originated or purchased to obtain additional
liquidity while mortgage loans are held until securitization or are sold
through whole loan sales. Amounts outstanding under these agreements at
September 30, 1997 were $79.2 million and $36.7 million.

In addition, the Company has entered into an uncommitted mortgage loan
purchase and sale agreement with a major investment bank. Under the terms of
this agreement, mortgage loans which are subject to a "take-out" commitment
between the Company and an investor, but have not yet been purchased, may be
sold to the investment bank with the accompanying trade assignment. This
allows the Company to accelerate turnover and provide additional liquidity to
fund additional mortgage loans.

The last of the Company's warehousing facilities is a $15.0 million
warehouse line of credit with a major corporation. This agreement expires on
October 31, 1998. At September 30, 1997, the Company had $1.6 million
outstanding under this facility.

In addition to these financing sources, the Company also has various
repurchase agreements with major investment banks which are collateralized by
certificates reflecting retained interests in securities issued by the
Company. At September 30, 1997, the Company had $3.4 million outstanding under
these agreements.

The Company used cash of $.9 million, $2.1 million, and $6 million for the
purchase of property, equipment and leasehold improvements during 1995, 1996,
and the nine months ended September 30, 1997, respectively. The increase
during the nine months ended September 30, 1997 represents upgrades to
computer equipment, office equipment and the purchase of additional furniture.
The Company has entered into various capital leases to fund a substantial
amount of these purchases.

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<PAGE>

the Company and is limited by the amount of servicing pledged as security.
This operating line of credit, which has a conversion option to a term loan,
is renewable from time to time and expires on November 4, 1998. At September
30, 1997, the Company had no outstanding balance under this line of credit.

The Company is required to comply with various operating and financial
covenants as provided in the agreements as described above, the most
restrictive of which are those relating to the Warehouse Facility as described
above.

The Company relies on securitizations and whole loan sales to generate cash
proceeds for repayment of its warehouse facilities and to create availability
to purchase additional mortgage loans. Further, gains on sales from the
Company's securitizations represent a significant portion of the Company's
revenue. Several factors affect the Company's ability to complete
securitizations of its mortgage loans, including conditions in the securities
markets generally, conditions in the asset-backed securities market
specifically, and the credit quality of the Company's portfolio of mortgage
loans. If the Company were unable to securitize profitably a sufficient number
of its mortgage loans in a particular reporting period, then the Company's
revenues for such period would decline which could result in lower income or a
loss for such period. In addition, unanticipated delays in closing a
securitization could also increase the Company's interest rate risk by
increasing the warehousing period for its mortgage loans.

The Company endeavors to effect timely and consistent public securitizations
of its mortgage loan pools. However, market and other considerations affect
the timing of such transactions. Any delay in the sale of a pool of mortgage
loans beyond a quarter-end would postpone the recognition of gain related to
such mortgage loans and would likely result in lower income or a loss for such
quarter being reported by the Company.

The Company believes that the Company's current warehousing and other credit
facilities will adequately fund the Company's mortgage banking operations. The
liquidity needs of the Company arise in operating its mortgage banking
operations, not only to meet operating expenses but also for its contractual
obligation as a mortgage servicer. As a mortgage servicer, the Company is
required to make advances to investors when a borrower is delinquent in
meeting its payment obligations under a particular mortgage loan. Although
most of these advances are recaptured either when the borrower becomes current
or through a foreclosure proceeding, the uncertainty as to when an advance
will be necessary requires the Company to maintain adequate liquidity. See
"Business--Mortgage Loan Servicing."

The net proceeds to the Company from the Offering will be used in part to
fund payment to Existing Shareholders of the Shareholders Distribution Amount
and to retire the subordinated notes to stockholders. See "Termination of S
Corporation Status" and "Use of Proceeds." At this time, the Company
anticipates that the remaining net proceeds from the Offering, together with
the funds available under its warehouse facilities and credit facilities will
be sufficient to fund its operations for the next 12 months, if the Company's
future operations are consistent with management's expectations. There can be
no assurance that the Company will be able to obtain financing on a favorable
or timely basis. The type, timing and terms of financing selected by the
Company will depend on its cash needs, the availability of other financing
sources and the prevailing conditions in the financial markets.

CERTAIN ACCOUNTING CONSIDERATIONS

Retained Interests in Securitizations

The Company derives a substantial portion of its income by recognizing gain
on sale of mortgage loans sold through securitizations, which is partially
represented by the subordinate certificates and interest-only residual
interests that the Company retains. In the non-agency securitizations, the
Company sells mortgage loans that it has originated or purchased to a trust
for a cash purchase price and the subordinate certificates. The cash purchase
price is raised through an offering by the trust of pass-through certificates
representing senior interests in the trust. Following the securitizations, the
purchasers of the pass-through certificates receive their respective
allocations of the principal collected and the investor pass-through interest
rate on the principal balance.

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<PAGE>

In home equity mortgage loan securitizations, the Company sells mortgage
loans that it has originated or purchased to a trust in return for a cash
purchase price and the interest-only residual interest. The Company also
retains a portion of the principal interest in the trust as a subordinate
credit enhancement for the senior certificate or note holders. The Company
receives its proportionate share of interest collected from borrowers relating
to the principal interest it retains, but receives principal distributions
only to the extent that the principal balance of the Company's interest
exceeds the minimum subordination requirements of the trust. In addition to
the distributions the Company receives relating to its principal interest, the
Company receives the excess of the interest rate payable by an obligor on a
mortgage loan over the interest rate passed through to the purchasers of the
notes or certificates with respect to the interest-only residual interests, as
well as the Company's normal servicing fee and other recurring fees.

The subordinate and residual interests which are capitalized on the
Company's balance sheet are reduced as cash distributions are received. The
subordinate and interests-only residual interests are accounted for as trading
securities in accordance with SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities," and, as such, they are recorded at their fair
value. Changes in fair value are reflected in the statement of operations.
Fair value of the subordinate certificates is determined based on market
prices for similar securities, and the fair value of the interest-only
residual interests is determined based on various economic factors, including
considerations of mortgage loan type, size, date of origination, interest
rate, term, collateral value and geographic location. Higher than anticipated
rates of mortgage loan prepayments or losses would require the Company to
write down the fair value of the interest-only residual interests, adversely
impacting earnings. Similarly, if delinquencies, or losses were greater than
was initially assumed, the fair value of the residual certificates would be
negatively impacted which would have an adverse effect on income for the
period in which such events occurred.

SFAS No. 91

In December 1986, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 91,
"Accounting for Non-Refundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." SFAS No. 91 establishes
the accounting for nonrefundable fees and costs associated with lending,
committing to lend, or purchasing a loan or a group of loans.

Under SFAS No. 91, direct loan origination costs, net of loan origination
fees, are recognized as a reduction of the loan's yield over the earlier of
the life of the related loan or the sale of the loan. In effect, SFAS No. 91
requires that origination fees be offset by their related direct loan costs
and that net deferred fees be recognized over the earlier of the life of the
loan or the sale of the loan, whether the loan is sold through securitization
or on a whole loan basis.

Subsequent to the second quarter of 1996, the Company generally sold
mortgage loans through securitization on a bimonthly basis and, as such,
carried a larger inventory of mortgage loans on its books from quarter to
quarter and from year to year, which resulted in SFAS No. 91 adjustments being
made during those periods. The Company contemplates that in the future it will
sell substantially all of its mortgage loan originations and purchases on a
bimonthly basis primarily through securitizations and, to a lesser extent, on
a whole loan basis.

SFAS No. 122

In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which amends SFAS No. 65 "Accounting for Certain Banking
Activities." Effective January 1, 1995, the Company adopted SFAS No. 122.
Because SFAS No. 122 prohibits retroactive application to years prior to
adoption thereof, the Company's historical financial results for periods prior
to 1995 have not been restated and, accordingly, are not directly comparable
to the financial results for 1995 and thereafter. Mortgage servicing rights
retained by the Company relating to loans originated prior to 1995 remain as
an "off-balance sheet" asset and the net income produced by this asset is
recognized over the life of the mortgage loans in the form of servicing income
or at the time the servicing rights are sold.

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<PAGE>

SFAS No. 122 requires mortgage banking entities to recognize as a separate
asset the rights to service mortgage loans for others, regardless of how those
servicing rights are acquired. Mortgage banking entities that acquire or
originate mortgage loans and subsequently sell or securitize those mortgage
loans and retain the mortgage loan servicing rights are required to allocate
the total cost of the loans to the mortgage servicing rights and the mortgage
loans. The Company determines fair value based upon the present value of
estimated net future servicing revenues less the estimated cost to service
loans. The cost allocated to these servicing rights is amortized in proportion
to and over the period of estimated net future cash flows related to servicing
income. As a result of the adoption of SFAS No. 122, the Company recognizes
greater revenues at the time a mortgage loan is sold and smaller revenues
during the period such loan is serviced. To this end, adoption of SFAS No. 122
resulted in additional income recorded as net gain from sales of mortgage
loans of approximately $16.2 million and $8.0 million during the years ended
1996 and 1995, respectively. Additionally, as the amount of uncapitalized
mortgage servicing rights decreases, the Company's ability to obtain
significant gains from sales of mortgage servicing rights also decreases.

SFAS No. 122 also requires impairment evaluations of all amounts capitalized
as servicing rights, based upon the fair value of the underlying mortgage loan
servicing rights. The Company periodically performs these evaluations on a
disaggregated basis for the predominant risk characteristics of the underlying
mortgage loans, including loan type and interest rate. Higher than anticipated
rates of loan prepayments or losses would require the Company to write down
the fair value of the mortgage loan servicing rights, adversely impacting
earnings.

A key component of the Company's ongoing business strategy is the retention
of its originated servicing as financial and operational considerations allow.
The Company, however, may sell some of its servicing on a "bulk" or "flow"
basis to generate current earnings and cash flow, depending upon
circumstances. As a consequence, the Company's owned mortgage loan servicing
portfolio at September 30, 1997 consisted of servicing rights to mortgage
loans with an aggregate outstanding principal balance of $4.0 billion,
including $1.7 billion for which no capitalized balance sheet value has been
recorded. During 1996 and 1995, the Company sold mortgage loan servicing
rights with aggregate principal balances of $1.0 billion and $0.9 billion,
respectively, and for gains of 111 and 98 basis points, respectively. The
prices at which mortgage loan servicing rights may be sold vary over time
according to prevailing interest and prepayment rates among other factors.
Accordingly, there can be no assurance of a continued market for mortgage loan
servicing rights at prices received by the Company in the past. Moreover,
mortgage loan servicing rights sold by the Company have generally related to
Agency mortgage loans recently originated by the Company, and such servicing
rights may, during certain interest rate environments, have relatively higher
market values than non-agency or more seasoned mortgage loans in the Company's
mortgage loan servicing portfolio.

SFAS No. 125

In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities", which
superceded SFAS No. 122. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment
of liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes
liabilities when extinguished. SFAS No. 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings.

SFAS No. 125 requires that liabilities and derivatives incurred or obtained
by transferors as part of a transfer of financial assets be initially measured
at fair value, if practicable. It also requires that servicing assets and
other retained interest in the transferred assets be measured by allocating
the previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of the
transfer. SFAS No. 125 provides implementation guidance for assessing
isolation of transferred assets and for accounting for transfers of partial
interests, servicing of financial assets, securitizations, transfers of sales-
type and direct

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financing lease receivables, securities lending transactions, repurchase
agreements including "dollar rolls," "wash sales," loan syndications and
participations, risk participations in banker's acceptances, factoring
arrangements, transfers of receivables with recourse, and extinguishment of
liabilities. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after December
31, 1996, and is to be applied prospectively.

In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125." The Statement defers
for one year the effective date of SFAS No. 125 relating to certain
transactions such as repurchase agreements and securities lending.

Other Recent Accounting Pronouncements

In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." This
Statement specifies the computation, presentation, and disclosure requirements
for earnings per share for entities with publicly held common stock or
potential common stock. This Statement shall be effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Earlier application is not permitted. At this time the Company has determined
that this Statement will have no significant impact on the financial position
or results of operations for 1997.

In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This Statement shall be effective for financial
statements for both interim and annual periods ending after December 15, 1997.
At this time the Company has determined that this Statement will have no
significant impact on the financial position or results of operations for
1997.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement shall be
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes
is required. At this time the Company has determined that this Statement will
have no significant impact on the financial position or results of operations
for 1997.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This Statement establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. This Statement shall be effective
for fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is to be restated. At
this time the Company has determined that this Statement will have no
significant impact on the financial position or results of operations for
1997.

40
<PAGE>

BUSINESS

OVERVIEW

The Company is a specialty mortgage banking company in the business of
originating, selling, securitizing and servicing mortgage loans secured by
one- to four-family residences. The Company was incorporated in California and
commenced its mortgage banking business in 1986. As a specialty mortgage
lender, the Company's strategy is to focus on specialized mortgage loan
products for primarily high credit quality borrowers. The Company generally
places an emphasis on credit scores obtained from three major credit bureaus
to evaluate the credit quality of borrowers. The Company considers "high
credit quality borrowers" to be those whose credit scores equal or exceed
levels required for the sale or exchange of their mortgage loans through
Fannie Mae or Freddie Mac. The specialized mortgage loans targeted by the
Company provide a relatively greater "spread" (i.e., greater interest and
other income to the originator relative to the cost associated with funding
and selling the mortgage loans) compared to other mortgage loans that present
a similar credit risk. The Company believes that its wholesale lending channel
(which generates a majority of its total originations), supported by its
correspondent and retail lending channels, provides an efficient and
responsive origination system for the types of mortgage loans it seeks to
originate. The Company seeks the most efficient method of execution for sales
of its mortgage loans and in recent years has increasingly utilized
securitization in addition to traditional whole loan sales.

The Company's business objective is to increase mortgage loan originations
through geographic expansion and by providing a diversified range of mortgage
loan products through its wholesale, correspondent and retail lending
channels. During the year ended December 31, 1996, the Company originated $2.3
billion of residential mortgage loans, 77% in California and 23% in other
states. During the nine months ended September 30, 1997, the Company
originated $2.5 billion of residential mortgage loans, 74% in California and
26% in other states. According to National Mortgage News (October 6, 1997),
for the six months ended June 30, 1997 the Company was ranked as the second
largest wholesale originator in the United States that is not publicly owned
or affiliated with a public company, and ranked 14th among all wholesale
originators. As of September 30, 1997, the Company's mortgage loan servicing
portfolio totaled $4.0 billion of mortgage loans.

BUSINESS STRATEGY

MORTGAGE LOAN ORIGINATION

Mortgage Loan Product Development. An important element of the Company's
mortgage loan origination strategy is to provide a variety of mortgage loan
products that are designed to respond to consumer needs and competitive
factors and be readily saleable at prices that will generate the Company's
targeted rate of return. The Company seeks those mortgage loan products with
relatively greater spreads compared to mortgage loans that present a similar
credit risk and chooses not to rely on discount pricing to increase mortgage
loan origination volume. This approach generally focuses the Company's
development process on mortgage loans that fail to satisfy one or more of the
standardized criteria (other than credit quality of the borrower) required for
sale or exchange through one of the Agencies or one of the national privately-
sponsored mortgage conduits. To date, the Company has tailored its loan
products primarily for high credit quality borrowers as described above.

The Company's secondary marketing department identifies a variety of new
mortgage loan products that it believes will respond to consumer needs and
that in many cases are not being widely offered by competitors. Such new
mortgage loan products may be created by the Company itself or may be
introduced by a competitor and identified by the Company as attractive for
origination. The Company generally requires that all of its

41
<PAGE>

mortgage loan products be readily saleable through the Company's
securitization programs or to secondary market investors.

The Company presently has under development and review a variety of mortgage
loan products that it expects to promote in 1998. Among the products that the
Company intends to launch on a pilot basis is a mortgage loan for high credit
quality borrowers that permits a higher loan-to-value ratio than is permitted
in mortgage loans currently being originated by the Company. Another product
to be introduced is a mortgage loan that is designed primarily for lower
credit quality borrowers which will require more extensive mortgage insurance
than is required on the Company's other mortgage loan products. All new
mortgage loan products introduced by the Company are carefully pre-tested in
the market over a period of time to assess both marketability to consumers and
performance of the mortgage loan product as an investment for secondary market
investors.

Current Mortgage Loan Products. The Company presently offers a broad range
of mortgage loan products in order to provide maximum flexibility to borrowers
and the mortgage brokers and other entities through which it originates
mortgage loans (the "Mortgage Sources"). The Company offers approximately 85
different mortgage loan programs at any given point in time, including a full
range of single-family mortgage loan products. Mortgage loan applicants can
choose among fixed-rate mortgage loans with several different term options,
including standard 15-year and 30-year terms, and "balloon" mortgage loans
with relatively shorter terms, such as five or seven years, and longer
amortization schedules, such as 30 years. An array of adjustable rate mortgage
loans with rates tied to various indices is also available. The Company offers
a wide variety of combinations of interest rates and origination fees
("points") on many of its mortgage loan products so that borrowers may elect
to pay higher points at closing and lower interest over the life of the
mortgage loan, or pay a higher interest rate and reduce or eliminate points
payable at closing. In addition, the Company offers buydown-type mortgage
loans which allow a borrower to make lower monthly payments for the first one,
two or three years of the loan. Of the mortgage loans originated during the
nine months ended September 30, 1997 and in the fiscal years 1996 and 1995,
fixed rate mortgage loans comprised 73%, 73% and 75%, respectively, adjustable
rate mortgage loans comprised 27%, 27% and 25%, respectively.

The Company's broad range of current mortgage loan products can be
categorized as follows:

. Agency Mortgage Loans. These mortgage loans conform to the underwriting
criteria for sale or exchange through one of the Agencies.

. Non-agency Mortgage Loans. These mortgage loans fail to satisfy the
criteria to be Agency mortgage loans for one or more reasons. Certain of
these mortgage loans (i.e., Jumbos) generally meet the Agency criteria but
exceed the maximum loan size (currently $227,150 for single-family, one-
unit mortgage loans in the continental United States). Jumbos are
generally eligible for sale to one of the national privately-sponsored
mortgage conduits.

Certain other non-agency mortgage loans may fail to satisfy other elements
of the Agency underwriting criteria, such as those relating to
documentation, employment history, income verification, loan-to-value
ratios, qualifying ratios or required borrower net worth. Beginning in
1995, the Company began to emphasize the origination of mortgage loans
which failed to satisfy one or more of the Agency and national conduit
underwriting criteria but which, from a credit risk standpoint as
determined primarily by credit score, presented a comparable risk profile.
The Company refers to this category of mortgage loans generally as
"Alternative A" mortgage loans. The Company focuses on an applicant's
credit score, in conjunction with other factors, in underwriting its
Alternative A mortgage loans. While some Alternative A mortgage loans
exceed the maximum loan size eligible for sale through one of the
Agencies, many have principal balances within the Agency limits.

. Home Equity Mortgage Loans. Home equity mortgage loans are generally
secured by second liens on the related property. Home equity mortgage
loans can take the form of a home equity line of credit (i.e., HELOC) or a
closed-end loan. Both types of home equity mortgage loans are designed
primarily for high credit quality borrowers and are underwritten according
to the Company's criteria for second-lien mortgage

42
<PAGE>

loans. HELOCs generally provide for either a 5-year or 15-year draw
period, during which the borrower may make cash withdrawals, and a 10-year
repayment period during which the amount outstanding at the end of the
draw period is repaid. Only interest payments are made during the draw
period. Home equity mortgage loans that are closed-end loans are fixed in
amount at the time of origination and amortize over their terms. HELOCs
generally bear adjustable interest rates while closed-end home equity
loans typically bear fixed interest rates. Home equity mortgage loans are
originated in some instances in conjunction with the Company's origination
of a first-lien mortgage loan on the related property.

. Other Mortgage Loans. This category consists of mortgage loans for
borrowers who have impaired or limited credit profiles or higher debt-to-
income ratios than would be acceptable for sale of such loans to one of
the Agencies. Such mortgage loans may also fail to satisfy the Agency
underwriting criteria in other ways. The Company categorizes these
mortgage loans as "A-" or "B" loans and believes they would generally be
considered "subprime" mortgage loans in the secondary mortgage market. The
Company does not originate mortgage loans that it would categorize as "C"
or "D" loans.

In 1994, the Company originated a substantial volume of non-agency mortgage
loans in the form of Jumbos which it sold to national mortgage conduits and
other private investors. In 1995, the Company's volume of Jumbo originations
declined with the general decrease nationwide in the origination volume of
residential mortgage loans and the general increase in competition that
reduced the spread available for this mortgage loan product. The increase in
originations of non-agency mortgage loans and home equity loans in 1996
reflects the Company's successful development of its Alternative A mortgage
loan products and its HELOC and closed-end second-lien products and the launch
of the Company's securitization programs for such mortgage loan products. The
following table summarizes the Company's originations of the above categories
of mortgage loans:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Agency Mortgage Loans
Number of mortgage loans............ 4,978 4,546 7,093 5,852 3,815
Volume of mortgage loans............ $ 643,770 $ 562,778 $ 885,050 $ 734,114 $ 475,473
Percent of total volume............. 26.71% 41.51% 38.75% 44.66% 18.81%
Non-agency Mortgage Loans
Number of mortgage loans............ 8,212 4,380 6,068 3,994 8,759
Volume of mortgage loans............ $1,736,830 $ 695,253 $1,137,572 $ 747,922 $1,625,080
Percent of total volume............. 72.06% 51.29% 49.81% 45.50% 64.31%
Home Equity Mortgage Loans
Number of mortgage loans............ 262 1,767 5,482 3,443 8,359
Volume of mortgage loans............ $ 12,110 $ 72,580 $ 234,308 $ 141,467 $ 400,782
Percent of total volume............. 0.50% 5.35% 10.26% 8.60% 15.86%
Other Mortgage Loans
Number of mortgage loans............ 137 214 250 174 221
Volume of mortgage loans............ $ 17,690 $ 24,993 $ 26,910 $ 20,346 $ 25,825
Percent of total volume............. 0.73% 1.84% 1.18% 1.24% 1.02%
Total Mortgage Loans
Number of mortgage loans............ 13,589 10,907 18,893 13,463 21,154
Volume of mortgage loans............ $2,410,400 $1,355,604 $2,283,840 $1,643,849 $2,527,160
Average principal balance........... $ 177 $ 124 $ 121 $ 122 $ 119
</TABLE>

43
<PAGE>

The Company's origination of home equity loans has increased as a percentage
of total mortgage loans originated in recent years. In 1994, the Company's new
product development group identified home equity loans as an attractive
potential product for the Company. The origination volume of this type of
mortgage loan has increased steadily as the Company's lending and servicing
staff has gained experience in marketing and servicing this specialized
mortgage loan product. The following table illustrates the growth in home
equity mortgage loan production and provides detail regarding the breakdown of
home equity mortgage loans between HELOCs and closed-end mortgage loans.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
---------------------- -------------------
1994 1995 1996 1997
------ ------ ------ -------------------
<S> <C> <C> <C> <C>
PERCENT OF MORTGAGE LOANS
ORIGINATED (BASED ON PRINCIPAL
BALANCES):
First mortgage loans.............. 99.49% 94.63% 89.73% 84.14%
Home equity mortgage loans
HELOC........................... 0.36 4.36 8.42 12.90
Closed-end...................... 0.15 1.01 1.85 2.96
------ ------ ------ ------
Total home equity mortgage
loans......................... 0.51 5.37 10.27 15.86
------ ------ ------ ------
100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
</TABLE>

Mortgage Loan Origination Channels. The Company originates mortgage loans
through its wholesale, correspondent and retail lending channels.

Wholesale Lending. The Company's wholesale lending channel, established in
1986, obtains its mortgage loan volume through a network of approximately 5,060
independent mortgage brokers approved by the Company (of which approximately
4,420 submitted mortgage loans in 1996). Mortgage brokers are qualified to
participate in the wholesale program after satisfactory completion of a formal
application process administered by the Company's Quality Assurance Department.
The responsibilities of the Quality Assurance Department include the review of
licensing, financial statements and resumes on key personnel combined with
credit and reference investigations to determine the history, reputation and
general lending expertise of the applicant. Approved mortgage brokers are
monitored by the Company's wholesale account executive staff and the broker
management division within the Quality Assurance Department. The Company
underwrites each mortgage loan application obtained from its mortgage brokers
and funds those mortgage loans which meet the Company's underwriting criteria.
No single Mortgage Source accounts for more than 5% of the total mortgage loan
originations of the Company.

The Company's wholesale lending channel generally enables the Company to
achieve a relatively high volume of mortgage loan originations at a lower net
cost than traditional retail mortgage loan originations because mortgage
brokers perform most of the labor intensive functions of the origination
process (in return for receipt of a mortgage loan origination fee), such as
taking and processing the mortgage loan application. The building of the
Company's mortgage loan origination volume through wholesale originations has
been cost efficient for the Company because it has increased economies of
scale, generated fee-based income, decreased overhead expenses and enabled the
Company to centralize its quality assurance and other support functions. See
"--Quality Assurance."

The Company believes that its wholesale lending channel is well-suited to
originate the types of mortgage loans that the Company seeks to originate. The
wholesale lending channel permits the Company to respond quickly to changes in
market conditions and consumer preferences. The Company can move quickly to
introduce a new mortgage loan product by disseminating it throughout the broker
network. By revising the terms on which it will fund mortgage loans submitted
by its mortgage brokers, the Company may also move quickly to increase the
level of origination of some loan products or to decrease originations of other
loan products that, due to market or other changes, may no longer meet the
Company's targeted rate of return or other origination objectives. The Company
believes that its flexibility would be reduced if it maintained a large retail
branch system with the attendant fixed investment and overhead costs.

44
<PAGE>

The wholesale lending channel also permits the Company to obtain non-agency
and other types of mortgage loans from mortgage brokers that generally only
originate Agency mortgage loans. The Company builds its relationship with
those mortgage brokers by providing access to specialty mortgage loan
products.

The Company's wholesale origination system currently operates out of the
Larkspur headquarters office and eight branch offices producing mortgage loans
in the western and southeast regions of the United States. The wholesale
lending channel originates mortgage loans through its sales force of
approximately 80 wholesale account executives. Each branch office's account
executives are responsible for developing and maintaining relationships with
mortgage brokers in specified territories. The quality of the approved
mortgage broker client base is supported by the branch sales and inside sales
support staff, who provide information and training in the appropriate
marketing and proper packaging of mortgage loan products as well as updates on
changes in underwriting practices. Additional and separate personnel in each
branch office underwrite all mortgage loans originated in that office.
Mortgage loan fundings remain centralized at the Company's Larkspur
headquarters. See "--Underwriting" and "--Quality Assurance."

The Company plans to continue the expansion of its wholesale lending channel
on a nationwide basis. The Company is actively seeking to expand its wholesale
lending channel pursuant to selected demographic statistics and other criteria
developed by the Company, which are intended to identify the most attractive
markets for the Company's mortgage loan products. The Company typically enters
into a new market using its national sales team, which initially penetrates a
market, to recruit selected brokers from the Company's unaffiliated wholesale
mortgage loan network. The Company's sales strategy is to limit the number of
branch centers in order to efficiently originate, process and underwrite
mortgage loans.

The following table sets forth the geographic distribution of origination
volume according to location of the mortgaged property:

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
---------------------------------------------- ------------------------------
STATE 1994 1995 1996 1996 1997
- ----- -------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California.............. $2,270,520 94% $1,003,354 74% $1,752,320 77% $1,262,149 77% $1,860,830 74%
Other................... 139,880 6 352,250 26 531,519 23 381,700 23 666,330 26
---------- --- ---------- --- ---------- --- ---------- --- ---------- ---
Totals................. $2,410,400 100% $1,355,604 100% $2,283,839 100% $1,643,849 100% $2,527,160 100%
========== === ========== === ========== === ========== === ========== ===
</TABLE>

Correspondent Lending. The correspondent lending program is designed to
allow the Company to acquire closed mortgage loans on terms similar to those
it acquires on a wholesale basis from its mortgage brokers. The correspondents
are generally small- to medium-sized mortgage companies, banks and thrifts
located throughout the U.S. who may have limited access to the capital
markets. The Company provides its correspondents with on-site sales support
and an interactive internet-based electronic link. The correspondents benefit
by gaining access to the Company's broad range of innovative mortgage loan
products without having to invest their resources in the development phase of
the mortgage loan products. The correspondents also benefit from attractive
pricing for sales to the Company, made possible by the Company's access to the
capital markets and the secondary mortgage loan markets.

Retail Lending. The retail channel, through a centralized operation, markets
to existing and new customers. The Company markets to existing customers
through inserts in the monthly mortgage statements, letters targeted to a
specific group (i.e., borrowers with interest rates above a designated level)
and outbound customer service calls. New customers are sought through national
direct mail campaigns, regional radio advertising and telemarketing. New
customers are also sought through several "affinity marketing" programs.
Groups targeted for affinity marketing purposes include banks and credit
unions for whom the Company will provide mortgage loan services from
processing through funding. Affinity marketing programs also target trade
groups and associations offering special pricing and discounts for group
members when the Company is endorsed by the respective group or association.
An additional segment targeted for affinity marketing are employers. Employees
of participating companies are offered the opportunity to apply for a mortgage
loan from the Company at a discounted price as part of the Company's standard
employee benefits package.

45
<PAGE>

The following table sets forth the volume of mortgage loan originations by
channel:

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- ------------------
1994 1995 1996 1997
------------------ ------------------ ------------------ ------------------
VOLUME PERCENT VOLUME PERCENT VOLUME PERCENT VOLUME PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wholesale............... $2,359,696 98% $1,253,405 92% $2,154,255 94% 2,342,394 93%
Correspondent........... 44,974 2 95,704 7 72,832 3 117,157 4
Retail.................. 5,730 -- 6,495 1 56,753 3 67,609 3
---------- --- ---------- --- ---------- --- ---------- ---
Total.................. $2,410,400 100% $1,355,604 100% $2,283,840 100% $2,527,160 100%
========== === ========== === ========== === ========== ===
</TABLE>

Underwriting. The Company relies on its underwriting administrative
procedures and mortgage loan underwriting standards to implement its
origination strategy and achieve the quality of mortgage loans required by its
secondary market investors.

Administration. Mortgage loan applications must be approved by the Company's
underwriters in accordance with its underwriting criteria, including credit
scores, loan-to-value ratios, borrower income qualifications, investor
requirements, necessary insurance coverages and property appraisal
requirements. To maintain the consistency of underwriting quality, the
Company's mortgage loan production personnel, such as account executives and
telemarketers, are not permitted to underwrite the mortgage loan packages
submitted by Mortgage Sources. Mortgage loan applications are assigned to an
underwriter at the Company based on the size and complexity of the mortgage
loan and the underwriter's experience level. The Company's chief underwriter
is located in the corporate headquarters in Larkspur and is responsible for
disseminating all underwriting policies.

The Company generally performs a pre-funding audit on each mortgage loan.
This audit includes a review for compliance with applicable underwriting
program guidelines and accuracy of the credit report and telephone
verification of employment. The Company performs a post-funding quality
control review on a minimum of 10% of the mortgage loans originated or
acquired for complete re-verification of employment, income and liquid assets
used to qualify for such mortgage loan. Such review also includes procedures
intended to detect evidence of fraudulent documentation and/or imprudent
activity during the processing, funding, servicing or selling of the mortgage
loan. Verification of occupancy and applicable information is made by regular
mail.

One- to four-family residential properties are appraised by qualified
independent appraisers who are approved by the Company. All appraisals are
required to conform to the Uniform Standards of Professional Appraisal
Practice adopted by the Appraisal Standards Board of the Appraisal Foundation
and must be on forms acceptable to Fannie Mae and Freddie Mac. As part of the
Company's pre-funding quality control procedures, either field or desk
appraisal reviews are obtained on 10% of all mortgage loans.

Standards. Conforming mortgage loans originated for sale to the Agencies
must satisfy the underwriting standards for one of the programs sponsored by
such entities. All other mortgage loans originated or acquired by the Company
(including Alternative A loans and home equity loans) are underwritten by the
Company according to its credit, appraisal and underwriting standards. Such
underwriting standards are applied to evaluate the prospective borrower's
credit standing and repayment ability and the value and adequacy of the
mortgaged property as collateral. These standards, which are summarized below,
are applied in accordance with applicable federal and state laws and
regulations. Exceptions to the underwriting standards are permitted when
compensating factors are present.

The Company's underwriting standards for purchase money or rate/term
refinance mortgage loans secured by one- to two-family primary residences
generally allow loan-to-value ratios at origination of up to 95% for mortgage
loans with original principal balances of up to $400,000, up to 90% for
mortgage loans secured by one- to four-family primary residences with original
principal balances of up to $400,000, up to 85% for mortgage loans with
original principal balances of up to $500,000 and up to 80% for mortgage loans
with original principal balances up to $650,000. The Company may acquire
mortgage loans with principal balances

46
<PAGE>

up to $3,000,000 ("super jumbos") if the mortgage loan is secured by the
borrower's primary residence. The loan-to-value ratio for super jumbos
generally may not exceed 60%. For cash-out refinance mortgage loans, the
maximum loan-to-value ratio generally is 80%, and the maximum "cash out"
amount permitted is based in part on the original amount of the related
mortgage loan.

The Company's underwriting standards for mortgage loans secured by
investment properties generally allow loan-to-value ratios at origination of
up to 90% for mortgage loans with original principal balances up to $250,000.
The Company's underwriting standards permit mortgage loans secured by
investment properties to have higher original principal balances if they have
lower loan-to-value ratios at origination.

For each mortgage loan secured by a first lien with a loan-to-value ratio at
origination exceeding 80%, the Company generally requires a primary mortgage
insurance policy insuring a portion of the balance of the mortgage loan at
least equal to the product of the original principal balance of such mortgage
loan and a fraction, the numerator of which is the excess of the original
principal balance of such mortgage loan over 75% of the lesser of the
appraised value and selling price of the related mortgage property and the
denominator of which is the original principal balance of the related mortgage
loan plus accrued interest thereon and related foreclosure expenses. In
certain circumstances, however, the Company does not require primary mortgage
insurance on mortgage loans with principal balances up to $500,000 that have
loan-to-value ratios exceeding 80% but less than or equal to 85%. All
residences, except cooperatives and certain high-rise condominium dwellings,
are eligible for this program. Each qualifying mortgage loan will be made at
an interest rate that is higher than the rate would be if the loan-to-value
ratio was 80% or less or if primary mortgage insurance was obtained.

In determining whether a prospective borrower has sufficient monthly income
available (i) to meet the borrower's monthly obligation on the proposed
mortgage loan and (ii) to meet monthly housing expenses and other financial
obligations, including the borrower's monthly obligations on the proposed
mortgage loan, the Company generally considers, when required by the
applicable documentation program, the ratio of such amounts to the proposed
borrower's acceptable monthly gross income. Such ratios vary depending on a
number of underwriting criteria, including loan-to-value ratios, and are
determined on a loan-by-loan basis.

The Company also examines a prospective borrower's credit report. Generally,
each credit report provides a credit score for the borrower. Credit scores
generally range from 350 to 850 and are available from three major credit
bureaus: TRW, Equifax and Trans Union. The Company attempts to obtain for each
borrower a credit score from each credit bureau. If three credit scores are
obtained, the Company applies the middle score of the primary wage earner. If
two scores are obtained, the Company applies the lower score of the primary
wage earner. These scores estimate, on a relative basis, which mortgage loans
are most likely to default in the future. Lower scores imply higher default
risk relative to a higher score. Credit scores are empirically derived from
historical credit bureau data and represent a numerical weighing of a
borrower's credit characteristics over a two-year period. A credit score is
generated through the statistical analysis of a number of credit-related
characteristics or variables. Common characteristics include number of credit
lines (trade lines), payment history, past delinquencies, severity of
delinquencies, current levels of indebtedness, types of credit and length of
credit history. Attributes are the specific values of each characteristic. A
scorecard (the model) is created with weights or points assigned to each
attribute. An individual mortgage loan applicant's credit score is derived by
summing together the attribute weights for that applicant.

The Company originates and acquires mortgage loans under one of five
documentation programs: full documentation, alternative documentation, limited
documentation, no ratio loan documentation and no income/no asset
verification.

47
<PAGE>

Under full documentation, the prospective borrower's employment, income and
assets are verified through written and telephonic communications. Alternative
documentation provides for alternative methods of employment verification
generally using W-2 forms or pay stubs. Generally, under a full documentation
program, a prospective borrower is required to have a minimum credit score of
620 and, under alternative documentation, a minimum credit score of 640.

Under the limited documentation program, more emphasis is placed on the
value and adequacy of the mortgaged property as collateral and other assets of
the borrower than on credit underwriting. Mortgage loans underwritten using
the limited documentation program are limited to borrowers with credit
histories that demonstrate an established ability to repay indebtedness in a
timely fashion. Under the limited documentation program, a prospective
borrower is required to have a minimum credit score of 640. Under the limited
documentation program, certain credit underwriting documentation concerning
income or income verification and/or employment verification is waived.
Mortgage loans originated and acquired with limited documentation include
cash-out refinance loans, super jumbos and mortgage loans secured by investor-
owned properties. Permitted maximum loan-to-value ratios (including secondary
financing) under the limited documentation program, which range up to 80%, are
more restrictive than mortgage loans originated with full documentation or
alternative documentation.

Under the no ratio loan documentation program, income ratios for the
prospective borrower are not calculated. Mortgage loans underwritten using the
no ratio loan documentation program have loan-to-value ratios less than or
equal to 80% and meet the standards for the limited documentation program. A
minimum credit score of 680 is required for this program.

Under the no income/no asset verification program, emphasis is placed on the
value and adequacy of the mortgaged property as collateral and credit history
rather than on verified income and assets of the borrower. Mortgage loans
underwritten under no income/no asset verification are limited to borrowers
with excellent credit histories. A minimum credit score of 680 is required.
Under the no income/no asset verification program, credit underwriting
documentation concerning income, employment verification and asset
verification is waived and income ratios are not calculated.

Exceptions. On a case-by-case basis, the Company's underwriters may
determine that the prospective borrower warrants an exception from its
underwriting guidelines. Such exceptions may include a debt service-to-income
ratio exception, a loan-to-value exception or an exception from certain
documentation requirements of a particular mortgage loan program. An exception
may generally be allowed if the application reflects certain compensating
factors, including among others: a high credit score; a low loan-to-value
ratio; cash reserves; stable employment; and the length of residence in the
subject property. Accordingly, the Company may classify certain mortgage loan
applications into a more extensive documentation program than other mortgage
loan applications that, in the absence of such compensating factors, would
only satisfy the criteria of a less extensive documentation program and may
fund mortgage loans that do not satisfy all of the criteria discussed above
for any particular documentation program.

48
<PAGE>

The following table sets forth for the periods indicated additional detail
on the Company's mortgage loan originations by category of mortgage loan:

<TABLE>
<CAPTION>
FIRST QUARTER 1996 SECOND QUARTER 1996
---------------------------------------------- ----------------------------------------------
DOLLAR AVERAGE WEIGHTED WEIGHTED AVERAGE DOLLAR AVERAGE WEIGHTED WEIGHTED AVERAGE
VOLUME PRINCIPAL AVERAGE AVERAGE CREDIT VOLUME PRINCIPAL AVERAGE AVERAGE CREDIT
(IN 000'S) BALANCE LTV COUPON SCORE (IN 000'S) BALANCE LTV COUPON SCORE
---------- --------- -------- -------- ------- ---------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Agency.................. $ 284,499 $131,652 76% 7.34% 680 $ 280,240 $124,000 75% 7.86% 680
Non-agency.............. 218,617 177,882 74 8.25 679 237,718 190,327 74 8.44 706
Home equity loans....... 25,019 38,849 87 9.36 682 47,820 40,389 86 8.60 713
Other................... 5,663 106,849 69 9.41 615 7,613 131,263 73 10.33 598
---------- ---------
Totals................. $ 533,798 $ 573,391
========== =========
<CAPTION>
THIRD QUARTER 1996 FOURTH QUARTER 1996
---------------------------------------------- ----------------------------------------------
DOLLAR AVERAGE WEIGHTED WEIGHTED AVERAGE DOLLAR AVERAGE WEIGHTED WEIGHTED AVERAGE
VOLUME PRINCIPAL AVERAGE AVERAGE CREDIT VOLUME PRINCIPAL AVERAGE AVERAGE CREDIT
(IN 000'S) BALANCE LTV COUPON SCORE (IN 000'S) BALANCE LTV COUPON SCORE
---------- --------- -------- -------- ------- ---------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Agency.................. $ 169,375 $118,362 76% 8.18% 687 $ 150,936 $120,460 75% 7.91% 700
Non-agency.............. 291,587 192,339 75 8.53 700 389,650 186,793 74 8.31 710
Home equity loans....... 68,628 42,494 82 7.66 705 92,841 45,555 84 7.52 707
Other................... 7,070 112,218 75 10.43 632 6,564 123,852 77 10.16 621
---------- ---------
Totals................. $ 536,660 $ 639,991
========== =========
<CAPTION>
FIRST QUARTER 1997 SECOND QUARTER 1997
---------------------------------------------- ----------------------------------------------
DOLLAR AVERAGE WEIGHTED WEIGHTED AVERAGE DOLLAR AVERAGE WEIGHTED WEIGHTED AVERAGE
VOLUME PRINCIPAL AVERAGE AVERAGE CREDIT VOLUME PRINCIPAL AVERAGE AVERAGE CREDIT
(IN 000'S) BALANCE LTV COUPON SCORE (IN 000'S) BALANCE LTV COUPON SCORE
---------- --------- -------- -------- ------- ---------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Agency.................. $ 137,450 $123,717 75% 7.70% 696 $ 164,577 $123,649 77% 7.92% 697
Non-agency.............. 441,147 192,305 73 8.17 710 495,176 179,868 75 8.53 710
Home equity loans....... 104,429 47,082 84 7.95 707 155,999 49,904 84 8.17 704
Other................... 9,133 120,178 73 9.90 627 9,508 113,190 77 10.24 625
---------- ---------
Totals................. $ 692,159 $ 825,260
========== =========
<CAPTION>
THIRD QUARTER 1997
----------------------------------------------
DOLLAR AVERAGE WEIGHTED WEIGHTED AVERAGE
VOLUME PRINCIPAL AVERAGE AVERAGE CREDIT
(IN 000'S) BALANCE LTV COUPON SCORE
---------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Agency.................. $ 173,446 $126,327 77% 7.65% 706
Non-agency.............. 688,757 185,549 75 8.24 712
Home equity loans....... 140,355 46,552 84 7.91 707
Other................... 7,183 117,759 73 9.71 627
----------
Totals................. $1,009,741
==========
</TABLE>

49
<PAGE>

Quality Assurance. The Company's Quality Assurance Department (the "QAD")
consists of eighteen people who operate out of its corporate headquarters in
Larkspur but also includes a two-person staff based in Southern California
which performs pre-funding quality control reviews for the Company's Southern
California Region. Since the Company's wholesale loan origination process
relies heavily on its Mortgage Sources, one of the primary functions of the
QAD includes the approval and related monitoring of its Mortgage Sources.
Other related functions for the QAD include the approval and monitoring of
third-party appraisers, escrow companies and title companies.

Another primary function of the QAD is to monitor overall mortgage loan
quality to seek to ensure that the mortgage loan originations comply with the
Company's quality standards as well as those of investors and mortgage
insurers. This is accomplished through a sampling of mortgage loan files for
review by the quality control unit within the QAD and through administration
of a verification of income program with the Internal Revenue Service. The
quality control unit of the QAD performs loan file reviews before funding and
has placed an increasing emphasis on its pre-funding review since early 1997.
The objective of pre-funding reviews is to ensure data integrity of the
information used by the Company's underwriters in evaluating mortgage loans.
The extent of the review may include validating all information or just
selected elements based on assessment of risk and other selection criteria.
The percentage of mortgage loans subjected to some form of additional
verification prior to funding either through the special IRS program or
through mortgage loan file reviews by the QAD is approximately 14% of loans
submitted for origination. The quality control unit of the QAD also selects
approximately 4% of funded loans for a post-funding review. A post-funding
review includes a full underwriting of the mortgage loan file, including a
reverification of credit, employment income and source of funds as well as a
review of various closing documents. The QAD also reviews mortgage loans which
revert to early payment default status. All material findings are submitted to
management for response. Reporting to senior management for the pre-funding
reviews occurs monthly and reporting for the post-funding reviews occurs
quarterly.

The Company devotes substantial resources and attention to improving its
quality assurance functions. Notwithstanding these efforts, there can be no
assurance that the Company's quality assurance procedures will prevent or
mitigate losses on the mortgage loans produced or serviced by the Company. See
"Risk Factors--Mortgage Loan Sales."

MORTGAGE LOAN SALES

As a mortgage banker, the Company originates all of its mortgage loans with
the intent of selling such loans. A primary component of the Company's
business strategy is to seek the most efficient method of selling its mortgage
loans. In recent years, the Company has developed the capacity to access the
capital markets by securitizing its mortgage loans in addition to selling them
in whole loan sale transactions. The Company evaluates the sale of each
mortgage loan type and compares prices available for each alternative method
of sale, given current market conditions at the time and the risk
characteristics of the mortgage loan type to determine which method of sale to
utilize.

The following table shows the method of sale for the Company's mortgage
loans for the periods indicated:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------- ---------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans sold through
securitization......... $ 295,290 $ -- $ 597,965 $ 175,923 $1,442,468
Whole loan sales........ 2,502,396 1,330,484 1,532,119 1,323,468 1,031,351
---------- ---------- ---------- ---------- ----------
Total................. $2,797,686 $1,330,484 $2,130,084 $1,499,391 $2,473,819
========== ========== ========== ========== ==========
</TABLE>

Securitization. In the second half of 1996, the Company began to securitize
substantially all of its non-agency mortgage loans and home equity mortgage
loans. Securitization is the process of pooling mortgage loans and issuing
securities, such as mortgage pass-throughs, or collateralized mortgage bonds
or notes. Under SFAS No. 125, regardless of whether the securities issued are
in the form of equity or debt securities, the transaction

50
<PAGE>

will generally be treated for accounting purposes as a sale of the underlying
mortgage loans. The Company intends to structure all of its securitizations to
qualify as sales for accounting purposes, with a resulting gain reflected at
the time of sale. Only the net retained interest in the securitized mortgage
loans remains on the balance sheet. Net cash proceeds from such
securitizations will be available to support new mortgage loan originations
and to repay borrowings under the Company's warehouse facilities. The Company
carries out its securitizations through its wholly-owned subsidiary Headlands
Mortgage Securities, Inc. ("HMSI"). HMSI maintains separate shelf registration
statements for the non-agency mortgage loan and home equity mortgage loan
securitization programs.

The Company believes that its ability to access the capital markets through
securitization is important to its overall business strategy in several ways.
Securitization is a very efficient method of selling the Company's non-agency
and home equity mortgage loans. Under the non-agency mortgage loan
securitization program, the Company generally sells the more senior classes of
the securities produced by the securitization for cash and retains one or more
of the subordinated classes. Such securities are carried on the balance sheet
at their estimated fair market value (based on market prices for similar
securities) under the line item "retained interests in securitizations." Due
to the relatively high credit quality of the mortgage loans in these
securitizations, the amount of subordinated securities retained by the Company
represents a relatively small percentage (generally less than 2%) of the total
principal of the mortgage loans securitized. In addition, the market value of
the classes of securities sold generally permits the Company to receive cash
in an amount equal to or greater than its cost of funding the mortgage loans.
As a result, the securitization of the Company's non-agency mortgage loans to
date has not required a substantial amount of the Company's available cash. In
the future, the Company may elect to retain additional classes of securities
in such securitizations which would require additional funds.

Under the home equity mortgage loan securitization program, the Company
generally sells the home equity mortgage loan securities for cash and a
retained trust interest that represents (i) an interest (which is subordinated
to payment on the securities sold) in the principal of the mortgage loans
securitized (the "Principal Amount") and (ii) the right to the excess of
future expected interest payments to be received on the mortgage loans
securitized over the future interest payments required to be made on the
securities sold (the "Interest-only Residual"). The estimated values of the
Principal Amount and is the Interest-only Residual are shown on the balance
sheet under the line item "retained interests in securitizations." The
securitizations of the Company's home equity mortgage loans generate negative
cash flow compared to the cost of the mortgage loans securitized. The Company
to date has elected to mitigate the extent of negative cash flow by selling a
portion of the Interest-only Residual in connection with the home equity
mortgage loan securitizations. In the future, the Company may elect to retain
the full amount of the Interest-only Residual in order to receive the future
cash flows generated thereby. In such event, the negative cash flow at the
time of effecting the securitization would be increased.

Securitization also supports the Company's wholesale origination channel by
increasing its flexibility in competing for non-agency mortgage loans. The
parameters of mortgage loan characteristics that may be included in a pool to
be securitized are generally broader than would be the case if the pool were
to be sold in a traditional whole loan sale to a financial institution.
Mortgage loan characteristics in securitizations are subject to the
requirements of the rating agencies and of any third-party credit enhancer
that may be involved, such as a monoline insurance company. The Company
believes, however, that these requirements generally provide more flexibility
in originating mortgage loans than would be the case under a traditional whole
loan sale method. This additional flexibility enables the Company to compete
more aggressively for mortgage loans and provide better service to its
Mortgage Sources.

The retained interests in the non-agency mortgage loan securitizations are
in the form of classes of subordinated securities which can be sold or pledged
by the Company. The retained interests in the home equity mortgage loan
securitizations are in the form of trust interests that are restricted as to
transfer and cannot be sold by the Company. The Company's retained interests
in its securitizations, regardless of the form, are subordinated to the
classes of securities issued to investors in such securitizations with respect
to future losses of principal and interest on the underlying mortgage loans.
Accordingly, any such losses incurred on the underlying mortgage

51
<PAGE>

loans will be applied first to reduce the remaining amount of the Company's
subordinated retained interest, until reduced to zero. In addition, with
respect to the Interest-only Residual retained in the home equity loan
securitizations, to the extent the actual loss rates, prepayment rates or
other characteristics experienced on a pool of mortgage loans differ adversely
from the assumptions used to evaluate the residual interest at the time of
sale, a reduction in the fair value of such interest on the balance sheet may
be required in a future period, with a corresponding charge to income.

Whole Loan Sales and Exchanges. Sales of mortgage loans and exchanges of
pooled mortgage loans for securities are conducted by the Company's Secondary
Marketing Department. The Company's whole loan sales and exchanges of mortgage
loans are generally made without recourse to the Company. The Company sells or
exchanges substantially all of its Agency mortgage loans through normal
secondary channels. The Company also generally sells its closed-end home
equity mortgage loans through whole loan sales rather than through the home
equity mortgage loan securitization program when the price received from whole
loan sales is more attractive to the Company. From time to time the Company
sells qualifying Jumbos to one of the privately-sponsored national mortgage
conduit programs; such Jumbos are also included at times in the Company's non-
agency mortgage loan securitization program along with the Alternative A
mortgage loans. The Company sells substantially all of its other mortgage
loans (i.e., subprime mortgage loans) on a whole loan basis (servicing
released) in order to avoid the credit risk associated with such mortgage
loans.

Representations and Warranties. In connection with both securitizations and
whole loan sales and exchanges, the Company makes representations and
warranties to the buyers thereof which it believes are customary in the
industry relating to, among other things, compliance with laws, regulations
and program standards and accuracy of information. In the event of a breach of
these representations and warranties, the Company may be required to
repurchase these mortgage loans and indemnify the investors for damages caused
by the breach. If a repurchase request is made, the Company will either (i)
attempt to remedy the deficiency and have the investors rescind the rejection
of the mortgage loan or (ii) refinance or sell the mortgage loan, sometimes at
a loss. Mortgage loans repurchased from investors have represented an
insignificant percentage of total mortgage loan originations based on the
aggregate principal balance over the last three fiscal years. The Company has
implemented a stringent quality assurance program monitoring the most
important stages of the mortgage loan origination process to minimize the
number of mortgage loans rejected by investors. See "--Quality Assurance" and
"--Mortgage Loan Servicing--Credit and Contractual Risks."

OPERATIONS AND INFORMATION SERVICES

The Company's offering of a broad range of conventional and specialized
mortgage loan products requires the timely delivery of such mortgage loan
products to the branches and careful monitoring and tracking of the
origination of such mortgage loan products through delivery to the ultimate
investor. For this reason, the Company focuses on the development of its
operations and technology capabilities and has organized many of the
production and servicing functions under the Operations Department in order to
promote the coordination of these functions. The Operations Department
includes the following key functions:

<TABLE>
<C> <S>
.Underwriting/Branch Operations .Loan Delivery
.Loan Closing/Document Tracking .Quality Assurance
.Systems Support .Corporate Training
.Computer Services .Servicing
</TABLE>

Each department manager is responsible for the day-to-day activities of
specified areas and reports to the Executive Vice President of Operations with
respect to communications between departments, coordinating services to branch
offices and long range planning issues, such as technology development.

The Company uses a mortgage loan origination and administration system
modified to meet the Company's specific needs, that has largely eliminated
many of the manual efforts associated with underwriting, funding and loan
delivery. This system provides real-time access to the information used by
each department in operations as

52
<PAGE>

well as the secondary marketing and treasury departments. This Company-wide
system provides a smooth flow of data from the origination process until the
mortgage loan is purchased by the investor. These integrated systems also
improve data integrity because information is not re-keyed or transferred to
multiple mortgage loan-tracking systems.

Prior to 1997, functions that were formerly conducted from a central
location in Larkspur were decentralized and moved to the branch offices.
Underwriting and closing document preparation are two such functions.
Decentralization of these functions has enabled the Company to offer prompt
and efficient service. Staffing each branch with management and staff who have
an understanding of the local market also increased the Company's ability to
assess mortgage loan quality and resolve broker-related issues more
efficiently. Operations functions which remain centralized include quality
assurance, systems programming and support, loan delivery and servicing.

Branch operations management has substantial contact with and receives
direction from senior management at the the Company's headquarters office.
Typical daily interaction between a branch operations officer and the
headquarters' staff include resolutions of underwriting exceptions,
interpretation of investor guidelines and requests from a branch for systems
support. The Company's operations procedure manual specifies workflow and
communication methods and underwriting requirements not specifically mentioned
in investor guidelines, but which the Company determines are prudent. The
procedure manual is also the vehicle by which internal procedures and controls
are disseminated to all operations personnel. All such procedures are designed
to ensure consistent, investment quality mortgage loan originations and an
efficient production environment.

The Information Services Department is responsible for implementing,
supporting and improving the software and hardware technology employed in the
Company. Specifically, the Information Services Department concentrates on
applications programming, applications development and analysis of new
software technologies which can be used within the Company to improve
information flow and operating efficiencies. The Information Services
Department also focuses on the integration and support of hardware
technologies including those established in the branch offices.

HEDGING ACTIVITIES

The Company originates and purchases mortgage loans and sells them primarily
through securitizations and whole loan sales. The market value of fixed-rate
mortgage loans are sensitive to changes in market interest rates. If interest
rates rise between the time the Company commits to originate at a specific
rate ("rate lock") or originates or purchases the mortgage loans and the time
the mortgage loans are committed for sale, there may be a decline in the
market value of the mortgage loans. To protect against such possible declines,
the Company has adopted a hedging strategy.

The Company retains the services of Tuttle & Co., an unaffiliated advisory
firm specializing in mortgage loan pipeline management to assist the Company
in seeking to minimize the interest rate risk associated with the time lag
between when loans are rate-locked and when they are committed for sale or
exchanged in the secondary market. Individual mortgage loan risks are
aggregated by note rate, mortgage loan type and stage in the pipeline, and are
then matched, based on duration, with the appropriate hedging instrument, thus
mitigating basis risk until closing and delivery. The Company currently hedges
its mortgage loan pipeline through a combination of forward sales of Fannie
Mae mortgage-backed securities and forward whole loan sales. The Company
determines which alternative provides the best execution in the secondary
market. As a managed account of Tuttle & Co., the Company is able to take
advantage of Tuttle's reporting services, including pipeline, mark-to-market,
commitment and position reporting.

Gains and losses on hedging transactions are recorded at the time of
settlement with the counterparty to the transaction, while the related gain or
loss on the mortgage loans in the pipeline are recorded at settlement.

The Company believes that it has implemented a cost-effective hedging
program to provide a level of protection against changes in the market value
of its fixed-rate mortgage loans held for sale. However, an

53
<PAGE>

effective hedging strategy is complex and no hedging strategy can completely
insulate the Company against such changes.

The Company does not presently hedge against declines in value in its
servicing portfolio and hedges only to a limited extent against declines in
value of its retained interests in securitizations. Such declines could occur
due to market interest rate changes and the effects of early prepayments of
the mortgage loans serviced.

MORTGAGE LOAN SERVICING

General. Mortgage loan servicing includes collecting payments from borrowers
and remitting those funds to investors, accounting for mortgage loan principal
and interest, reporting to investors, holding custodial funds for payment of
mortgage-related expenses such as taxes and insurance, advancing funds to
cover delinquent payments, inspecting the mortgaged premises as required,
contacting delinquent borrowers, supervising foreclosures and property
disposition in the event of unremedied defaults, and otherwise administering
the mortgage loan.

The Company's fees for servicing mortgage loans generally range from 0.25%
to 0.50% per annum on the outstanding principal balances of the mortgage
loans. Servicing fees are collected by the Company out of monthly remittances
to investors. Other sources of mortgage servicing rights revenues include late
charges, assumption and modification fees and prepayment penalties. The
Company must cover general overhead and other normal costs associated with
mortgage servicing rights, such as computer and personnel costs. The Company
is also required to pay certain costs in connection with foreclosure
proceedings on defaulted mortgage loans for which it may not be fully
reimbursed. Potential exposure to foreclosure costs is contrasted to losses on
principal amounts, as to which the Company has limited liability because
substantially all of the mortgage loans in its mortgage loan servicing
portfolio are sold or exchanged to investors in the secondary mortgage market
on a nonrecourse basis. See "--Credit and Contractual Risks."

In 1993, the Company established its Servicing Center in Santa Rosa,
California. The Servicing Center became operational in February 1994 and
presently occupies approximately 13,000 square feet. The Servicing Center is
fully integrated into the Company's networking system and employs a well-
established, experienced provider of computing services, Alltel Information
Services Inc. for its mortgage loan servicing computing services. The Company
believes that the Servicing Center has the capacity to substantially increase
the number of mortgage loans that it services without significantly increasing
its fixed operating costs. Prior to the time the Servicing Center became
operational, the Company's mortgage loan servicing portfolio was subserviced
by a separate servicing entity and the Company was not actively engaged in
servicing activities.

The following table provides certain information regarding changes in the
Company's mortgage loan servicing portfolio:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------- --------------------
1994 1995 1996 1996 1997
------- ------- -------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Beginning Servicing
Portfolio............... $ 4,283 $ 4,779 $ 4,149 $ 4,149 $ 4,387
Add: Originations........ 2,410 1,356 2,284 1,644 2,527
Less: Bulk sales of
servicing rights........ (736) (943) (1,033) (1,033) (1,823)
Less: Amortization and
prepayments............. (611) (507) (543) (386) (522)
Less: Service released
sales................... (567) (536) (470) (402) (566)
------- ------- -------- --------- ---------
Ending Servicing
Portfolio............... $ 4,779 $ 4,149 $ 4,387 $ 3,972 $ 4,003
======= ======= ======== ========= =========
</TABLE>

54
<PAGE>

The following table sets forth certain information regarding the Company's
mortgage loan servicing portfolio:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Agency mortgage loans:
Number of mortgage loans......... 18,677 15,835 17,118 16,497 12,899
Percent of total number.......... 64.24% 58.09% 49.82% 55.24% 34.88%
Principal amount (in millions)... $ 2,371 $ 1,911 $ 2,026 $ 1,954 $ 1,465
Percent of total principal
amount.......................... 49.61% 46.06% 46.18% 49.19% 36.61%
Non-agency mortgage loans:
Number of mortgage loans......... 10,133 11,178 12,487 10,729 13,269
Percent of total number.......... 34.85% 41.00% 36.34% 35.93% 35.87%
Principal amount (in millions)... $ 2,396 $ 2,228 $ 2,192 $ 1,926 $ 2,136
Percent of total principal
amount.......................... 50.14% 53.70% 49.97% 48.50% 53.35%
Home equity mortgage loans:
Number of mortgage loans......... 266 248 4,695 2,636 10,739
Percent of total number.......... 0.91% 0.91% 13.66% 8.83% 29.04%
Principal amount (in millions)... $ 12 $ 10 $ 161 $ 92 $ 394
Percent of total principal
amount.......................... 0.25% 0.24% 3.67% 2.31% 9.83%
Other mortgage loans(1):
Number of mortgage loans......... -- -- 63 -- 78
Percent of total number.......... -- -- 0.18% -- 0.21%
Principal amount (in millions)... -- -- $ 8 -- $ 8
Percent of total principal
amount.......................... -- -- 0.18% -- 0.21%
Total mortgage loans serviced:
Number of mortgage loans......... 29,076 27,261 34,363 29,862 36,985
Principal balance (in millions).. $ 4,779 $ 4,149 $ 4,387 $ 3,972 $ 4,003
Average principal balance ....... $164,362 $152,195 $127,666 $133,006 $108,235
Average coupon--first lien....... 7.13% 7.79% 8.05% 7.94% 8.17%
Average coupon--home equity...... 9.55% 9.46% 9.60% 8.15% 9.93%
</TABLE>
- --------
(1) Consists of subprime mortgage loans.

The following table sets forth certain information regarding the number and
aggregate principal balance of the mortgage loans serviced by the Company at
September 30, 1997, including both fixed and adjustable rate mortgage loans,
at various mortgage interest rates:

<TABLE>
<CAPTION>
PERCENT OF
NUMBER PERCENT OF TOTAL TOTAL PRINCIPAL AGGREGATE
MORTGAGE INTEREST RATE OF LOANS NUMBER OF LOANS BALANCE PRINCIPAL BALANCE
---------------------- -------- ---------------- --------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
0.00-6.99%.............. 5,190 14.03% $ 495,675 12.38%
7.00-7.49............... 2,856 7.72 374,804 9.36
7.50-7.99............... 3,410 9.22 453,338 11.32
8.00-8.49............... 4,695 12.69 728,904 18.21
8.50-8.99............... 7,089 19.17 1,072,629 26.80
9.00-9.49............... 3,195 8.64 364,132 9.10
9.50-9.99............... 1,885 5.10 148,095 3.70
10.00 and over.......... 8,665 23.43 365,502 9.13
------ ------ ---------- ------
Total................. 36,985 100.00% $4,003,079 100.00%
====== ====== ========== ======
</TABLE>

55
<PAGE>

As of September 30, 1997, approximately 73% of the above mortgage loans
serviced by the Company were fixed interest rate mortgage loans. If mortgage
interest rates decline the Company's prepayment rate is likely to increase,
thereby negatively affecting the Company's income. See "Risk Factors--Interest
Rate Fluctuations-- Servicing Operations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview--Mortgage
Loan Servicing Portfolio." This negative effect on the Company's income may be
offset by a rise in origination and servicing income attributable to new
mortgage loan originations, which historically have increased as mortgage
interest rates have declined.

The Company believes the credit quality of the mortgage loans that it
originates, the relative age of mortgage loans it services and the economic
factors impacting the areas it serves, among other factors, have resulted in
relatively low delinquency ratios of the Company's mortgage loan servicing
portfolio compared to industry averages. See "Risk Factors--Delinquency and
Default." The Servicing Center is responsible for administering the collection
of mortgage loans, maintenance of those properties in foreclosure and REO.
Pursuant to the Company's procedures, once a borrower has missed a scheduled
payment, over the next 45 days the Company's collections department attempts
to establish contact with the borrower both by telephone and by sending two
automatic notices of delinquency to solve the delinquency. In many instances,
the delinquency is resolved, but if it is not, the collections department
generally records a notice of default, subject to prior notice to the
borrower, and commences foreclosure proceedings. Approximately seven months
after the delinquency, and after meeting all the legal requirements for
foreclosure, the property is sold at a trustee sale absent any intervening act
by the borrower. The following table shows (with the principal amount of
delinquent and foreclosed mortgage loans as a percentage of the principal
amount of the Company's total mortgage loan servicing portfolio) the Company's
recent delinquency statistics:

<TABLE>
<CAPTION>
AT
AT DECEMBER 31, SEPTEMBER 30,
------------------- --------------
1994 1995 1996 1996 1997
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Delinquency of Mortgage Loans
Serviced (at end of period):
30 days............................ 1.12% 1.03% 1.36% 1.02% 0.96%
60 days............................ 0.17 0.23 0.13 0.15 0.13
90 days or more.................... 0.17 0.17 0.04 0.06 0.13
----- ----- ----- ------ ------
Total delinquencies.............. 1.46% 1.43% 1.53% 1.23% 1.22%
===== ===== ===== ====== ======
Foreclosures Pending................. 0.35% 0.53% 0.57% 0.64% 0.26%
</TABLE>

Purchase and Sale of Mortgage Servicing Rights. The Company intends to
increase the size of its mortgage loan servicing portfolio by retaining a
significant portion of the mortgage loan servicing rights related to the
mortgage loans it originates. The Company has no plans to increase its
mortgage loan servicing rights portfolio through bulk or flow purchase of
mortgage loan servicing rights from others, although it may do so if a
strategic purchase opportunity presents itself.

The Company may from time to time sell portions of its mortgage loan
servicing portfolio, and may elect to sell mortgage loans it has originated on
a servicing-released basis, based on strategic factors, such as market
conditions and financial objectives. These sales increase revenue at the time
of sale but reduce future servicing fee income. Prices obtained for mortgage
loan servicing rights vary, and it is not possible to anticipate what price
the Company will receive for any future sales. Among the factors that
influence the value received for mortgage servicing rights are servicing fee
rates, anticipated prepayment rates, average mortgage loan balances, servicing
costs, custodial account balances, delinquency and foreclosure experience, and
purchasers' required rates of return. The Company's owned servicing portfolio
at September 30, 1997 consisted of servicing rights to mortgage loans with an
aggregate outstanding principal balance of $4.0 billion, of which $2.3 billion
was capitalized on the Company's balance sheet. During 1996 and 1995, the
Company sold mortgage servicing rights with aggregate principal balances of
$1.0 billion and $0.9 billion, respectively.

56
<PAGE>

In general, the decision to sell, buy or retain mortgage loan servicing
rights is based upon the market for and value of mortgage loan servicing
rights, the Company's current financial needs and objectives, including, among
other things, its cash and/or capital requirements and its debt-to-equity and
other financial ratios. The Company's ability to sell its servicing rights
under its various servicing agreements with investors is generally subject to
the consent of the investors. In addition, under the servicing provisions
governing the Company's securitizations, the successor servicer is subject to
prior approval of the rating agencies rating the subject securities.

Credit and Contractual Risks. As a seller and servicer of mortgage loans,
the Company contractually obligates itself to assume certain risks with
respect to the mortgage loans that it sells and services. Mortgage loan
servicers, such as the Company, are also typically required to pay (or at
least advance) delinquent mortgage loan payments and certain costs in
connection with foreclosure proceedings on defaulted mortgage loans, for which
the servicers may not be fully reimbursed. The Company must bear the costs
associated with making such advances. The Company's underwriting, quality
assurance and internal audit procedures are designed in part to limit its
delinquency and default risk. The Company also follows policies and procedures
designed to minimize risks associated with representations and warranties made
by the Company with respect to mortgage loans that it sells. See "--Mortgage
Loan Originations--Underwriting" and "--Quality Assurance."

Mortgage loan servicing rights represent a contractual right and not a
beneficial ownership interest in the underlying mortgage loans. Failure to
service the mortgage loans in accordance with contract requirements may lead
to a termination of the mortgage loan servicing rights without the payment of
any compensation.

MORTGAGE LOAN FUNDING AND BORROWING ARRANGEMENTS

The Company utilizes short-term warehouse facilities and repurchase
agreements to fund mortgage loan originations and purchases. In October 1993,
the Company entered into a mortgage loan warehousing agreement (the "Warehouse
Facility"). Under the terms of the Warehouse Facility, the Company has
available a $215 million warehouse line of credit secured by the mortgage
loans the Company originates or purchases. The Company is required to comply
with various operating and financial covenants as defined in the agreements
governing the agreement. Such covenants include restrictions on (i) changes in
the Company's business that would materially and adversely affect the
Company's ability to perform its obligations under the facility, (ii) selling
any asset other than in the ordinary course of business, and (iii) maximum
debt and distributions allowed. Such covenants also contain requirements for
(i) minimum net worth and mortgage loan servicing portfolio balances and (ii)
maximum leverage ratios. In accordance with industry practice, the Warehouse
Facility is renewable by the lenders annually and currently expires on
November 4, 1999. The Company expects, although there can be no assurance,
that the Warehouse Facility will continue to be available in the future. At
September 30, 1997, the outstanding balance under the Warehouse Facility was
$133.9 million.

57
<PAGE>

The Company also has a $12.0 million operating line of credit from a group
of commercial banks who are also lenders in the Warehouse Facility. This
operating line of credit is secured by certain servicing contracts of the
Company and is limited by the amount of servicing pledged as security. This
operating line of credit, which has a conversion option to a three-year,
amortizing term loan, is renewable from time to time and expires on November
4, 1998. At September 30, 1997, the Company had no outstandings under this
line of credit.

In addition to these financing sources, the Company also has various
repurchase agreements with major investment banks which are collateralized by
certificates reflecting interest in the Company's private securities. At
September 30, 1997, the Company had $3.4 million outstanding under these
agreements.

The Company relies on securitizations and whole loan sales to generate cash
proceeds for repayment of its warehouse facilities and to create availability
to purchase additional mortgage loans. Several factors affect the Company's
ability to complete securitizations of its loans, including conditions in the
securities markets generally, conditions in the asset-backed securities market
specifically, and the credit quality of the Company's portfolio of mortgage
loans. Unanticipated delays in closing a securitization could also increase
the Company's interest rate risk by increasing the warehousing period for its
mortgage loans.

COMPETITION

The mortgage banking business is highly competitive. The Company competes
with other wholesale and retail mortgage banking entities, mortgage brokers
and financial institutions, many of which have substantially greater financial
and other resources than the Company. The market for mortgage loan
originations is also significantly influenced by interest rate levels and
changes as well as demographic and other factors. The Company expects greater
competition from its existing competitors. In addition, Fannie Mae and Freddie
Mac are currently developing technologies and business practices that will
expand the scope of mortgage loans eligible to be Agency mortgage loans to
include some Alternative A and subprime mortgage loans. The foregoing factors
may result in lower mortgage loan origination volume, compressed pricing
margins or other challenging or adverse effects for the Company. Mortgage
brokers compete on the basis of service, range of mortgage loan products and
pricing. Retail mortgage banking companies have direct access to borrowers and
generally are able to sell their mortgage loans to the same entities that
purchase the Company's mortgage loans. The Company depends primarily on
mortgage brokers for originating new mortgage loans. Competitors also seek to
establish relationships with mortgage brokers who are not obligated by
contract or otherwise to continue to do business with the Company. Although
independent mortgage bankers may not possess the financial resources of those
affiliated with larger financial institutions, management believes that such
independent companies have the potential to be more adept at adjusting to
changing market conditions. See "Risk Factors--Competition."

EMPLOYEES

As of September 30, 1997, the Company had 595 full-time employees, 18 part-
time employees and 3 temporary employees on its payroll. Approximately 297 of
the Company's employees were employed at the Company's headquarters in
Larkspur, California. The Company's employees are not represented by any
collective bargaining unit. The Company believes that it maintains good
relations with its employees.

58
<PAGE>

PROPERTIES

The principal executive and administrative offices of the Company occupy
approximately 49,600 square feet of commercial office space in Larkspur,
California, under three separate leases expiring on various dates in 1997 and
1998. The Company leases approximately 13,000 square feet of additional space
in Santa Rosa, California, for its Servicing Center under a lease expiring
November 30, 1998, and an additional 46,100 square feet at various locations
in connection with its branch offices, for lease terms expiring at various
dates from 1997 through 2001. The Company does not own any real estate except
for its interest in real estate held in the ordinary course of business
(including real estate owned as a result of foreclosure). The Company intends
to lease additional office space in connection with the expansion of its
branch office system. See "--Business Strategy."

LEGAL PROCEEDINGS

The Company is not a party to any material litigation. Additionally, the
Company's management is not aware of any pending or threatened claims against
the Company that might materially adversely affect the Company's operating or
financial results.

REGULATION

The Company is subject to the rules and regulations of, and examinations by,
FNMA, FHLMC, VA, HUD and state and local regulatory and housing authorities
with respect to originating, processing, underwriting, selling, securitizing
and servicing mortgage loans. In addition, there are other federal and state
statutes and regulations, as well as judicial decisions, affecting such
activities. These rules, regulations and decisions may, among other things:
impose licensing obligations on the Company, establish eligibility criteria
for mortgage loans, prohibit discrimination, provide for inspections and
appraisals of properties, require credit reports on prospective borrowers,
regulate payment features; and, in some cases, set maximum interest rates,
fees and loan amounts. Among other federal consumer credit laws, mortgage loan
origination activities are subject to the ECOA, Truth-in-Lending Act, RESPA,
the Fair Housing Act, the Fair Credit Reporting Act, the Home Mortgage
Disclosure Act, as well as the regulations promulgated thereunder. These laws
prohibit certain types of discrimination, kickbacks and referral fees, and
require the disclosure of certain information to borrowers concerning credit
and settlement costs. Many of the regulatory requirements are designed to
protect the interests of consumers, while others protect the owners or
insurers of mortgage loans. Failure to comply with these requirements can lead
to loss of approved status, termination of servicing contracts without
compensation to the servicer, demands for indemnification or loan repurchases,
class action lawsuits and administrative enforcement actions, which may
involve civil money penalties and, in some instances, treble damages. Although
the Company believes that it is in compliance in all material respects with
applicable federal and state laws, rules and regulations, the requirements to
which the Company is subject often are ambiguous and subject to differing
interpretations. There can be no assurance that more restrictive laws, rules
and regulations will not be adopted in the future or that existing laws, rules
and regulations, or the provisions of the mortgage loan documents with
mortgagors, will not be interpreted in a more restrictive manner, which could
make compliance more difficult or expensive, restrict the Company's ability to
originate, purchase, sell or service mortgage loans, further limit or restrict
the amount of interest and other charges earned from loans originated,
purchased or serviced by the Company, expose the Company to claims by
mortgagors and administrative enforcement actions, or otherwise adversely
affect the business, financial condition or prospects of the Company. See
"Risk Factors--Regulation and Legislation."

Certain conventional mortgage loans are subject to state usury statutes.
Federally related first-lien mortgage loans are exempt from the effect of such
statutes. Despite federal exemption of state usury limits, the Company must
comply with usury statutes in those states that have opted out of the
preemption. Various state laws affect the Company's mortgage banking
operations. The Company is licensed to do business in those states where the
Company's operations require such licensing.

59
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company and their positions are
as follows:

<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
Peter T. Paul........... President, Chief Executive Officer and Director
Becky S. Poisson........ Executive Vice President--Operations and Director
Gilbert J. MacQuarrie... Executive Vice President, Chief Financial Officer and Secretary and Director
Steven M. Abreu......... Executive Vice President, Production and Secondary Marketing
</TABLE>

Directors and Executive Officers

Peter T. Paul, age 53, has been President, founder and major stockholder of
the Company since it began operations in 1986. He also holds the position of
Chief Executive Officer. Prior to founding the Company, he was Vice President
of United Century Mortgage in California and was responsible for wholesale
mortgage lending in several western states. From 1977 to 1980, Mr. Paul was
Executive Vice President and director of Lindsey & Co. in charge of all its
mortgage banking activities. Mr. Paul's substantial experience in the
secondary mortgage market includes positions in the Secondary Mortgage
Marketing Departments for Ticor and IMI, mortgage insurance companies, and as
a GNMA salesman for Weeden & Co. Mr. Paul received a B.A. degree in business
administration from the University of New Hampshire in 1967 and was awarded an
M.B.A. degree from Boston University in 1971. Mr. Paul has 25 years experience
in the mortgage banking industry and is a Director of the California Mortgage
Bankers Association.

Becky S. Poisson, age 47, is Executive Vice President, Operations of the
Company and has served in such capacity since January of 1994. From 1992
through 1993, Ms. Poisson was Senior Vice President, Operations. She oversees
the day-to-day operations of the Company's underwriting, funding, branch
operations, mortgage loan delivery, information services, servicing and
Quality Assurance Department. Prior to joining the Company, Ms. Poisson was
Vice President of Operations at Bank of San Francisco. From 1988 to 1990, Ms.
Poisson was Vice President--Regional Underwriting Manager of Security Pacific
National Bank, and from 1986 to 1988 she was Vice President of Asset
Management of Unified Mortgage Company. From 1984 to 1986, Ms. Poisson was
Vice President of Loan Acquisitions/Sales for Farmers' Savings Bank, and from
1974 to 1984, Ms. Poisson was responsible for all closing operations for
Lindsey and Company, Inc. Ms. Poisson received a B.A. degree from the
University of Wisconsin in 1971. Ms. Poisson has 23 years experience in the
banking and mortgage banking industries.

Gilbert J. MacQuarrie, age 42, is Executive Vice President, Chief Financial
Officer and Secretary of the Company and has served in such capacities since
1997. From 1994 to 1997, Mr. MacQuarrie served as Senior Vice President, Chief
Financial Officer and Secretary, and from 1987 to 1994 he served in both
capacities of Controller and Assistant Controller of the Company. As head of
the Company's Corporate Finance Group, Mr. MacQuarrie is responsible for
accounting, treasury, finance and human resources. Mr. MacQuarrie received a
B.A. degree from Sonoma State University and is a member of the American
Institute of Certified Public Accountants and the California Society of
Certified Public Accountants.

Steven M. Abreu, age 32, is Executive Vice President, Production and
Secondary Marketing of the Company and has served in such capacity since 1997.
Mr. Abreu has been elected to serve as a director of the Company effective
upon the pricing of the Offering. Mr. Abreu served as Senior Vice President,
Production and Secondary Marketing since 1994 and 1996, respectively. He is
responsible for all of the Company's production offices, national expansion
and secondary marketing activities. Mr. Abreu served as Assistant Vice
President of Secondary Marketing from 1988 to 1992. Prior to rejoining
Headlands in 1994, Mr. Abreu was Vice President and Institutional Mortgage
Bond Salesman for Donaldson, Lufkin & Jenrette. Mr. Abreu has a B.S. degree
from the University of San Francisco.

60
<PAGE>

Additional Directors

The Company has elected three additional directors effective upon the
pricing of the Offering. Such directors will be "outside directors." An
"outside director" is a director who is not (i) an employee of the Company,
(ii) a 5% stockholder of the Company, (iii) a director, officer or general
partner of a 5% stockholder of the Company, or (iv) a director, officer or
general partner of a general partner of a 5% stockholder of the Company.

Mark L. Korell, age 50, was elected to serve as a director of the Company
effective upon the pricing of the Offering. Mr. Korell is president and chief
executive officer of Industrywide Mortgage Exchange ("IMX"), San Ramon,
California, a recently formed software company which facilitates mortgage loan
sales between loan originators and mortgage lenders. From 1995 to 1997, Mr.
Korell served as group president and chief executive officer of Norwest
Mortgage, Inc., Des Moines, Iowa, a nationwide mortgage lender and mortgage
loan servicer. From 1993 to 1995, Mr. Korell served as president and chief
executive officer of GMAC Mortgage Group, Minneapolis, Minnesota, and from
1986 to 1993, as president and chief executive officer of Residential Funding
Corp., Minneapolis, Minnesota. Mr. Korell has a B.S. degree from the
University of Wisconsin (Madison) and an M.B.A. degree from Stanford Business
School.

Leonard Auerbach, age 51, was elected to serve as a director of the Company
effective upon the pricing of the Offering. Mr. Auerbach is president of L, B,
A and C, Inc., Orinda, California, which offers consulting services to
mortgage lenders. From 1989 to 1997, Mr. Auerbach and L, B, A and C, Inc.
served as general partners in Tuttle & Co., which offered consulting services
in connection with the management of residential mortgage loan origination
pipeline risk. Since 1987, Mr. Auerbach has served as a trustee of the
Robertson Stephens Investment Trust, San Francisco, California, an investment
trust of twelve publicly traded mutual funds. Mr. Auerbach has a Ph.D. degree
from the University of California (Berkeley).

Mark E. Lachtman, age 54, was elected to serve as a director of the Company
effective upon the pricing of the Offering. Mr. Lachtman is president of First
Capital Group, Inc., San Rafael, California, a mortgage brokerage company that
he founded in 1983. He previously served as director of production for Fair,
Isaac & Co., San Rafael, California, from 1978 to 1982. He is a founding
director and currently treasurer of the California Association of Mortgage
Brokers, North Bay Chapter. Mr. Lachtman has a B.A. degree from the University
of California (Berkeley) and a Ph.D. degree from the University of Maryland.

COMMITTEES OF THE BOARD

Audit Committee. The Company has established an Audit Committee effective
upon the pricing of the Offering composed of Messrs. Korell, Auerbach,
Lachtman and MacQuarrie and Ms. Poisson. The Audit Committee will make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls.

Compensation Committee. The Company has established a Compensation Committee
effective upon the pricing of the Offering composed of the three outside
directors. The Compensation Committee will determine the compensation of the
Company's executive officers and administer the Company's stock option plan.

Other Committees. The Board of Directors may establish other committees as
deemed necessary or appropriate from time to time, including, but not limited
to, an Executive Committee of the Board of Directors.

COMPENSATION COMMITTEE INTERLOCKS

No interlocking relationship exists between the Company's Board of Directors
or officers responsible for compensation decisions and the board of directors
or compensation committee of any other company, nor has any such interlocking
relationship existed in the past.

61
<PAGE>

COMPENSATION OF DIRECTORS

Outside directors receive automatic stock options pursuant to the Company's
Stock Option Plan. See "--Executive Compensation--Stock Option Plan--Automatic
Grants to Non-Employee Directors." None of the directors of the Company has
received any separate compensation for service on the Board of Directors or on
any committee thereof. Following the consummation of the Offering, the Company
expects to pay outside directors $10,000 per year. In addition, upon pricing
of the Offering, each outside director will be granted options to purchase
10,000 shares of Common Stock at the initial public offering price. All
directors will receive reimbursement of reasonable out-of-pocket expenses
incurred in connection with meetings of the Board of Directors. No director
who is an employee of the Company will receive separate compensation for
services rendered as a director.

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

Management of the Company receives annual base salaries. Mr. Paul, Ms.
Poisson, Mr. MacQuarrie and Mr. Abreu currently receive base salaries of
$90,000, $120,000, $120,000 and $120,000, respectively. The base salaries may
be raised at the discretion of the Compensation Committee. In addition, the
Board of Directors has established a bonus incentive compensation plan for
executive officers of the Company. This program permits the Board of
Directors, in their discretion, to award cash bonuses annually to executive
officers of the Company.

The following Summary Compensation Table sets forth information concerning
compensation earned in the years ended December 31, 1995, 1996 and 1997 by the
Company's Chief Executive Officer and its three other executive officers
serving at the end of the last completed fiscal year.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- --------------------------- ---- --------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Peter T. Paul..................... 1997 $ 90,000 $ 510,287 -- --
President and Chief Executive 1996 90,000 510,750 -- --
Officer 1995 90,000 8,000 -- --
Becky S. Poisson.................. 1997 $ 113,000 $ 100,000 70,000 --
Executive Vice President, 1996 94,000 30,000 -- --
Operations 1995 82,520 35,459 -- --
Gilbert J. MacQuarrie............. 1997 $ 113,000 $ 100,000 70,000 --
Executive Vice President, 1996 94,000 30,000 -- --
Chief Financial Officer and 1995 82,000 29,479 -- --
Secretary --
Steven M. Abreu................... 1997 $ 117,800 $ 100,000 70,000 --
Executive Vice President, 1996 100,800 30,000 -- --
Production and 1995 104,800 -- -- --
Secondary Marketing
</TABLE>

62
<PAGE>

Option Grants

The following table sets forth information concerning stock options granted
during the 1997 fiscal year to each of the executive officers, adjusted to give
effect to the stock split. Each of the stock options to purchase Common Stock
of the Company becomes exercisable as follows: 25% in July 1998 and 25% in each
year thereafter.

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
--------------------------------------------------------- -----------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR EXPIRATION
NAME GRANTED(#)(1) FISCAL YEAR BASE PRICE($/SH)(2) DATE 5%($) 10%($)
- ---- ------------- ------------ ------------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Peter T. Paul........... -- -- -- -- -- --
Becky S. Poisson........ 70,000 13.51% $4.06 7/27/07 $178,500 $452,900
Gilbert J. MacQuarrie... 70,000 13.51 4.06 7/27/07 178,500 452,900
Steven M. Abreu......... 70,000 13.51 4.06 7/27/07 178,500 452,900
</TABLE>
OPTION/SAR GRANTS IN CURRENT FISCAL YEAR
- --------
(1) All options were granted without related DERs.
(2) Estimated fair market value on the date of grant, as determined by
independent third party appraisal.

Option Exercises and Fiscal Year End Values

The following table sets forth certain information with respect to the value
of the options as of December 31, 1997 held by the named executive officers,
adjusted to give effect to the stock split.

FISCAL YEAR END OPTION VALUE

<TABLE>
<CAPTION>
NUMBER PF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AS OF OPTIONS AS OF
DECEMBER 31, 1997 DECEMBER 31, 1997(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Peter T. Paul............... -- -- -- --
Becky S. Poisson............ -- 70,000 -- $765,800
Gilbert J. MacQuarrie....... -- 70,000 -- 765,800
Steven M. Abreu............. -- 70,000 -- 765,800
</TABLE>
- --------

(1) The dollar amounts set forth represent the difference between the assumed
initial public offering price of $15.00 per share and the exercise price of
the options, multiplied by the applicable number of shares underlying the
options.

EMPLOYMENT AGREEMENTS

The Company entered into employment agreements with Mr. Paul, Ms. Poisson,
Mr. MacQuarrie and Mr. Abreu. Each agreement provides for a term through
December 31, 1999 and will be automatically extended for an additional year at
the end of each year of the agreement, unless either party provides a
prescribed prior written notice to the contrary. Each agreement provides for
the annual base salary set forth under the caption "--Executive Compensation"
above and for participation by the subject officer in the bonus incentive
compensation plan. Each employment agreement provides for the subject officer
to receive his or her base salary and bonus compensation to the date of the
termination of employment by reason of death, disability or resignation and to
receive base compensation to the date of the termination of employment by
reason of a termination of employment for cause as defined in the agreement.
Each employment agreement also provides for the subject officer to receive, in
the event that the Company terminates the subject officer's employment without
cause, or if the subject officer resigns for "good reason" (as defined in the
agreement, including the occurrence

63
<PAGE>

of a "Change of Control" of the Company as defined in the agreement), an
amount equal to two times the combined salary and bonus for the last fiscal
year. Section 280G of the Code may limit the deductibility of such payments by
the Company for federal income tax purposes. Each employment agreement also
contains a "non-compete" provision prohibiting the subject officer from
competing with the Company for a period of one year following termination of
employment following the Company's termination of the subject officer without
cause or resignation of the subject officer for "good reason" (including a
"Change of Control"). In addition, all outstanding options and Awards (see "--
Stock Option Plan" below) granted to the subject officer under the Stock
Option Plan shall immediately vest upon his or her termination without cause
or termination for "good reason" (including upon a "Change of Control").
"Change of Control" for purposes of the agreements would include a merger or
consolidation of the Company, a sale of all or substantially all of the assets
of the Company, changes in the identity of a majority of the members of the
Board of Directors of the Company (other than due to the death, disability or
age of a director) or acquisitions of more than 25% of the Company's capital
stock, subject to certain limitations.

STOCK OPTION PLAN

General. The Company's 1997 Executive and Non-Employee Director Stock Option
Plan (the "Stock Option Plan") provides for the grant of qualified incentive
stock options ("ISOs") which meet the requirements of Section 422 of the
Internal Revenue Code, stock options not so qualified ("NQSOs"), deferred
stock, restricted stock, performance shares, stock appreciation and limited
stock awards ("Awards") and dividend equivalent rights ("DERs").

Purpose. The Stock Option Plan is intended to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to afford additional incentive to others to increase their
efforts in providing significant services to the Company.

Administration. The Stock Option Plan will be administered by the
Compensation Committee, which shall at all times be composed solely of "non-
employee directors" as required by Rule 16b-3 under the Exchange Act. Members
of the Compensation Committee are eligible to receive only NQSOs pursuant to
automatic grants of stock options discussed below.

Options and Awards. Options granted under the Stock Option Plan will become
exercisable in accordance with the terms of grant made by the Committee.
Awards will be subject to the terms and restrictions of the Awards made by the
Committee. Option and Award recipients shall enter into a written stock option
agreement with the Company. The Committee has discretionary authority to
select participants from among eligible persons and to determine at the time
an option or Award is granted when and in what increments shares covered by
the option or Award may be purchased or will vest and, in the case of options,
whether it is intended to be an ISO or a NQSO provided, however, that certain
restrictions applicable to ISOs are mandatory, including a requirement that
ISOs not be issued for less than 100% of the then fair market value of the
Common Stock (110% in the case of a grantee who holds more than 10% of the
outstanding Common Stock) and a maximum term of ten years (five years in the
case of a grantee who holds more than 10% of the outstanding Common Stock).
Fair market value means as of any given date, with respect to any option or
Award granted, at the discretion of the Board of Directors or the Compensation
Committee, (i) the closing sale price of the Common Stock on such date as
reported in the Western Edition of the Wall Street Journal or (ii) the average
of the closing price of the Common Stock on each day of which it was traded
over a period of up to twenty trading days immediately prior to such date, or
(iii) if the Common Stock is not publicly traded (e.g., prior to the
Offering), the fair market value of the Common Stock as otherwise determined
by the Board of Directors or the Compensation Committee in the good faith
exercise of its discretion.

Eligible Persons. Officers and directors and employees of the Company and
other persons expected to provide significant services to the Company are
eligible to participate in the Stock Option Plan. ISOs may be granted to the
officers and key employees of the Company. NQSOs and Awards may be granted to
the directors, officers, key employees, agents and consultants of the Company
or any of its subsidiaries.

64
<PAGE>

Under current law, ISOs may not be granted to any director of the Company
who is not also an employee, or to directors, officers and other employees of
entities unrelated to the Company. No options or Awards may be granted under
the Stock Option Plan to any person who, assuming exercise of all options held
by such person, would own or be deemed to own more than 25% of the outstanding
shares of equity stock of the Company.

Shares Subject to the Plan. Subject to anti-dilution provisions for stock
splits, stock dividends and similar events, the Stock Option Plan authorizes
the grant of options to purchase, and Awards of, an aggregate of up to 700,000
shares of the Company's Common Stock. If an option granted under the Stock
Option Plan expires or terminates, or an Award is forfeited, the shares
subject to any unexercised portion of such option or Award will again become
available for the issuance of further options or Awards under the Stock Option
Plan. The maximum number of shares covered by the Stock Option Plan will
increase to 10% of the Company's total outstanding shares at any time,
provided that no more than 1,000,000 shares of Common Stock shall be
cumulatively available for grant as Incentive Stock Options.

Term of the Plan. Unless previously terminated by the Board of Directors,
the Stock Option Plan will terminate on September 15, 2007, and no options or
Awards may be granted under the Stock Option Plan thereafter, but existing
options or Awards remain in effect until the options are exercised or the
options or Awards are terminated by their terms.

Term of Options. Each option must terminate no more than ten years from the
date it is granted (or five years in the case of ISOs granted to an employee
who is deemed to own an excess of 10% of the combined voting power of the
Company's outstanding equity stock). Options may be granted on terms providing
for exercise either in whole or in part at any time or times during their
restrictive terms, or only in specified percentages at stated time periods or
intervals during the term of the option.

DERs. The Plan provides for granting of DERs in tandem with any options
granted under the Plan. Such DERs accrue for the account of the optionee
shares of Common Stock upon the payment of dividends on outstanding shares of
Common Stock. The number of shares accrued is determined by a formula and such
shares may be made transferable to the optionee either upon exercise of the
related option or on a "current-pay" basis so that payments would be made to
the optionee at the same time as dividends are paid to holders of outstanding
Common Stock. Holders of DERs may be made eligible to participate not only in
cash distributions but also in distributions of stock or other property made
to holders of outstanding Common Stock. Shares of Common Stock accrued for the
account of the optionee are eligible to receive dividends and distributions.
DERs may also be made "performance based" by conditioning the right of the
holder of the DER to receive any dividend equivalent payment or accrual upon
the satisfaction of specified performance objectives.

Option Exercise. The exercise price of any option granted under the Stock
Option Plan is payable in full in cash, or its equivalent as determined by the
Committee. The Company may make loans available to options holders to exercise
options evidenced by a promissory note executed by the option holder and
secured by a pledge of Common Stock with fair value at least equal to the
principal of the promissory note unless otherwise determined by the Committee.

Automatic Grants to Non-Employee Directors. Following the pricing of the
Offering, each non-employee director of the Company will be automatically
granted NQSOs to purchase 10,000 shares of Common Stock without DERs. Such
automatic grants of stock options vest 25% on the anniversary date in the year
following the date of the grant and 25% on each anniversary date thereafter.
The exercise price for such automatic grants of stock options is the initial
public offering price of the Common Stock in the Offering, and is required to
be paid in cash.

Amendment and Termination of Stock Option Plan. The Board of Directors may,
without affecting any outstanding options or Awards, from time to time revise
or amend the Stock Option Plan, and may suspend or discontinue it at any time.
However, no such revision or amendment may, without stockholder approval,
increase the number of shares subject to the Stock Option Plan, modify the
class of participants eligible to receive options or Awards granted under the
Stock Option Plan or extend the maximum option term under the Stock Option
Plan.

65
<PAGE>

EMPLOYEE STOCK PURCHASE PLAN

The 1998 Employee Stock Purchase Plan (the "ESPP") was adopted by the Board
of Directors on October 20, 1997, to be effective upon the closing of this
Offering. The ESPP provides employees of the Company with an opportunity to
purchase shares of Common Stock at a discount and pay for their purchases
through payroll deductions. All expenses incurred in connection with the
implementation and administration of the ESPP will be paid by the Company. A
pool of 300,000 shares of Common Stock has been reserved for issuance under
the ESPP (subject to anti-dilution provisions). In general, each regular,
full-time and part-time (non-seasonal) employee who has worked for at least
three months and works an average of over 20 hours per week will be eligible
to participate in the ESPP, provided the employee is employed as of the first
day of the purchase period.

Eligible employees may elect to contribute up to 15% of their cash
compensation to purchasing shares of Common Stock under the ESPP. At the end
of each six-month purchase period, the Company will apply the amount
contributed by the participant during that period to purchase shares of Common
Stock for the participant. The purchase price will be equal to 85% of the
lower of (a) the market price of Common Stock immediately before the beginning
of the applicable "offering period" or (b) the market price of Common Stock on
the last business day of the purchase period. The first offering period will
commence upon the closing of this Offering and will extend through December
31, 1999. The value of the Common Stock purchased each calendar year (measured
at the beginning of the offering period) may not exceed $25,000 per
participant. Participants may withdraw their contributions at any time before
the close of each purchase period.

66
<PAGE>

PRINCIPAL AND SELLING SHAREHOLDERS

BENEFICIAL OWNERSHIP OF COMMON STOCK BY LARGE AND SELLING SHAREHOLDERS

The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of September
30, 1997, and as adjusted to reflect the sale of Common Stock being offered
hereby, by (i) each of the Selling Shareholders, and (ii) each person known to
the Company to beneficially own more than five percent of the Company's Common
Stock. The table reflects a 14,000-for-1 stock split to be effected
immediately prior to the Offering.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
BEFORE OFFERING NUMBER OF AFTER OFFERING(1)
----------------------- SHARES -----------------------
NUMBER PERCENT BEING SOLD NUMBER PERCENT
------------ -------------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Paul Family Group
1100 Larkspur Landing Circle, Suite 101
Larkspur, California 94939
Peter T. Paul(2)(3)..................... 14,000,000 100.0% 3,500,000 10,500,000 56.8%
Jessica M. Paul(4)...................... 1,680,000 12.0% -- 1,680,000 9.1%
Daniel W. Paul(4)....................... 840,000 6.0% -- 840,000 4.5%
Gilbert J. MacQuarrie(4)................ 840,000 6.0% -- 840,000 4.5%
Paul Family Group (exclusive of the Vot-
ing Trust)............................. 8,400,000 60.0% -- 8,400,000 45.4%
Hart Family Group
100 Larkspur Landing Circle, Suite 110
Larkspur, California 94939
Dennis M. Hart(5)....................... 1,400,000 10.0% -- 1,400,000 7.6%
Kathryn E. Hart(5)...................... 1,400,000 10.0% 700,000 700,000 3.8%
D. Michael Hart, Jr.(6)................. 933,333 6.67% 933,333 -- --
Elizabeth A. Hart(6).................... 933,333 6.67% 933,333 -- --
Christopher K. Hart(6).................. 933,333 6.67% 933,333 -- --
Hart Family Group(7).................... 5,600,000 40.0% 3,500,000 2,100,000 11.4%
</TABLE>
- --------
(1) Assuming no exercise of the Underwriters' over-allotment option and no
purchases by listed shareholders in the Offering.
(2) Pursuant to a Voting Trust Agreement dated September 15, 1997, all of the
outstanding shares of Common Stock of the Company have been transferred to
Mr. Peter T. Paul, as Voting Trustee, 1100 Larkspur Landing Circle, Suite
101, Larkspur, California 94939, with certain voting and investment
powers, including the power to act on behalf of each of the shareholders
in connection with the Offering. The Voting Trust Agreement will terminate
on September 30, 2000.
(3) Peter T. Paul beneficially owns, through a living trust, 6,720,000 shares
of Common Stock of the Company.
(4) Jessica M. Paul, daughter of Peter T. Paul, beneficially owns 1,680,000
shares of Common Stock of the Company held in two trusts for her benefit.
Daniel W. Paul, her uncle, and Gilbert J. MacQuarrie, the Company's
Executive Vice President, Chief Financial Officer and Secretary, each
serve as a trustee for one of those trusts, with sole voting and
investment power with respect to the trust assets.
(5) Dennis M. Hart and his wife Kathryn E. Hart each beneficially own
1,400,000 shares of Common Stock of the Company. Mr. Hart served as a
director of the Company from April 1986 to September 1997.
(6) D. Michael Hart, Jr., Elizabeth A. Hart and Christopher K. Hart, the adult
children of Dennis M. and Kathryn E. Hart, each beneficially own 933,333
shares of Common Stock of the Company.
(7) The 2,100,000 shares to be beneficially owned by the Hart Family after the
closing of the Offering are pledged as collateral for certain bank loans
unrelated to the Company.

67
<PAGE>

BENEFICIAL OWNERSHIP OF COMMON STOCK BY DIRECTORS AND MANAGEMENT

The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of September
30, 1997, and as adjusted to reflect the sale of Common Stock offered hereby,
by (i) each director, (ii) the Company's executive officers, and (iii) all
directors and executive officers as a group. Unless otherwise indicated in the
footnotes to the table, the beneficial owners named have, to the knowledge of
the Company, sole voting and investment power with respect to the shares
beneficially owned, subject to community property laws where applicable.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
OF COMMON STOCK OF COMMON STOCK
BEFORE OFFERING AFTER OFFERING(1)
------------------------------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
------------------------ ------------- ----------------------- ----------
<S> <C> <C> <C> <C>
Peter T. Paul(2)........... 14,000,000 100% 10,500,000 56.8%
Becky Poisson.............. 0 -- 0 --
Gilbert J. MacQuarrie(3)... 840,000 6.0% 840,000 4.5%
Steve Abreu................ 0 -- 0 --
Directors and executive of-
ficers as a group (7 per-
sons)..................... 14,840,000 100% 9,940,000 53.7%
</TABLE>
- --------
(1) Assuming no exercise of Underwriters' overallotment option and no
purchases by any of the listed stockholders in the Offering.
(2) See footnotes (2), (3) and (4) to previous table.
(3) See footnote (4) to previous table.

68
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

HISTORY OF ARRANGEMENTS WITH FCMC

The Company was incorporated in California and commenced its mortgage
banking business in 1986. From inception of operations, the Company conducted
certain of its business through a contractual arrangement with First
California Mortgage Company ("FCMC"). This arrangement was embodied in an
Agency Agreement dated December 11, 1992 (the "Agency Agreement").

Pursuant to the Agency Agreement, the Company arranged mortgage loans
through its unaffiliated broker network that were funded by and in the name of
FCMC. After funding the mortgage loans, FCMC warehoused the mortgage loans
until the mortgage loans were sold (the "Warehouse Period"). The secondary
marketing function for all mortgage loans arranged by the Company was
performed by the Company. In performing the marketing function, the Company
entered into sales commitments in the name of FCMC. During the Warehouse
Period, the Company bore all marketing risks and rewards (resulting from
interest rate volatility) associated with the mortgage loans. FCMC retained
all cash received from the mortgage loans during the Warehouse Period. In
addition, FCMC received a "production fee" for each mortgage loan funded,
which was paid by the Company at the date of funding. Gains and losses
realized on sales of mortgage loans arranged by the Company were received by
or paid to the Company at the mortgage loan sale settlement date.

Generally, the Company packaged all of the mortgage loans it arranged and
sold them in the secondary market with servicing rights retained by the
Company. FCMC performed all servicing functions for mortgage loans previously
arranged by the Company. FCMC received certain servicing benefits and a
servicing fee for each mortgage loan serviced by FCMC on behalf of the
Company. The servicing income, net of the servicing fee charged by FCMC, was
paid to the Company in arrears on a monthly basis and accounted for as
mortgage loan administration income. The Company received all proceeds on the
sale of mortgage loan servicing rights for mortgage loans previously arranged
by the Company.

In 1993, the Company took steps to conduct all of its business activities
independently of FCMC through its own personnel and facilities in order to
facilitate the full implementation of its business strategy. In particular,
the Company wanted to establish and deal directly with its own sources of
mortgage loan financing to permit it to arrange funding for the planned
expansion of its origination activities and to realize net interest income on
its portfolio of mortgage loans held for sale. In addition, the Company wanted
to gain control over its servicing rights portfolio to permit it to arrange
for planned increases in such portfolio, to improve customer service and to
realize the resulting efficiencies in servicing costs and to be able to buy
and sell servicing rights directly when market and other considerations
warrant. Prior to June 30, 1993, the Company became an authorized
seller/servicer for both Fannie Mae and Freddie Mac. As of July 1, 1993, the
Company began originating mortgage loans in its own name and undertaking
servicing responsibilities as the servicer of record. Pursuant to a Mortgage
Loan Subservicing Agreement with FCMC dated July 1, 1993, FCMC agreed to act
as subservicer for the Company with respect to all newly originated mortgage
loans until such time as the Company elected to take over the servicing of
such mortgage loans at its own facility.

On October 25, 1993, the Company entered into the Warehouse Facility to
enable it to fund its own originations. On the same date, the Company also
entered into a Servicing Transfer Agreement (the "Servicing Transfer
Agreement") with FCMC, The First National Bank of Chicago ("FNBC"), as agent
under two FCMC credit facilities, and First Interstate Bank of California, as
agent under the Warehouse Facility. Under the Servicing Transfer Agreement,
FCMC confirmed (i) that the Company owned the servicing rights to mortgage
loans being subserviced under the Subservicing Agreement by FCMC and that the
Company had the right to terminate the Subservicing Agreement upon demand, and
(ii) that FCMC would transfer for consideration to the Company the servicing
rights to substantially all of the mortgage loans originated prior to July 1,
1993 in the name of FCMC upon demand by the Company. In addition, pursuant to
the Servicing Transfer Agreement, FNBC released its security interest in the
servicing rights described in the preceding sentence and FCMC and the Company
terminated the Agency Agreement as of October 25, 1993. The transfer of
servicing rights to the Company's Servicing Center was substantially completed
in 1994, and the Subservicing Agreement was terminated.

69
<PAGE>

SETTLEMENT AGREEMENTS

Following completion of the steps described above permitting the Company to
operate independently of FCMC, a number of disputes arose between the Company,
FCMC and its successor in interest, Mortgage Service America Co. ("MSA"). In
addition, at approximately the same time, litigation ensued between Peter T.
Paul ("PTP") and Dennis M. Hart ("DMH") and between the Company and DMH in
which the Company and PTP alleged that loans previously made to DMH by the
Company and PTP (which loans were evidenced by the "Note to Headlands" and
"Note to PTP" referenced below) were due and owing. The proceeds of such loans
to DMH were to be used primarily for payment of personal income taxes and for
investment in FCMC required by its lenders in connection with the separation
of the Company's operations from FCMC. In the litigation, DMH questioned
various actions by PTP as an officer and director of the Company in connection
with PTP's ownership of Headlands Insurance Agency, Inc. ("HIA") and Marin
Conveyancing Corporation ("MCC") and transactions between the Company and HIA
and MCC. These disputes and the litigation were resolved pursuant to two
settlement agreements (the "Settlement Agreements") which were finalized in
July 1996 as described below. At the time of settlement, PTP and DMH were
directors of the Company and PTP, DMH and the members of their respective
families referred to below each beneficially owned, individually, in excess of
5% of the Company's outstanding Common Stock. Accordingly, the various
payments and assignments effected pursuant to the Settlement Agreements
constitute related transactions required to be described herein.

FCMC and Headlands Settlement and Mutual Release Agreement. This agreement
(the "FCMC-Headlands Agreement") was entered into on April 11, 1996 by the
Company, FCMC (through MSA), PTP and DMH and his wife, Katherine E. Hart
("KEH"). In order to resolve a dispute between the Company and FCMC over the
amounts and rights related to certain inter-company receivables and payables
relating to services between the parties, as well as a dispute between the
Company and certain of its shareholders, the FCMC-Headlands Agreement provided
for the following:

(1) Assignment of Inter-company Receivables and Payables. The Company
agreed to assign to DMH and KEH the disputed receivables due to the Company
from FCMC and the disputed payables due to FCMC from the Company, the net
amount of which receivables and payables was agreed by the parties to equal
$1.6 million due the Company from FCMC; and

(2) Mutual Release. The parties to the FCMC-Headlands Agreement agreed to
release each other (and certain related parties) from claims arising from
the disputed matters.

Headlands Shareholders Settlement and Mutual Release Agreement. This
agreement (the "Headlands Shareholders Agreement") was entered into on April
11, 1996 by the Company, DMH, KEH, D. Michael Hart, Jr. ("DMH Jr."), Elizabeth
A. Hart ("EAH"), Christopher K. Hart ("CKH") (DMH Jr., EAH and CKH being
referred to collectively as the "Hart Children" and, together with DMH and
KEH, the "Hart Family"), PTP and his daughter, Jessica M. Paul ("JMP"), HIA
and MCC. The Company's common stock was at the time wholly owned by PTP, JMP
and the Hart Family (collectively, the "Headlands Shareholders"). The
Headlands Shareholders Agreement was entered into to resolve disputes arising
out of (i) a promissory note of DMH to the Company evidencing indebtedness
under an open line of credit in the face amount of $6.5 million (the "Note to
Headlands"); (ii) a promissory note of DMH to PTP in face amount of $2,270,719
(the "Note to PTP"); (iii) actions by PTP in connection with his ownership of
HIA and MCC and transactions between the Company and HIA and MCC; (iv) demand
for payment of dividends from the Headlands Shareholders and for payment of
his 1994 bonus from PTP; and (v) the need to approve an amended warehouse line
of credit. To resolve these disputed matters, the Headlands Shareholders
Agreement provided for the following:

(1) Consent to Assignment of Inter-company Receivables and Payables. The
Headlands Shareholders consented to the distribution upon the closing of
the settlement transactions (the "closing") of the Company's receivables
and payables relating to FCMC as a dividend pursuant to the FCMC-Headlands
Agreement (see chart below illustrating such distribution).

(2) Note to Headlands. The Headlands Shareholders agreed that the value
to the Company of the Note to Headlands was $1,396,021, as of March 31,
1996 and approved of the distribution of the Note, plus accrued interest
and related claims, to the Hart Children as a dividend upon the closing.

70
<PAGE>

(3) Agreement on Share Ownership. The Headlands Shareholders confirmed
the number of outstanding shares then held by each of them and agreed that
throughout the period they held shares they received the proper amount of
dividends and distributions to which they were entitled.

(4) Cash Distributions. Dividends to the Headlands Shareholders were
approved for distribution upon the closing in the following amounts:
$638,948 each to DMH and KEH; $973,608 to each of the Hart Children;
$719,474 to JMP; and $6,475,266 to PTP.

(5) Compensation to PTP and Bank Lines of Credit. The following
compensation was approved for payment to PTP: 1994 bonus, $500,000; 1995
salary, $90,000; 1995 bonus, $9,240; 1996 salary, $90,000; and 1996 bonus,
$500,000. In addition, PTP was authorized to negotiate a renewal or
amendment to the Company's warehouse lines of credit.

(6) HIA and MCC Shares. PTP agreed to assign shares of HIA and MCC to the
Headlands Shareholders such that the share ownership of HIA and MCC was the
same as for the Company.

(7) Note to PTP. The Hart Children agreed that the value of the Note to
PTP as of March 31, 1996 was $2,479,735 and agreed to purchase the Note
from PTP for that amount plus accrued interest and related claims.

(8) PTP and JMP Loan to the Company. PTP agreed to make a loan to the
Company, the repayment of which would be subordinated to the lenders under
the warehouse lines of credit as required by such lenders. At the closing,
PTP and JMP made loans to the Company pursuant to unsecured promissory
notes. At September 30, 1997, the principal amount of the notes totaled
$9,670,000 ($7,736,000 held by PTP and $1,934,000 held by JMP). The notes
bear interest at a variable rate equal to LIBOR for one-year deposits, plus
5.0%. The notes mature on June 29, 2000, but will be repaid in full from
proceeds of the Offering.

(9) Company Distribution Policy. The Company agreed to distribute to PTP
and JMP as the holders of the unsecured promissory notes, so long as the
Company continues to be an S corporation and no default would result under
the warehouse line of credit, an amount equal to 60% of the Company's
federal taxable income (less net gain under Section 1231 of the Code) and
40% of any net gain under Section 1231 of the Code until the notes have
been repaid.

(10) Mutual Release. The parties to the Headlands Shareholders Agreement
agreed to release each other (and certain related parties) from claims
arising from the disputed matters. In July 1996, the closing occurred and
the various assignments and distributions under the Settlement Agreements
were effected.

The following chart illustrates the various cash and other distributions
made by the Company according to the Settlement Agreements:

<TABLE>
<CAPTION>
TYPE OF PURCHASE
PROPERTY AMOUNT OF OF NOTE TO DISTRIBUTIONS
NAME DISTRIBUTED DISTRIBUTION PTP FROM CLOSING
---- ------------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
PTP.................. Cash $ 6,475,266 $2,479,735 $8,955,001*
JMP.................. Cash 719,474 719,474*
DMH.................. Inter-company
Receivables 800,000 800,000
Cash 638,948 638,948
KEH.................. Inter-company
Receivables 800,000 800,000
Cash 638,948 638,948
DMH Jr............... Note to
Headlands 465,340 465,340
Cash 973,608 (826,578) 147,029
EAH.................. Note to
Headlands 465,340 465,340
Cash 973,608 (826,578) 147,029
CKH.................. Note to
Headlands 465,340 465,340
Cash 973,608 (826,578) 147,029
TOTAL $14,389,480
</TABLE>
- --------
* Before deducting the amount of $9,670,000 loaned back to the Company at
closing pursuant to the subordinated, unsecured promissory notes referred to
in (8) above.

71
<PAGE>

TAX INDEMNIFICATION AGREEMENT

See "Termination of S Corporation Status."

OTHER BUSINESS TRANSACTIONS WITH MANAGEMENT

At December 31, 1995, the amount of the Note to Headlands referred to above
was $1,365,389. This note was deemed repaid in full in 1996 pursuant to the
Settlement Agreements.

Also during 1996, the Company issued the note payable to stockholders
evidencing the subordinated loan described above made to PTP and JMP. The
initial principal amount of the note was $9,670,000 and the amount of interest
accrued thereon during 1996 was $341,774. As of September 30, 1997, this note
had been divided into two notes with principal balances of $8,901,000 and
$769,000. These notes will be paid in full from proceeds of the Offering.

At December 31, 1995, the gross amount of the receivables due from FCMC was
$3.4 million. These receivables were assigned in 1996 pursuant to the
Settlement Agreements.

The Company had accounts receivable from HIA of $105,000, $56,000 and
$45,000 at September 30, 1997 and December 31, 1996 and 1995, respectively.
The Company had accounts payable due to MCC of $39,000 at September 30, 1997
and accounts receivable of $58,000 and $69,000 at December 31, 1996 and 1995,
respectively. The Company provided administrative services to these related
parties, and received fees (included in production income) of $195,000,
$240,000 and $180,000 during the nine months ended September 30, 1997 and the
years ended December 31, 1996 and 1995, respectively.

72
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock. At September 30, 1997,
there were 14,000,000 shares of Common Stock outstanding (after giving effect
to a 14,000-for-1 stock split to be effected immediately prior to the
Offering) and no shares of Preferred Stock outstanding. Prior to this
Offering, there has been no established trading market for the Company's
Common Stock. No assurance can be made that an active public trading market
for the Common Stock will develop after the Closing, or if developed, that it
will be sustained.

COMMON STOCK

Each holder of Common Stock is entitled to one vote for each share held.
California law generally permits holders of Common Stock to cumulate votes for
the election of directors; however, the Company's Bylaws contain a prohibition
on cumulative voting which prohibition will take effect, pursuant to
California law, once the Common Stock is quoted on the Nasdaq National Market
and is held by at least 800 holders of record on the record date for the
Company's most recent annual meeting. The Common Stock is not convertible into
any other security.

Holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock would be entitled to share
in the Company's assets remaining after the payment of liabilities and the
satisfaction of any liquidation preference granted the holders of any
outstanding shares of Preferred Stock. The Common Stock has no preemptive or
other subscription rights. The outstanding shares of Common Stock are, and the
Common Stock offered hereby will be when issued, fully paid and nonassessable.

PREFERRED STOCK

The Board of Directors has the authority, without further action by the
shareholders of the Company, to issue up to 5,000,000 shares of Preferred
Stock in one or more series, and to fix the designations, rights, preferences,
privileges, qualifications and restrictions thereof including dividend rights,
conversion rights, voting rights, rights and terms of redemption, liquidation
preferences and sinking fund terms, any or all of which may be greater than
the rights of the Common Stock. The Board of Directors, without shareholder
approval, can issue Preferred Stock with voting, conversion and other rights
which could adversely affect the voting power and other rights of the holders
of Common Stock. Preferred Stock could thus be issued quickly with terms
calculated to delay or prevent a change in control of the Company or to make
removal of management more difficult. In certain circumstances, such issuance
could have the effect of decreasing the market price of the Common Stock. The
issuance of Preferred Stock may have the effect of delaying, deterring or
preventing a change in control of the Company without any further action by
the shareholders including, but not limited to, a tender offer to purchase
Common Stock at a premium over then current market prices. The Company has no
present plan to issue any shares of Preferred Stock.

REGISTRATION RIGHTS

Members of the Paul Family Group and the Hart Family Group, as holders of
currently outstanding Common Stock (10,500,000 shares after the closing of the
Offering), are entitled to certain rights with respect to registration under
the Securities Act of such Common Stock. Under the terms of a Founders
Registration Rights Agreement, such holders are entitled to include within any
registration statement under the Securities Act proposed by the Company with
respect to a firm commitment underwritten public offering of Common Stock
(either for its own account or for the account of other security holders)
shares of Common Stock held by such holders, subject to certain conditions and
limitations, including the right of the underwriters to limit the number of
shares included in the registration.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is The Bank of New
York.

73
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon the closing of the Offering, the Company will have outstanding
18,500,000 shares of Common Stock (19,700,000 shares of Common Stock if the
Underwriters' over-allotment option is executed in full). The 8,000,000 shares
of Common Stock to be sold in the Offering, and any of the 1,200,000 shares
that may be sold upon exercise of the Underwriters' over-allotment option,
will be freely tradable by persons other than "affiliates" of the Company, as
that term is defined in Rule 144, without restriction or registration or
registration under the Securities Act. The remaining 10,500,000 shares (such
shares being referred to herein as the "Restricted Shares") will be held by
the Company's current shareholders. The Restricted Shares may not be sold
unless they are registered under the Securities Act or sold pursuant to an
applicable exemption from registration, including an exemption pursuant to
Rule 144.

As currently in effect, Rule 144 generally permits the public sale in
ordinary trading transactions of "restricted securities" and of securities
owned by "affiliates" beginning 90 days after the date of this Prospectus if
the other restrictions enumerated in Rule 144 are met. Restricted securities
are securities acquired directly or indirectly from an issuer or an affiliate
of the issuer in an action not involving a public offering. In general, under
Rule 144, if a period of at least one year has elapsed since the later of the
date the restricted securities were acquired from the Company or an affiliate,
as applicable, then the holder of such restricted securities (including an
affiliate) is entitled, subject to certain conditions, to sell within any
three-month period a number of shares which does not exceed the greater of:
(i) 1% of the Company's then outstanding shares of Common Stock; or (ii) the
share's average weekly trading volume during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain manner-of-sale
provisions and requirements as to notice and the availability of current
public information about the Company. Affiliates may sell shares not
constituting restricted securities in accordance with the foregoing
limitations and requirements but without regard to the one-year period.
However, a person who is not and has not been an affiliate of the Company at
any time during the 90 days preceding the sale of the shares, and who has
beneficially owned restricted securities for at least two years, is entitled
to sell such shares under Rule 144 with regard to the volume limitations,
manner-of-sale provisions and notice and public information requirements of
Rule 144. All of the Restricted Shares will become eligible for sale pursuant
to Rule 144 beginning on the 90th day following the date of this Prospectus.
Notwithstanding, the Company and each of its directors, executive officers and
shareholders have agreed during the 180-day period immediately following the
date of this Prospectus not to sell or otherwise dispose of any securities of
the Company without the consent of the Representatives, subject to specific
exceptions.

The Company has reserved 700,000 shares of its Common Stock for issuance
under the Stock Option Plan (subject to increase to 10% of the Company's total
outstanding shares at any time) and 300,000 shares of its Common Stock for
issuance under the Employee Stock Purchase Plan. All of the shares of Common
Stock issued under the foregoing plans will also be restricted securities
unless the Company files a registration statement under the Securities Act
relating to the issuance of the shares. The Company currently intends to
register the shares of Common Stock reserved under each of these employee
benefit plans. Subject to compliance with Rule 144 by affiliates of the
Company, any shares issued under such employee benefit plans will become
freely tradable at the effective date of the registration statement for the
shares reserved under such plan.

Prior to the Offering, there has been no public market for the Common Stock,
and no prediction can be made as to the effect, if any, that sales of shares
or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market could adversely affect prevailing market
prices.

74
<PAGE>

UNDERWRITING

The Underwriters named below represented by NationsBanc Montgomery
Securities LLC, BT Alex. Brown Incorporated and UBS Securities LLC (the
"Representatives"), have severally agreed, subject to the terms and conditions
set forth in the Underwriting Agreement, to purchase from the Company and the
Selling Shareholders, the number of shares of Common Stock indicated below
opposite their respective names at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are
committed to purchase all of such shares if any are purchased.

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
NationsBanc Montgomery Securities LLC ......................
BT Alex. Brown Incorporated.................................
UBS Securities LLC..........................................
---------
Total..................................................... 8,000,000
=========
</TABLE>

The Representatives have advised the Company and the Selling Shareholders
that the Underwriters propose initially to offer the Common Stock to the
public on the terms set forth on the cover page of this Prospectus. The
Underwriters may allow to selected dealers a concession of not more than $
per share, and the Underwriters may allow, and such dealers may reallow, a
concession of not more than $ per share to certain other dealers. After
this Offering, the offering price and other selling terms may be changed by
the Representatives. The shares of Common Stock are offered subject to receipt
and acceptance by the Underwriters, and to certain other conditions, including
the right to reject orders in whole or in part.

The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 1,200,000 additional shares of Common Stock to cover over-
allotments, if any, at the offering price less the Underwriting Discount set
forth on the cover page of this Prospectus. To the extent the Underwriters
exercise this option, each of the Underwriters will be committed, subject to
certain conditions, to purchase such additional shares in approximately the
same proportion as set forth in the above table. The Underwriters may purchase
such shares only to cover over-allotments made in connection with the
Offering.

The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act, or will contribute to payments
the Underwriters may be required to make in respect thereof. The Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.

All of the Company's officers and directors and certain of the Company's
shareholders have agreed that they will not, without the prior written consent
of NationsBanc Montgomery Securities LLC (which consent may be withheld in its
sole discretion) and subject to certain limited exceptions, directly or
indirectly, sell, offer, contract or grant any option to sell, make any short
sale, pledge, transfer, establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any
shares of Common Stock, options or warrants to acquire Common Stock, or
securities exchangeable or exercisable for or convertible into Common Stock
currently owned either of record or beneficially by them or announce the
intention to do any of the foregoing, for a period commencing on the date of
this Prospectus and continuing to a date 180 days after such date. NationsBanc
Montgomery Securities LLC may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to these lock-up
agreements. In addition, the Company has agreed that, for a period of 180 days
after the date of this Prospectus, it will not, without the consent of
NationsBanc Montgomery Securities LLC, issue, offer, sell or grant options to
purchase or otherwise dispose of any equity securities or securities
convertible into or exchangeable for equity securities except for (i) the
issuance of shares of Common Stock offered hereby, (ii) the issuance of shares
of Common Stock pursuant to the exercise of outstanding options, and (iii) the
grant of options to purchase shares of Common Stock pursuant to the Stock
Option Plan.

75
<PAGE>

Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price will be determined by
negotiations among the Company, the Selling Shareholders and the
Representatives. Among the factors to be considered in such negotiations are
the history of, and prospects for, the Company and the industry in which it
competes, an assessment of the Company management, its past and present
operations and financial performance, the prospects for future earnings of the
Company, the present state of the Company's development, the general condition
of the securities markets at the time of the Offering, the market prices of
and demand for publicly traded common stocks of comparable companies in recent
periods and other factors deemed relevant.

The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at the level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid for or the purchase of
the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with the Offering. A "penalty bid"
is an arrangement permitting the Representatives to reclaim the selling
concession otherwise accruing to an Underwriter or syndicate member in
connection with the Offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed
by such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.

The Representatives have informed the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.

LEGAL MATTERS

The validity of the Common Stock to be offered hereby will be passed upon
for the Company by Tobin & Tobin, a professional corporation, San Francisco,
California. Certain legal matters in connection with the Offering will be
passed upon for the Underwriters by O'Melveny & Myers LLP, San Francisco,
California.

EXPERTS

The consolidated financial statements of Headlands Mortgage Company as of
September 30, 1997 and December 31, 1996 and 1995, and for the nine-month
period ended September 30, 1997 and each of the years in the three-year period
ended December 31, 1996, have been included herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP refers to a change in the Company's method of accounting
for originated mortgage servicing rights in 1995 and its method of accounting
for transfers and servicing of financial assets in 1997.

76
<PAGE>

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, of which this Prospectus is a part, with respect
to the Common Stock offered hereby. This Prospectus omits certain information
contained in the Registration Statement, including exhibits thereto, and
reference is made to the Registration Statement for further information with
respect to the Company and the Common Stock offered hereby. Statements
contained herein concerning the provisions of documents are necessarily
summaries of such documents and when any such document is an exhibit to the
Registration Statement, each such statement is qualified in its entirety by
reference to the copy of such documents filed with the Commission. Copies of
the Registration Statement, and exhibits thereto, may be acquired upon payment
of the prescribed fees or examined without charge at the public reference
facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and may be accessed on the Commission's World Wide Web Site referred to below.

Upon the closing of the Offering, the Company will be subject to the
informational requirements of the Exchange Act and in accordance therewith
will file reports and other information with the Commission. Reports and other
information filed by the Company with the Commission pursuant to the
information requirements of the Exchange Act may be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
following Regional Offices of the Commission: Seven World Trade Center, 13th
Floor, New York, New York 10048 and Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies can be obtained at
prescribed rates from the public reference facilities of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission also maintains a World Wide Web Site that contains reports, proxy
statements and other information regarding registrants, such as the Company,
that file electronically with the Commission. The address of the site is
http://www.sec.gov.

77
<PAGE>

INDEX OF DEFINED TERMS

<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Agencies................................................................. 4
Awards................................................................... 64
Change of Control........................................................ 64
CKH...................................................................... 70
Code..................................................................... 8
Common Stock............................................................. 1
Company.................................................................. 3, F-7
DERs..................................................................... 64
DMH...................................................................... 70
DMH Jr................................................................... 70
EAH...................................................................... 70
ECOA..................................................................... 19
ESPP..................................................................... 66
Existing Shareholders.................................................... 8
FASB..................................................................... 38
FCMC..................................................................... 28, 69
FCMC-Headlands Agreement................................................. 70
FNBC..................................................................... 69
Hart Family Group........................................................ 67
Headlands................................................................ 3
HELOC.................................................................... 4
HIA...................................................................... 70
HMDA..................................................................... 19
HMSI..................................................................... 51
HUD...................................................................... 19
Interest-only Residual................................................... 7, 51
ISO...................................................................... 64
JMP...................................................................... 70
Jumbos................................................................... 4
KEH...................................................................... 70
locked pipeline loan..................................................... 13
MBA...................................................................... 8
MCC...................................................................... 70
Mortgage Sources......................................................... 4, 42
MSA...................................................................... 70
non-agency mortgage loans................................................ 13
NQSO..................................................................... 64
Offering................................................................. 1
Paul Family Group........................................................ 67
Principal Amount......................................................... 7, 51
PTP...................................................................... 70
QAD...................................................................... 50
Representatives.......................................................... 75
RESPA.................................................................... 19
Selling Shareholders..................................................... 1
Servicing Transfer Agreement............................................. 69
Settlement Agreement..................................................... 31
Settlement Agreements.................................................... 70
</TABLE>

78
<PAGE>

<TABLE>
<CAPTION>
PAGE
------
<S> <C>
SFAS..................................................................... 38
Shareholders Distribution Amount......................................... 8, 22
Stock Option Plan........................................................ 64
Tax Agreement............................................................ 20, 22
TILA..................................................................... 19
Warehouse Facility....................................................... 36, 57
Warehouse Period......................................................... 69
</TABLE>

79
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HEADLANDS MORTGAGE COMPANY
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets as of September 30, 1997 and December 31,
1996 and 1995 ......................................................... F-3
Consolidated Statements of Operations for the nine months ended Septem-
ber 30, 1997 and 1996 and for the Years Ended December 31, 1996, 1995
and 1994 .............................................................. F-4
Consolidated Statements of Stockholders' Equity for the nine months
ended September 30, 1997 and for the Years Ended December 31, 1996,
1995 and 1994 ......................................................... F-5
Consolidated Statements of Cash Flows for the nine months ended Septem-
ber 30, 1997 and 1996 and for the Years Ended December 31, 1996, 1995
and 1994 .............................................................. F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Headlands Mortgage Company:

We have audited the accompanying consolidated balance sheets of Headlands
Mortgage Company and subsidiary (the Company) as of September 30, 1997 and
December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the nine-month period
ended September 30, 1997 and each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statements 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 financial position of Headlands
Mortgage Company and subsidiary as of September 30, 1997 and December 31, 1996
and 1995, and the results of their operations and their cash flows for the
nine-month period ended September 30, 1997 and each of the years in the three-
year period ended December 31, 1996 in conformity with generally accepted
accounting principles.

As discussed in Note 2 to the consolidated financial statements, effective
January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 122, "Accounting For Mortgage Servicing Rights" and effective
January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 125, "Accounting For Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities."

KPMG Peat Marwick LLP

San Francisco, California

December 19, 1997

F-2
<PAGE>

HEADLANDS MORTGAGE COMPANY

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31,
------------------------- -------------------------
PRO FORMA ACTUAL 1996 1995
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.. $ 3,137,927 $ 3,137,927 $ 2,701,332 $ 28,882,313
Retained interests in
securitizations........... 32,670,313 32,670,313 15,128,487 585,157
Accounts receivable........ 16,611,340 16,611,340 7,558,494 1,882,859
Accounts receivable from
related parties........... 65,246 65,246 119,513 3,541,273
Note receivable from re-
lated parties............. -- -- -- 1,365,389
Mortgage loans held for
sale, pledged............. 262,295,839 262,295,839 238,171,841 97,088,392
Originated mortgage servic-
ing rights, net........... 25,208,735 25,208,735 20,275,593 7,083,271
Property, equipment and
leasehold improvements,
net....................... 7,048,332 7,048,332 3,016,423 3,827,854
Mortgage loans held for in-
vestment, net............. 826,607 826,607 692,816 1,075,278
Real estate owned, net..... 462,330 462,330 880,462 1,705,449
Other assets............... 1,671,660 1,671,660 445,510 394,953
------------ ------------ ------------ ------------
TOTAL ASSETS........... $349,998,329 $349,998,329 $288,990,471 $147,432,188
============ ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Notes payable.............. $254,711,846 $254,711,846 $241,343,055 $ 91,233,524
Bank line of credit ....... -- -- -- 25,000,000
Notes payable to stockhold-
ers....................... 9,670,000 9,670,000 9,670,000 --
Accounts payable........... 11,655,126 11,655,126 4,390,082 2,150,048
Accrued liabilities........ 7,880,786 7,880,786 4,443,093 3,174,495
Distributions Payable...... 18,786,965 -- -- --
Deferred tax liability..... 18,744,571 -- -- --
------------ ------------ ------------ ------------
Total liabilities...... 321,449,294 283,917,758 259,846,230 121,558,067
------------ ------------ ------------ ------------
Commitments and contingen-
cies
Stockholders' equity:
Common Stock (no par
value; 14,700,000 shares
authorized, 14,000,000
shares issued and
outstanding)............ 28,549,035 1,000 1,000 1,000
Retained earnings........ -- 66,079,571 29,143,241 25,873,121
------------ ------------ ------------ ------------
Total stockholders' eq-
uity.................. 28,549,035 66,080,571 29,144,241 25,874,121
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.. $349,998,329 $349,998,329 $288,990,471 $147,432,188
============ ============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

HEADLANDS MORTGAGE COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- -----------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME:
Net gain from sales of
mortgage loans....... $45,009,683 $10,816,018 $25,598,792 $12,307,023 $ 6,130,900
Loan administration
income............... 7,195,976 8,280,570 11,119,880 13,426,817 14,736,528
Gain from sale of
mortgage servicing
rights............... 9,374,526 11,040,823 11,083,549 8,836,293 7,449,425
Production income..... 6,223,237 4,442,060 5,830,170 3,831,938 6,043,680
Interest income, net
of interest expense.. 8,826,202 3,496,519 5,624,446 1,813,858 2,709,314
Net unrealized gain in
valuation of retained
interests in
securitizations...... 667,979 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total income ....... 77,297,603 38,075,990 59,256,837 40,215,929 37,069,847
EXPENSES:
Personnel............. 20,799,293 14,669,504 20,545,181 15,514,731 19,609,940
General and adminis-
trative.............. 10,978,295 8,659,357 13,458,281 10,899,708 10,584,162
Occupancy and rents... 1,658,899 1,435,839 1,940,920 2,136,050 2,591,042
Depreciation and
amortization of
property, equipment
and leasehold
improvements......... 1,983,178 2,245,399 2,919,314 3,483,647 2,964,493
Amortization and im-
pairment of origi-
nated mortgage ser-
vicing rights........ 3,599,393 634,973 2,093,037 958,372 --
----------- ----------- ----------- ----------- -----------
Total expenses...... 39,019,058 27,645,072 40,956,733 32,992,508 35,749,637
----------- ----------- ----------- ----------- -----------
Income before income
taxes.............. 38,278,545 10,430,918 18,300,104 7,223,421 1,320,210
Income taxes........ 1,342,215 414,539 640,504 252,820 50,215
----------- ----------- ----------- ----------- -----------
Net Income.......... $36,936,330 $10,016,379 $17,659,600 $ 6,970,601 $ 1,269,995
=========== =========== =========== =========== ===========
PRO FORMA INFORMATION
(UNAUDITED):
Income before income
taxes and pro forma
data................. $38,278,545 $10,430,918 $18,300,104 $ 7,223,421 $ 1,320,210
Provision for
pro forma
income taxes (unau-
dited)............... 16,076,989 4,380,986 7,686,044 3,033,837 541,286
----------- ----------- ----------- ----------- -----------
Pro forma net income
(unaudited)........ $22,201,556 $ 6,049,932 $10,614,060 $ 4,189,584 $ 778,924
=========== =========== =========== =========== ===========
Pro forma earnings
per share of common
stock (unaudited).. $ 1.42 $ 0.68
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

HEADLANDS MORTGAGE COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON RETAINED STOCKHOLDERS'
STOCK EARNINGS EQUITY
------- ------------- -------------
<S> <C> <C> <C>
Balances at December 31, 1993.......... $1,000 $ 26,900,485 $ 26,901,485
Net income............................. -- 1,269,995 1,269,995
Distribution to stockholders........... -- (9,267,960) (9,267,960)
------- ------------- -------------
Balances at December 31, 1994.......... 1,000 18,902,520 18,903,520
Net income............................. -- 6,970,601 6,970,601
------- ------------- -------------
Balances at December 31, 1995.......... 1,000 25,873,121 25,874,121
Net income............................. -- 17,659,600 17,659,600
Distribution to stockholders........... -- (14,389,480) (14,389,480)
------- ------------- -------------
Balances at December 31, 1996.......... 1,000 29,143,241 29,144,241
Net income............................. -- 36,936,330 36,936,330
------- ------------- -------------
BALANCES AT SEPTEMBER 30, 1997......... $1,000 $ 66,079,571 $ 66,080,571
======= ============= =============
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

HEADLANDS MORTGAGE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------------- -------------------------------------------------
1997 1996 1996 1995 1994
--------------- --------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net income............. $ 36,936,330 $ 10,016,379 $ 17,659,600 $ 6,970,601 $ 1,269,995
Adjustments to
reconcile net income
to net cash used in
operating activities:
Depreciation and
amortization of
property, equipment
and leasehold
improvements......... 1,983,178 2,245,399 2,919,314 3,483,647 2,964,493
Amortization and
impairment of
originated mortgage
servicing rights..... 3,599,393 634,973 2,093,037 958,372 --
Gain from sale of
mortgage servicing
rights............... (9,374,526) (11,040,823) (11,083,549) (8,836,293) --
Net gain from sales
of mortgage loans.... (45,009,683) (10,816,018) (24,550,108) (12,307,023) (6,130,900)
Net (purchase of)
proceeds from
retained interests
in securitizations... (17,541,826) (4,677,434) (14,543,330) 183,181 (768,338)
(Increase) decrease
in accounts receiv-
able................. (9,052,846) (1,795,929) (5,675,635) 5,406,134 3,253,642
Decrease (increase)
in accounts receiv-
able from related
parties.............. 54,267 3,333,722 3,421,760 (768,143) (2,773,130)
Mortgage loans origi-
nated................ (2,527,159,851) (1,643,848,993) (2,283,839,831) (1,355,603,902) (2,410,399,875)
Proceeds from sale of
mortgage loans....... 2,378,526,392 1,510,862,432 2,146,944,916 1,342,791,085 2,659,127,895
Principal payments
received on mortgage
loans held for
sale................. 170,154,019 23,256,408 21,595,009 3,362,146 517,374
Decrease (increase)
in deferred costs,
net of fees.......... (634,875) (924,324) (1,233,435) (707,571) 3,798,822
Origination of
mortgage servicing
rights retained...... (18,372,237) (10,971,020) (16,251,858) (8,041,643) --
Proceeds from sale of
mortgage servicing
rights............... 19,214,228 12,007,323 12,050,048 8,836,293 --
(Increase) decrease
in other assets...... (1,226,150) (416,506) (50,557) 539,825 (530,015)
Increase (decrease)
in accounts pay-
able................. 7,265,044 966,687 2,240,034 728,685 (18,104)
Decrease in accounts
payable to related
parties.............. -- -- -- -- (7,220,187)
Increase (decrease)
in accrued liabili-
ties................. 3,437,693 (823,183) 1,268,598 1,047,544 (3,237,888)
--------------- --------------- --------------- --------------- ---------------
Net cash (used in)
provided by
operating
activities......... (7,201,450) (121,990,907) (147,035,987) (11,957,062) 239,853,784
Net cash provided by
(used in) investing ac-
tivities:
Decrease (increase) in
note receivable from
stockholder........... -- 1,365,389 1,365,389 (68,482) (837,751)
Purchase of property,
equipment and
leasehold
improvements.......... (6,015,087) (1,733,255) (2,107,883) (899,306) (5,137,542)
Net proceeds from sale
of mortgage loans
held for investment... (133,791) 329,091 382,462 710,294 (782,195)
Net proceeds from real
estate investment..... -- -- -- -- 538,564
Net proceeds from sale
(purchase of) real
estate owned.......... 418,132 404,207 824,987 (794,560) (879,934)
--------------- --------------- --------------- --------------- ---------------
Net cash provided by
(used in) investing
activities......... (5,730,746) 365,432 464,955 (1,052,054) (7,098,858)
Net cash provided by fi-
nancing activities:
Borrowing on the ware-
house line............ 3,211,114,962 1,618,479,095 2,350,158,333 1,328,821,487 3,417,854,983
Payments on the ware-
house line............ (3,198,848,503) (1,495,297,625) (2,202,308,567) (1,313,866,251) (3,649,142,795)
Net proceeds from
notes payable......... 1,102,332 -- 2,259,765 -- --
(Repayment of) pro-
ceeds from line of
credit with bank...... -- (19,400,000) (25,000,000) 25,000,000 --
Repayment of proceeds
from note payable to
stockholders.......... -- 9,670,000 9,670,000 -- (706,340)
Distributions to
stockholders.......... -- (14,389,480) (14,389,480) -- (9,267,960)
--------------- --------------- --------------- --------------- ---------------
Net cash provided by
(used in) financing
activities......... 13,368,791 99,061,990 120,390,051 39,955,236 (241,262,112)
--------------- --------------- --------------- --------------- ---------------
Net (decrease) increase
in cash................ 436,595 (22,563,485) (26,180,981) 26,946,120 (8,507,186)
Cash and cash equiva-
lents beginning of
year................... 2,701,332 28,882,313 28,882,313 1,936,193 10,443,379
--------------- --------------- --------------- --------------- ---------------
Cash and cash equiva-
lents end of year...... $ 3,137,927 $ 6,318,828 $ 2,701,332 $ 28,882,313 $ 1,936,193
=============== =============== =============== =============== ===============
Supplemental disclosures
of cash flow
information:
Cash paid for inter-
est................... $ 21,754,430 $ 6,903,921 $ 11,946,721 $ 4,513,602 $ 9,400,000
Cash paid for income
taxes................. 576,135 26,125 54,552 800 402,344
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

HEADLANDS MORTGAGE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)

1. ORGANIZATION

Headlands Mortgage Company (the "Company") is a closely-held S-corporation
which was organized in 1981. The Company is a full service mortgage banking
business, which consists of the origination, acquisition, sale and servicing
of residential mortgage loans secured by one-to-four unit family residences,
and the purchase and sale of mortgage servicing rights.

The Company is headquartered in Northern California, and has production
branches in California, Washington, Oregon, Nevada, Florida, New Jersey,
Idaho, and Arizona. Loans are originated primarily on a wholesale basis,
through a network of independent mortgage loan brokers approved by the
Company. Other loan origination sources include correspondent and retail
lending. The market for the Company's mortgage banking operations is
predominantly California and the western United States.

The consolidated financial statements include Headlands Mortgage Company
("HMC"), and its subsidiary Headlands Mortgage L.L.C. ("HMLLC") for the year
ended December 31, 1996, and additionally HMLLC's successor Headlands Mortgage
Securities Inc. ("HMSI") for the nine months ended September 30, 1997. The
activity of the subsidiaries is related to the Company's securitizations. All
material intercompany balances and transactions have been eliminated.

In 1996, the Company diversified its residential mortgage loan sales
activities to include the securitization of such loans into Real Estate
Mortgage Investment Conduits ("REMICs") and Asset-Backed Securities ("ABS").
The REMICs, which consist of pooled fixed-rate first-lien mortgages, were
issued by the Company to the public through the registration statement of the
related underwriter during 1996, and through the registration statement of
HMSI during the nine months ended September 30, 1997. The ABS, which consist
of revolving home equity loans and closed-end second mortgages, were issued by
the Company through HMLLC and the registration statement of the related
underwriter in 1996, and through the registration statement of HMSI during the
nine months ended September 30, 1997.

The Company operates a loan servicing center which it opened in January
1994. The Company's source of servicing is from mortgage loans it has
originated and sold.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents, including restricted cash
and cash equivalents in the amount of $2,104,450 at September 30, 1997 and
$1,621,985 at December 31, 1996.

(b) Mortgage Loans Held for Sale

Mortgage loans held for sale consist of residential mortgage loans and home
equity lines of credit. Residential mortgage loans have contractual maturities
of up to 30 years, and home equity lines of credit have contractual maturities
of up to 25 years. The real property of the borrower is pledged as collateral
under either loan type. Mortgage loans held for sale are stated at the lower
of cost or aggregate market value.

The cost of a mortgage loan held for sale is the outstanding principal
balance of the mortgage loan decreased by fees or discounts collected and
increased by fees and certain direct costs. Fees and costs incurred net of
discounts collected are deferred and recognized as adjustments to gain or loss
when the related loans are sold.

F-7
<PAGE>

HEADLANDS MORTGAGE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Company sells mortgage-backed and asset-backed securities through
forward delivery contracts. Such forward delivery contracts that have not been
completed at the end of an accounting period are used to determine the market
value of unsold loans. The Company also enters into commitments with private
and institutional investors. The market value of loans relating to such
commitments are determined by the outstanding commitments from investors or
current investor yield requirements. The fees paid for commitments are
recognized over the term of the commitment or as the commitment is filled.

Gains or losses realized from mortgage loan sales are recognized at time of
settlement with investors based upon the difference between the proceeds from
sale and the carrying value of the mortgage loans sold, net of commitment fees
paid. Such sales ordinarily provide for a pass-through yield to the investor
and a yield retained by the Company for servicing. For mortgage loan sales
other than pursuant to securitizations, the yield retained for servicing has
not exceeded in material respect contractually specified servicing fees or
adequate servicing compensation and hence no excess servicing value has been
recognized. If the mortgage loans are sold with the servicing rights released
to the purchaser, the Company reflects the difference between the value paid
by the investor for the servicing rights and the carrying value of such
servicing rights in net gain from sales of mortgage loans. If the mortgage
loans are sold with the servicing rights retained by the Company, the Company
determines the relative fair value of the servicing rights and includes such
amount in the calculation of net gain from sales of mortgage loans.

In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights, an amendment to Statement No. 65" ("SFAS 122"). This
statement provided guidance for the recognition of mortgage servicing rights
as an asset when a mortgage loan is sold and servicing rights are retained.
SFAS 122 requires that a portion of the cost of originating a mortgage loan be
allocated to the mortgage servicing rights based on its relative fair value.
The Company elected to adopt this standard effective January 1, 1995.

Originated mortgage servicing rights are stated at the lower of amortized
relative fair value or market value as determined by quoted market prices for
similar assets. The Company stratifies originated mortgage servicing rights
based on the loan type and note rate of the underlying loans. It is the policy
of the Company to amortize originated mortgage servicing rights in proportion
to and over the period of estimated net servicing income. To achieve this, the
Company computes amortization on a loan by loan basis using a cash flow model.
This method allocates the amortization expense over the servicing life of each
loan in the servicing portfolio in proportion to the corresponding net
servicing income. Valuation adjustments are charged to impairment expense on
an aggregate stratum basis.

The Company recognizes gain or loss from the sale of mortgage servicing
rights when the purchase/sales contract has been executed and the risks and
rewards of ownership are determined to have passed to the purchaser. The gain
recognized reflects the difference between the carrying value of the servicing
rights sold and the proceeds from sale, net of selling expenses.

F-8
<PAGE>

HEADLANDS MORTGAGE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(d) Retained Interests in Securitizations

Retained interests in securitizations consist of subordinate certificates in
REMICs and ABS which were issued by the Company. All of the Company's
securities are classified as trading and stated at market value in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."

The Company pools mortgage loans that it has originated or purchased and
issues securities. The Company generally sells the more senior classes of the
securities for cash and retains one or more of the subordinated classes.

The subordinate classes of the REMIC securities consist of classes with less
than an AAA rating due to reduced credit enhancement. Theses classes generally
have a stated principal amount and earn a fixed interest rate. Management
believes that it has made reasonable estimates of the market value of the
subordinated interests of market securities on its balance sheet, based on
market prices for similar securities.

In an asset-backed securitization, the Company retains as an investment a
subordinate principal interest and the interest-only residual interest created
as a result of such securitization. A significant portion of the Company's
total income is recognized as net gain on sale of mortgage loans, which
partially represents the present value of the interest-only residual interests
and mortgage servicing rights. The Company recognizes such net gain on sale of
mortgage loans in the period in which such loans are sold, although cash is
received by the Company over the life of the loans. Management believes that
it has made reasonable estimates of the present value of the interest-only
residual interests of the home equity loan securities on its balance sheet.
The Company projects the expected cash flows over the life of the retained
interests, using prepayment and default assumptions that market participants
would use for similar financial instruments that are subject to prepayment,
credit and interest rate risks. The Company then determines the present value
of these cash flows using an interest rate which it believes is commensurate
with the risks involved.

(e) Mortgage Loans held for Investment

Mortgage loans held for investment are stated at the lower of aggregate cost
or fair value.

(f) Real Estate Owned

Real estate owned includes property acquired through foreclosure or deed
taken in lieu of foreclosure. The properties are predominantly located in
California, and are carried at the lower of cost or fair value less estimated
selling expenses.

(g) Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization.

Depreciation on property and equipment is calculated using the straight-line
method over the estimated useful lives of the assets, generally 3 to 5 years.
Amortization of leasehold improvements is calculated using the straight-line
method over the shorter of the lease term or estimated useful life of the
asset.

(h) Fannie Mae Stock

The Company is the owner of record of Federal National Mortgage Association
("Fannie Mae") shares in excess of the minimum requirement. The Fannie Mae
shares are held in accordance with the FNMA servicing agreement, and are
included in other assets in the accompanying financial statements.

F-9
<PAGE>

HEADLANDS MORTGAGE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(i) Financial Statement Presentation

The Company prepares its financial statements using an unclassified balance
sheet presentation as is customary in the mortgage banking industry. A
classified balance sheet presentation would have aggregated current assets,
current liabilities and net working capital as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ----------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Current assets.............. $ 314,078,445 $ 263,560,678 $ 135,311,967
Current liabilities......... (267,417,713) (249,395,038) (121,310,153)
------------- ------------- -------------
Net working capital......... $ 46,660,732 $ 14,165,640 $ 14,001,814
============= ============= =============
</TABLE>

(j) Loan Administration Income

Loan administration income represents fees earned as master servicer for
residential mortgage loans owned by investors. The fees are calculated based
on a contractual percentage of the outstanding principal balances of the loans
serviced, and recognized when collected. Loan Administration income also
includes ancillary fees collected in conjunction with the servicing operation.

(k) Production Income

Production income consists of fees paid to the Company by borrowers for the
preparation, documentation and underwriting of loans. These fees and related
lending transaction costs are deferred until the related loan is sold. Upon
sale of the loan, the deferred fees are recognized as production income and
deferred costs are recognized in the applicable expense classification.

(l) Income Taxes

The Company has elected for both Federal and State income tax purposes to be
treated as an S corporation. Consequently, the net earnings of the Company are
taxed directly to the stockholders, rather than the Company.

Income taxes are based on an asset and liability approach for financial
accounting and reporting for income taxes. Deferred income taxes arise from
temporary differences in reporting income and expense for tax and financial
reporting purposes. The primary temporary differences relating to Company
operations stem from the recognition of additional net gain on sales of
mortgage loans required under SFAS No. 122, and the tax treatment of the
Company's loan securitizations.

(n) Unaudited Interim Financial Data

The interim financial data for the nine months ended September 30, 1996 are
unaudited. However, in the opinion of the Company's management, the interim
data includes all adjustments, consisting of only normal recurring accruals,
necessary for a fair statement of the results for the interim periods.

(o) Reclassifications

Certain reclassifications were made to the prior balances to conform with
the current presentation.

F-10
<PAGE>

HEADLANDS MORTGAGE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(p) Use of Management Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts on the balance sheets at
September 30, 1997, December 31, 1996 and December 31, 1995 and the statements
of operations for the periods then ended. Actual results could differ
significantly from those estimates.

(q) Adoption of New Accounting Pronouncement

On January 1, 1997, the Company adopted Statement of Financial Accounting
Standard No. 125 ("SFAS 125"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." This Statement provides
guidelines for distinguishing transfers of financial assets that are sales
from transfers that are secured borrowings. SFAS 125 supersedes SFAS 76, 77
and 122, while amending both SFAS 65 and 115. The Statement is to be applied
prospectively, however, portions of SFAS No. 125 were deferred under SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125" until January 1, 1998. Earlier implementation is not permitted.

Under SFAS 125, a transfer of financial assets in which control is
surrendered is accounted for as a sale to the extent that consideration other
than beneficial interests in the transferred assets is received in the
exchange. Liabilities and derivatives incurred or obtained by the transfer of
financial assets are required to be measured at fair value, if practicable.
Also, servicing assets and other retained interests in the transferred assets
must be measured by allocating the previous carrying value between the asset
sold and the interest retained, if any, based on their relative fair values at
the date of transfer. For each servicing contract in existence before January
1, 1997, previously recognized servicing rights that do not exceed
contractually specified servicing are required to be combined, net of any
previously recognized servicing obligations under that contract, as a
servicing asset or liability.

SFAS 125 also requires an assessment of interest-only strips, loans, other
receivables and retained interests in securitizations. If these assets can be
contractually prepaid or otherwise settled such that the holder would not
recover substantially all of its recorded investment, the asset will be
measured like trading securities. This assessment is required for financial
assets held on or acquired after January 1, 1997.

(r) Unaudited Pro forma Consolidated Balance Sheet Data

The unaudited Pro forma data as of September 30, 1997 on the Consolidated
Balance Sheets gives effect to (i) recognition of a distribution to the
Existing Shareholders of the Shareholders Distribution Amount in the aggregate
amount of $18.8 million (calculated as of September 30, 1997) (ii) the
creation of a deferred tax liability in the amount of $18.7 million
(calculated as of September 30, 1997) and (iii) the reclassification of S
Corporation retained earnings in the amount of $28.5 million, arising in
connection with the Company's termination of S corporation status.

3. NOTE RECEIVABLE FROM STOCKHOLDER

Note receivable from stockholder at December 31, 1995 and 1994 consisted of
the principal balance including accrued interest outstanding due from a
stockholder. This note earned interest at the Bank of America reference rate,
which was 8.65% and 8.5% at December 31, 1995 and 1994, respectively. The note
was due December 31, 1994, and fully repaid during 1996.

4. MORTGAGE LOANS HELD FOR SALE

Mortgage loans held for sale included net deferred fees and costs, and
consisted of the following at:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------------------
1997 1996 1995
------------- ------------ -----------
<S> <C> <C> <C>
Mortgage loans.................... $206,685,240 $217,297,135 $96,187,050
Home equity lines of credit....... 52,840,947 18,739,929 --
Deferred costs, net of fees....... 2,769,652 2,134,777 901,342
------------ ------------ -----------
$262,295,839 $238,171,841 $97,088,392
============ ============ ===========
</TABLE>

F-11
<PAGE>

HEADLANDS MORTGAGE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5. ORIGINATED MORTGAGE SERVICING RIGHTS

Originated mortgage servicing rights (OMSR) consist of the following:

<TABLE>
<CAPTION>
ACCUMULATED IMPAIRMENT NET
OMSR AMORTIZATION ALLOWANCE OMSR
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31,
1994..................... $ -- $ -- $ -- $ --
Current year additions.... 8,041,643 (32,985) (925,387) 7,083,271
Write-downs due to prepay-
ments.................... (706,316) -- 706,316 --
----------- --------- ----------- -----------
Balance at December 31,
1995..................... 7,335,327 (32,985) (219,071) 7,083,271
Current year additions.... 16,251,858 (225,794) (1,867,243) 14,158,821
Servicing sold............ (1,021,175) 12,638 42,038 (966,499)
Write-downs due to prepay-
ments.................... (286,354) -- 286,354 --
----------- --------- ----------- -----------
Balance at December 31,
1996..................... $22,279,656 $(246,141) $(1,757,922) $20,275,593
Current year additions.... 18,374,275 (345,816) (3,253,577) 14,774,882
Servicing sold............ (10,427,036) 128,906 456,390 (9,841,740)
Write-downs due to prepay-
ments.................... (4,208,322) 105,077 4,103,245 --
----------- --------- ----------- -----------
Balance at September 30,
1997..................... $26,018,573 $(357,974) $ (451,864) $25,208,735
=========== ========= =========== ===========
</TABLE>

The capitalized mortgage servicing rights were reported at fair value at
September 30, 1997, December 31, 1996 and December 31, 1995, which was lower
than amortized relative fair value at the time of loan sale. The fair value
was estimated based on prepayment speeds consistent with those published by
various Wall Street securities dealers for securities with similar
characteristics to those in the Company's portfolio, delinquency rates
consistent with other California concentrated portfolios, and estimated
escrow, principal, interest and payoff float.

The unpaid principal balance of mortgage loans for which the Company has
capitalized mortgage servicing rights was approximately $2,328 million, $2,017
million and $730 million at September 30, 1997, December 31, 1996 and December
31, 1995, respectively. The Company held off balance sheet originated mortgage
servicing rights with an estimated fair value of approximately $16.8 million,
$22.9 million and $34.2 million at September 30, 1997, December 31, 1996 and
December 31, 1995, respectively. These estimated fair values may not represent
actual amounts that would be realized upon any sale or liquidation of the
asset.

6. RETAINED INTERESTS IN SECURITIZATIONS

Retained interests in securitizations consist of assets generated by the
Company's loan securitizations. These assets were as follows at:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- --------------------
1997 1996 1995
------------- ----------- --------
<S> <C> <C> <C>
REMIC subordinate certificates........ $ 5,471,971 $ 3,953,659 $585,157
Interest-only residual interest....... 18,831,600 7,689,529 --
ABS interest.......................... 6,421,659 2,563,177 --
ABS overcollateralization............. 1,945,083 922,122 --
----------- ----------- --------
$32,670,313 $15,128,487 $585,157
=========== =========== ========
</TABLE>

The Company classifies REMIC and ABS securities as trading securities in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" and carries them as current assets at market value.

F-12
<PAGE>

HEADLANDS MORTGAGE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Company is contractually bound by the Headlands Home Equity Loan (HHEL)
ABS Trust to retain it's transferor interest and overcollateralization. While
the Company can sell these certificates, it would be considered a "Rapid
Amortization Event" under the terms of the trust, and would trigger rapid
amortization of the trust senior certificates.

The interest-only residual interest is recorded as a result of the Company's
securitization of home equity lines of credit through the HHEL trust. The
Company is subject to certain recourse provisions in connection with its
securitization and presents its obligation under these provisions as a
reduction in the carrying value of the asset. The Company estimates future
cash flows from this interest-only residual interest and values them utilizing
assumptions that it believes are consistent with those that would be utilized
by an unaffiliated third party purchaser. The interest-only residual interest
is recorded as a trading security at fair value. To the Company's knowledge,
there is no active market for the sale of this interest-only residual
interest.

The fair value of the interest-only residual interest is determined by
computing the present value of the excess of the weighted average coupon on
the loans sold over the sum of: (1) the coupon on the senior interests, (2)
the contracted servicing fee, (3) expected losses to be incurred on the
portfolio of loans sold over the lives of the loans, (4) overcollateralization
and (5) fees payable to the trustee and the monoline insurer. Prepayment
assumptions used in the present value computation are based on market
prepayment rates for similar loans.

The cash flows expected to be received by the Company are discounted at an
interest rate that the Company believes an unaffiliated third-party purchaser
would require as a rate of return on such a financial instrument. To the
extent that actual future excess cash flows are different from estimated
excess cash flows, the fair value of the Company's interest-only residual
certificate will be adjusted quarterly with corresponding adjustments made to
earnings in that period.

The Company provided an initial overcollateralization on the security sold
and builds overcollateralization from the excess cash flows. The
overcollateralization reduces the certificate balance of the securities sold
by the amount required by the monoline insurer. The current amount of such
overcollateralization built through cash flows is recorded by the Company as
part of retained interests in securitizations, and earns a market rate of
interest.

7. MORTGAGE LOANS HELD FOR INVESTMENT

During the normal course of business, the Company is required from time to
time to repurchase certain loans from investors. Mortgage loans held for
investment consisted of residential real estate mortgage loans at September
30, 1997, December 31, 1996 and December 31, 1995. All properties are located
in the state of California. Interest rates on these mortgage loans are at
variable and fixed rates which range from 7.25% to 12.00% at September 30,
1997, from 6.94% to 8.875% at December 31, 1996, and from 7.25% to 10.25% at
December 31, 1995. The maturities range from 3 months to 29 years at September
30, 1997, from 1 year to 26 years at December 31, 1996, and from 1 to 28 years
at December 31, 1995.

8. REAL ESTATE OWNED

Real estate owned, net, consists of the following at:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ----------------------
1997 1996 1995
------------- ---------- ----------
<S> <C> <C> <C>
Residential real estate at cost... $508,624 $ 932,717 $2,250,600
Less valuation allowance:
Balance at beginning of year.... (52,255) (545,151) (211,000)
Additions to allowance.......... (98,264) (645,279) (723,501)
Deductions related to real es-
tate sold...................... 104,225 1,138,175 389,350
-------- ---------- ----------
Real estate owned, net............ $462,330 $ 880,462 $1,705,449
======== ========== ==========
</TABLE>

F-13
<PAGE>

HEADLANDS MORTGAGE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements, net, consist of the following
at :

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------------------
1997 1996 1995
------------- ------------ ----------
<S> <C> <C> <C>
Furniture and fixtures........... $ 1,453,481 $ 1,253,607 $1,247,556
Office equipment................. 17,065,445 11,713,822 10,039,045
Leasehold improvements........... 819,654 728,474 666,725
Automobiles...................... 47,911 47,911 47,911
----------- ------------ ----------
19,386,491 13,743,814 12,001,237
Less accumulated depreciation and
amortization.................... (12,338,159) (10,727,391) (8,173,383)
----------- ------------ ----------
$ 7,048,332 $ 3,016,423 $3,827,854
=========== ============ ==========
</TABLE>

10. NOTES PAYABLE

Notes payable consist of the following at:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------------------
1997 1996 1995
------------- ------------ -----------
<S> <C> <C> <C>
Warehouse line of credit with banks,
expiring on November 4, 1999, $215
million at September 30, 1997, $185
million at December 31, 1996 and $110
million at December 31, 1995, and
bearing variable interest rates,
including a rate adjusted for
compensating balances................. $133,944,961 $166,457,268 $91,233,524
Master repurchase agreement with an
investment banker, expiring September
10, 1998, $250 million at September
30, 1997 and December 31, 1996,
bearing variable interest rates based
on the LIBOR.......................... 79,167,084 57,973,407 --
Master repurchase agreement with an in-
vestment banker, expiring February 18,
1998, bearing a variable interest rate
based on the LIBOR.................... 36,686,994 -- --
Warehouse line of credit with a major
corporation, expiring October 31,
1998, $15 million at September 30,
1997, $5 million at December 31, 1996
and 1995, and bearing variable inter-
est rates based on the LIBOR.......... 1,550,710 2,652,615 --
Servicing secured working capital line
of credit, expiring on November 4,
1998, $12 million at September 30,
1997 and at December 31, 1996 and
1995, and bearing a variable interest
rate based on the open Federal Funds
rate or the LIBOR including a rate ad-
justed for compensating balances...... -- 12,000,000 --
Master repurchase agreement with an in-
vestment banker, secured by marketable
securities, bearing a variable inter-
est rate based on the LIBOR........... 2,868,968 2,259,765 --
Master repurchase agreement with an in-
vestment banker, secured by marketable
securities, bearing a variable inter-
est rate baased on the LIBOR.......... 493,129 -- --
------------ ------------ -----------
$254,711,846 $241,343,055 $91,233,524
============ ============ ===========
</TABLE>

F-14
<PAGE>

HEADLANDS MORTGAGE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The warehouse lines of credit and master repurchase agreements are secured
by mortgage loans held for sale, except the two master repurchase agreements
which are secured by marketable securities, and the servicing secured line of
credit which is secured by a portion of the Company's servicing portfolio.

The weighted average cost of funds for the nine months ended September 30,
1997 was 4.93 percent, and for the years ended December 31, 1996 and 1995 was
5.17 and 5.19 percent, respectively. Compensating balances averaged $30.4
million for the nine months ended September 30, 1997 and $24.6 million and
$28.9 million for the years ended December 31, 1996 and 1995, respectively,
and were comprised of corporate and custodial accounts. Warehouse interest
expense of $23.3 million for the nine months ended September 30, 1997 and
$12.8 million and $3.6 million for the years ended December 31, 1996 and 1995,
respectively, has been netted with interest income in the statement of
operations.

The Company must comply with certain covenants provided in its loan
agreements, including requirements relating to net worth, working capital,
outstanding indebtedness, and the loan servicing portfolio. At September 30,
1997, December 31, 1996 and December 31, 1995, the Company was in compliance
with the aforementioned loan covenants. The Company's warehouse lines of
credit restrict the Company's ability to pay dividends in any fiscal year to
an amount not to exceed 25% of adjusted net income for such fiscal year.
Adjusted net income is generally defined to mean net income less gain (loss)
on sale of mortgages and decrease in deferred tax liability and plus service
release premiums, amortization of servicing rights, net book value of
servicing assets sold and increase in deferred tax lability.

11. BANK LINE OF CREDIT

The Company entered into a line of credit agreement with a bank during 1995.
The agreement provided the Company with borrowings for the sole purpose of
investing in cash equivalents. These borrowings were at a nominal interest
rate and were supported by compensating balances. The balance outstanding at
December 31, 1995 was $25,000,000. The line of credit was paid in full during
1996, and the agreement was dissolved.

12. NOTES PAYABLE TO STOCKHOLDERS

The Company issued notes during 1996 to two of its stockholders.The
principal amount outstanding under the notes at September 30, 1997 was
$9,670,000. The notes bear interest at a variable rate based on the LIBOR, and
mature on June 29, 2000. Principal and accrued interest are payable annually.
Any rights of the stockholders under the notes are subordinate to the
Company's warehouse lenders.

13. RELATED PARTY TRANSACTIONS

The Company had a receivable from a related party of approximately $3.4
million at December 31, 1995. The sole owner of the related party is a
stockholder of the Company. The Company and the related party reached a
settlement agreement during 1996 to facilitate the receipt of the outstanding
receivable.

The Company had loans receivable from employees (included in accounts
receivable) of $36,000, $19,000 and $39,000 at September 30, 1997, December
31, 1996 and December 31, 1995, respectively. The Company also had accounts
receivable from Headlands Insurance Agency, a related party, of approximately
$105,000, $56,000 and $45,000 at September 30, 1997, December 31, 1996 and
December 31, 1995, respectively. The Company had accounts payable to Marin
Conveyance Corporation, another related party, at September 30, 1997 of
$39,000, and accounts receivable from the same related party at December 31,
1996 and 1995 of $58,000 and $69,000, respectively. The Company provided
administrative services to these related parties, and received fees (included
in production income) of $195,000 during the nine months ended September 30,
1997, and $240,000 and $180,000 during 1996 and 1995, respectively.

F-15
<PAGE>

HEADLANDS MORTGAGE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

14. LOAN ADMINISTRATION

The Company's portfolio of residential mortgage loans serviced aggregated
approximately $4.0 billion, $4.4 billion and $4.1 billion at September 30,
1997, December 31, 1996 and December 31, 1995, respectively. Of the Company's
portfolio at September 30, 1997, 74% of the loans serviced were located in
California with 26% in other states. At December 31, 1996, 81% of the loans
serviced were located in California with 19% in other states. At December 31,
1995, 96% of the loans serviced were located in California with 4% in other
states. The delinquency ratio of the portfolio was 1.22%, 1.52% and 1.44% as
of September 30, 1997, December 31, 1996 and December 31, 1995, respectively.

Principal balances serviced were as follows at:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------- -----------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Fannie Mae........................ $ 989,000,000 $1,367,000,000 $1,239,000,000
Freddie Mac....................... 482,000,000 674,000,000 682,000,000
HMC securities.................... 1,364,000,000 489,000,000 224,000,000
Home equity lines of credit....... 367,000,000 148,000,000 --
Other investors................... 801,000,000 1,709,000,000 2,004,000,000
-------------- -------------- --------------
$4,003,000,000 $4,387,000,000 $4,149,000,000
============== ============== ==============
</TABLE>

The Company is required to advance corporate funds for principal, interest,
escrow and foreclosure costs relating to loans for which it services. These
advances (included in accounts receivable) were approximately $7.5 million,
$4.6 million and $1.3 million at September 30, 1997, December 31, 1996 and
December 31, 1995, respectively. A portion of these advances is non-
recoverable. The Company had reserved approximately $227,000, $511,000 and
$416,000 for unrecoverable advances and future foreclosure losses at September
30, 1997, December 31, 1996 and December 31, 1995, respectively.

Related trust funds on deposit in trustee bank accounts were approximately
$35.6 million at September 30, 1997, $7.7 million at December 31, 1996 and
$7.1 million at December 31, 1995, and are not included in the accompanying
balance sheets. Separate bank accounts are maintained and such funds are not
commingled with those of the Company.

The Company maintained errors and omissions and employee fidelity bond
insurance policies in the amount of $5.5 million at September 30, 1997, and $5
million at December 31, 1996 and 1995.

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

Because no market exists for certain of the Company's assets and
liabilities, fair value estimates are based on judgments regarding credit
risk, investor expectations of future economic conditions, normal cost of
administration and other risk characteristics, including interest rate and
prepayment risk. These estimates are subjective in nature and involve
uncertainties and matters of judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.

In addition, the fair value estimates presented do not include the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments.

F-16
<PAGE>

HEADLANDS MORTGAGE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The estimated fair values of the Company's balance sheet financial
instruments at:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------------- -------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Financial assets
Cash and cash equiva-
lents................. $ 3,137,927 $ 3,137,927 $ 2,701,332 $ 2,701,332 $ 28,882,313 $ 28,882,313
Retained interests in
securitizations....... 32,670,313 32,670,313 15,128,487 15,128,487 585,157 585,157
Mortgage loans held for
sale.................. 262,295,839 265,964,961 238,171,841 241,883,738 97,088,392 98,051,417
Mortgage loans held for
investment............ 826,607 826,607 692,816 692,816 1,075,278 1,075,278
Financial liabilities:
Notes payable.......... 254,711,846 254,711,846 241,343,055 241,343,055 91,233,524 91,233,524
Line of credit with
bank.................. -- -- -- -- 25,000,000 25,000,000
Note payable to stock-
holders............... 9,670,000 9,670,000 9,670,000 9,670,000 -- --
</TABLE>

These estimated fair values do not represent actual amounts that may be
realized upon any sale or liquidation of the related assets or liabilities. In
addition, these values do not give effect to discounts to fair value which may
occur when financial instruments are sold in large quantities. The fair values
presented above represent the Company's best estimate of fair value using the
methodologies discussed below:

(a) Cash and Cash Equivalents

The carrying value is a reasonable estimate of fair value.

(b) Retained Interests in Securitizations

The fair value of subordinate interests is determined based on the market
price obtained for similar securities. The fair value of interest-only
residual interests is determined using estimated discounted future cash flows
taking into consideration anticipated prepayment rates and loss experience.

(d) Mortgage Loans Held for Sale, Mortgage Loans Held for Investment, Loan
Sale Commitments, and Locked Loan Origination Commitments

Fair value of mortgage loans held for sale, mortgage loans held for
investment, commitments to originate mortgage loans and commitments to sell
mortgage loans are estimated using quoted market prices for mortgage-backed
securities backed by similar loans or by prices obtained by the Company in
forward delivery contracts. The fair value of commitments to originate
mortgage loans includes a portion of the unrealized gain or loss calculated
using quoted market prices based on a historical estimate of the percentage of
such commitments that will actually result in mortgage loans originated.

(e) Financial Liabilities

The fair value of financial liabilities is believed to be equal to the
carrying amount because the terms of the debt are similar to terms currently
offered by lenders, and the interest rates are variable based on current
market rates.

(f) Off Balance Sheet Financial Instruments

At September 30, 1997, the locked pipeline was $267.5 million with a related
fair value of $272.2 million, and, net of related mandatory forward
commitments, had unrecognized gains at approximately $3.6 million. At December
31, 1996, the locked pipeline was $103.9 million with a related fair value of
$106.2 million, and, net of related mandatory forward commitments, had
unrecognized gains of approximately $1.8 million. At December 31, 1995, the
locked pipeline was $84.0 million with a related fair value of $84.8 million,
and, net of related mandatory forward commitments, had unrecognized gains of
approximately $0.4 million.

F-17
<PAGE>

HEADLANDS MORTGAGE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Mortgage servicing rights retained relating to loans sold prior to January
1, 1995 are not financial instruments and, accordingly, are not included in
the above fair values. These servicing rights contribute substantial value to
the Company and are not reflected in the accompanying financial statements.

16. PROFIT SHARING PLAN

On December 31, 1993, the Company adopted a new profit sharing plan. The new
plan has entry dates of July 1st and January 1st and any employee who has
completed 6 months of employment on those dates is automatically a member of
the plan. To participate in the current year's profit sharing, an employee
must be a member of the plan, must have worked 1,000 hours during the fiscal
year and must be employed as of the profit sharing plan year end. The plan
provides vesting ratably over two to six years. Contributions are at the
discretion of the Board of Directors. When made, contributions are credited to
each member's account in proportion to their annual compensation and time of
service. The Company did not contribute to the profit sharing plan during the
nine months ended September 30, 1997, nor during the two years ended December
31, 1996.

17. COMMITMENTS AND CONTINGENCIES

(a) Leases

The Company leases office space under various operating leases. Minimum
rental commitments under these operating leases with an initial or remaining
noncancelable lease term in excess of one year as of September 30, 1997 were
as follows:

<TABLE>
<CAPTION>
RELATED
LEASE SUBLEASE NET LEASE
COMMITMENT INCOME COMMITMENT
----------- --------- -----------
<S> <C> <C> <C>
4th quarter 1997....................... $ 511,820 $ (40,197) $ 471,623
1998................................... 2,465,751 (149,187) 2,316,564
1999................................... 2,338,528 (47,661) 2,290,867
2000................................... 2,252,395 -- 2,252,395
2001................................... 2,173,961 -- 2,173,961
2002................................... 2,194,004 -- 2,194,004
Thereafter............................. 713,240 -- 713,240
----------- --------- -----------
$12,649,699 $(237,045) $12,412,654
=========== ========= ===========
</TABLE>

Rent expense recorded by the Company for the nine months ended September 30,
1997 was $1.7 million, and for the years ended December 31, 1996 and 1995 was
$1.9 million and $2.1 million, respectively.

In addition to the office leases described above, the Company entered into
leases for certain office equipment during 1996 and 1997. The future minimum
payments under these noncancelable lease terms as of September 30, 1997 were
as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL TOTAL
LEASES LEASES LEASES
--------- ---------- -----------
<S> <C> <C> <C>
4th quarter 1997......................... $ 17,435 $ 278,978 $ 296,413
1998..................................... 69,741 1,127,021 1,196,762
1999..................................... 58,118 1,127,020 1,185,138
2000..................................... -- 712,763 712,763
2001..................................... -- 262,931 262,931
Thereafter............................... -- 170,055 170,055
-------- ---------- -----------
$145,294 $3,678,768 $ 3,824,062
======== ========== ===========
</TABLE>

F-18
<PAGE>

HEADLANDS MORTGAGE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Expense recorded by the Company under these equipment leases for the nine
months ended September 30, 1997 was approximately $97,000, and for the year
ended December 31, 1996 was approximately $12,000.

(b) Loan Commitments

The Company made commitments to deliver loans to various investors. The
mandatory commitments outstanding were $454.0 million, $276.2 million and
$78.9 million at September 30, 1997, December 31, 1996 and December 31, 1995,
respectively, with a related market cost of $1.0 million at September 30,
1997, and $0.5 million at December 31, 1996 and 1995. The Company had prepaid
commitment fees of approximately $45,000, $58,000 and $-0- related to these
commitments at September 30, 1997, December 31, 1996 and December 31, 1995,
respectively.

The Company uses mandatory sell forward delivery commitments to buy and sell
whole loans, to issue private securities and to issue Fannie Mae and Freddie
Mac securities. These commitments, which are used as a hedge against locked
loan origination commitments whereby the Company has extended an interest rate
lock to the borrower, were included in the lower of cost or market valuation
of mortgage loans held for sale.

The Company is subject to interest rate risk on open commitments. This risk
results from differences between the market interest rate and the commitment
interest rate.

The Company is contractually committed to fund the undrawn portion of home
equity lines of credit (HELOCs) which it has originated. This commitment
extends to HELOCs which are currently held for sale by the Company, and HELOCs
sold by the Company into the Headlands Home Equity Loan Trusts. As of
September 30, 1997 and December 31, 1996, this unfunded commitment was
approximately $99.1 million and $38.2 million, respectively.

Additionally, the Company is contractually committed to fund the undrawn
portion of mortgage loans originated under it's land/home program. The terms
of these loans allow borrowers to draw funds under their mortgage loans in
installments. As of September 30, 1997 and December 31, 1996, this unfunded
commitment was approximately $1.1 million.

The Company is a defendant to a number of claims arising in the ordinary
course of business. Management is of the view that these matters will not have
a material adverse effect on the Company's financial position, net income or
liquidity.

18. STOCK OPTION PLAN

The Company's 1997 Executive and non-employee Director Stock Option Plan
(the Plan) provides for the grant of qualified incentive stock options (ISOs),
stock options not so qualified (NQSOs), deferred stock, restricted stock,
performance shares, stock appreciation rights, limited stock appreciation
rights, and dividend equivalent rights (DERs). ISOs may be granted to the
officers and key employees of the Company. NQSOs and awards may be granted to
the directors, officers, key employees, agents and consultants of the Company
or any subsidiaries. Unless previously terminated by the Board of Directors,
the Plan will terminate on September 15, 2007.

In September 1997, options to acquire 518,000 shares of common stock were
granted to certain officers with an exercise price of $4.06 per share. The
Company used an independent appraisal firm to value the options granted in
1997. The independent appraisal firm considered three valuation approaches in
developing a value for the options, including (1) market comparison using
comparable public companies, (2) underlying asset method using the Company's
individual assets, and (3) discounted future returns analysis based on an
expected value

F-19
<PAGE>

HEADLANDS MORTGAGE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

discount model. The Board of Directors determined the estimated fair value of
the option shares at the time of grant by adjusting the independent appraisal
upward to take into consideration the probability of a successful initial
public offering. The options, along with the options granted to non-officer
directors, vest over four years and have ten year terms. As of September 30,
1997, no options have been exercised or are eligible to be exercised.

In accordance with the provisions of APB Opinion No. 25, the Company will
recognize compensation expense over the vesting period for the difference
between such exercise price and the estimated fair value of the underlying
shares at time of grant, aggregating approximately $3.3 million. If the
Company had calculated compensation cost based on the fair value at the grant
date under Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," the Company's net income would have been
reduced to the pro forma amount indicated below:

<TABLE>
<CAPTION>
AS C CORPORATION
AS S CORPORATION PRO FORMA
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
Net income:
As reported............................. $36,936,330 $22,201,556
Pro forma............................... $36,779,497 $22,107,294
</TABLE>

The pro forma amounts above were based on an option value calculated using the
Black-Scholes option-pricing model with the following assumptions:

<TABLE>
<S> <C>
Weighted average expected life (years)............................ 3.25
Risk-free interest rate........................................... 5.835%
Volatility........................................................ 72.000%
Expected dividend yield........................................... --
</TABLE>

Stock options activity during the nine months ended September 30, 1997 was
as follows:

<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Balance at December 31, 1996......................... -- --
Granted................................................ 518,000 $4.06
Exercised.............................................. -- --
Canceled............................................... -- --
------- -----
Balance at September 30, 1997........................ 518,000 $4.06
======= =====
</TABLE>

At September 30, 1997, all stock options had a remaining term of ten years
and an exercise price of $4.06.

19. PREFERRED STOCK

The Company has authorized 5,000,000 shares of Preferred Stock. As of
September 30, 1997, none of the authorized shares have been issued.

20. UNAUDITED PRO FORMA INFORMATION

Pro forma information has been presented to show what the significant
effects on the historical financial information might have been based upon the
revocation of the S corporation status. The number of shares used in all
calculations has been adjusted to reflect a 14,000-for-one stock split.

F-20
<PAGE>

HEADLANDS MORTGAGE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Pro forma net income represents the results of operations adjusted to
reflect a change in the Company's income tax status from an S corporation to a
C corporation, using a pro forma income tax rate of 41% for 1992 and 1994, and
42% for 1993 and 1995 through 1997. If the S corporation status had been
terminated as of September 30, 1997, the amount of the deferred tax liability
and corresponding reduction in retained earning would have been approximately
$18.7 million. Any remaining retained earnings after adjustments attributable
to termination of S corporation status will be reclassified as common stock.

Pro forma earnings per share is computed by dividing pro forma net income by
the weighted average number of shares of common stock and dilutive common
stock equivalents. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, common and common equivalent shares issued below
the estimated initial public offering price during the twelve month period
prior to the date of the initial filing of the Company's Registration
Statement have been included in the calculation, using the treasury stock
method, as if they were outstanding for all periods presented. For purposes of
this calculation, outstanding stock options are considered common stock
equivalents and totaled 377,795 shares for all periods presented under the
treasury stock method. The pro forma weighted average number of shares also
includes the effect of the assumed issuance of 1,253,334 shares of common
stock to generate sufficient cash to pay to shareholders upon termination of
the Company's S corporation status the amount of previously earned and
undistributed taxable income ($18.8 million at September 30, 1997). The
assumed issuance of common stock was based on an assumed price of $15.00, the
midpoint of the estimated range of the initial public offering price. The
weighted average shares outstanding for computing primary earnings per share
were 15,631,129 for the nine months ended September 30, 1997 and the year
ended December 31, 1996.

Supplemental pro forma earnings per share of $1.38 and $0.68 for the periods
ended September 30, 1997 and December 31, 1996, respectively, reflects further
adjustment for the effect of the add back, net of tax, of interest expense
recorded since July 1996, the inception of the Notes, to be repaid from the
proceeds of the offering. In that calculation, weighted average shares
outstanding of 16,331,129 include the effect of the assumed issuance of
700,000 shares of common stock in July 1996 to retire the Notes payable to
stockholders ($10.5 million at September 30, 1997).

21. SUBSEQUENT EVENTS

On December 10, 1997, the company authorized an additional 35,300,000 shares
of common stock and authorized a 14,000-to-1 share stock split to become
effective prior to the effectiveness of the Registration Statement for the
Company's initial public offering. In accordance with SEC Staff Accounting
Bulletin Topic 4(c), the stock split has been retroactively reflected in the
accompanying consolidated balance sheet.

F-21
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDER-
WRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RE-
LATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.

---------------
TABLE OF CONTENTS
---------------

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 13
Termination of S Corporation Status...................................... 22
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 23
Capitalization........................................................... 24
Dilution................................................................. 25
Selected Consolidated Financial Data..................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 28
Business................................................................. 41
Management............................................................... 60
Executive Compensation................................................... 62
Principal and Selling Shareholders....................................... 67
Certain Relationships and Related Business Transactions.................. 69
Description of Capital Stock............................................. 73
Shares Eligible for Future Sale.......................................... 74
Underwriting............................................................. 75
Legal Matters............................................................ 76
Experts.................................................................. 76
Available Information.................................................... 77
Index of Defined Terms................................................... 78
Index to Financial Statements............................................ F-1
</TABLE>

UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER TO PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

8,000,000 SHARES

HEADLANDS
MORTGAGE
COMPANY

---------------
PROSPECTUS
---------------

NationsBanc Montgomery Securities llc

BT Alex. Brown

UBS Securities

, 1998

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The expenses expected to be incurred in connection with the issuance and
distribution of the securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the SEC
registration and filing fees, are estimated:

<TABLE>
<S> <C>
SEC Registration................................................... $ 47,484
Legal Fees and Expenses............................................ $ *
Accounting Fees and Expenses....................................... $ *
NASD Fees.......................................................... $ *
Blue Sky Qualification Fees and Expenses........................... $ *
Printing and Engraving Fees........................................ $ *
Transfer Agent and Custodian Fees.................................. $ *
Miscellaneous...................................................... $ *
--------
Total............................................................ $800,000
========
</TABLE>
- --------
* To be provided by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 204(a)(10)(A) of the General Corporation Law of the State of
California ("GCL") allows a corporation to eliminate the personal liability of
a director for monetary damages in an action brought by or in the right of the
corporation for breach of a director's duties to the corporation and its
stockholders, except that such provision may not eliminate or limit the
liability of directors for (i) acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law, (ii) acts or omissions
that a director believes to be contrary to the best interests of the
corporation or its stockholders or that involve the absence of good faith on
the part of the director, (iii) any transaction from which a director derived
an improper personal benefit, (iv) acts or omissions that show a reckless
disregard for the director's duty to the corporation or its stockholders in
circumstances in which the director was aware, or should have been aware, in
the ordinary course of performing a director's duties, of a risk of serious
injury to the corporation or its stockholders, (v) acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication
of the director's duty to the corporation or its stockholders, (vi) certain
liabilities arising from contracts with the corporation in which the director
has a material financial interest, (vii) the making of any distributions to
stockholders contrary to the law, (viii) the distribution of assets to
shareholders after dissolution proceedings without paying or adequately
providing for all known liabilities of the corporation within certain time
limits, and (ix) the making of any loan or guaranty contrary to law. The
Registrant's Articles of Incorporation contains a provision which eliminates
directors' personal liability as set forth above, except, as required by
Section 204(a)(10)(B) and (C) of the GCL, any liability of a director for any
act or omission occurring prior to the date of the provision's effectiveness,
or any liability for an officer's acts or omissions, notwithstanding that the
officer is also a director or that the officer's actions, if negligent or
improper, have been ratified by the directors.

Section 317 of the GCL ("Section 317") empowers a corporation to indemnify
any person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of the corporation to
procure a judgment in its favor) by reason of the fact that he or she is or
was a director, officer, employee or agent of the corporation, against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with the proceeding if that person acted in
good faith and in a manner the person reasonably believed to be in the best
interests of the corporation and, in the case of a criminal proceeding, had no
reasonable cause to believe the conduct of the person was unlawful. The
termination of any proceeding

II-1
<PAGE>

by judgment, order, settlement, conviction or upon a plea of nolo contendere
or its equivalent does not, of itself, create a presumption that the person
did not act in good faith and in a manner which the person reasonably believed
to be in the best interests of the corporation or that the person had
reasonable cause to believe that the person's conduct was unlawful. Section
317 empowers the corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending, or completed
action by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that the person is or was a director, officer,
employee or agent of the corporation, against expenses actually and reasonably
incurred by that person in connection with the defense or settlement of the
action if the person acted in good faith, in a manner the person believed to
be in the best interests of the corporation and its stockholders, provided
that (i) the person is successful on the merits or (ii) such amounts are paid
with court approval. Section 317 also provides that, unless a person is
successful on the merits in defense of any proceeding referred to above,
indemnification may be made only if authorized in the specific case, upon a
determination that indemnification is proper in the circumstances because the
indemnified person met the applicable standard of conduct described above by
one of the following: (1) a majority vote of a quorum consisting of directors
who are not parties to such proceedings; (2) if such quorum is not obtainable,
by independent legal counsel in a written opinion; (3) by approval of
stockholders with such indemnified person's shares not being entitled to vote
thereon; or (4) by the court in which the proceeding is or was pending upon
application by or on behalf of the person. Such indemnification may be
advanced to the indemnified person upon the receipt of the corporation of an
undertaking by or on behalf of the indemnified person to repay such amount in
the event it shall be ultimately determined that such indemnified person is
not entitled to indemnification. Section 317 also allows the corporation, by
express provision in its articles, to authorize additional rights for
indemnification pursuant to Section 204(a)(ii).

The Bylaws of the Registrant provide that the Registrant shall indemnify its
directors and officers against expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with any
proceeding arising by reason of such person being or having been a director or
officer of the corporation and shall advance to such director or officer
expenses incurred in defending any such proceeding to the fullest extent
permissible under California law. The Bylaws also provide that the Registrant
may indemnify its employees and agents for such expenses by resolution of the
Board of Directors.

Reference is also made to the Form of Underwriting Agreement filed as
Exhibit 1.1 to this Registration Statement for provisions relating to the
indemnification of directors, officers and controlling persons against certain
liabilities including liabilities under the Securities Act of 1933, as
amended.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

None.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits:
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Composite Articles of Incorporation of the Registrant
3.2** Amended and Restated Bylaws of the Registrant
4.1** Specimen Common Stock Certificate
5.1* Opinion of Tobin & Tobin as to legality (including consent of
such firm)
9.1** Voting Trust Agreement dated September 15, 1997, as amended
10.1.1** Employment Agreement of Peter T. Paul
10.1.2** Employment Agreement of Becky S. Poisson
10.1.3** Employment Agreement of Gilbert J. MacQuarrie
10.1.4** Employment Agreement of Steven M. Abreu
10.2** 1997 Executive and Non-Employee Director Stock Option Plan dated
July 22, 1997
10.3** Description of Bonus Incentive Compensation Plan
10.4** Amended and Restated Mortgage Loan Capital Loan Warehousing,
dated as of August 29, 1997, among the Registrant and the Lenders
therein named, as amended
</TABLE>

II-2
<PAGE>

<TABLE>
<C> <S>
10.5** Amended and Restated Servicing Secured Credit Agreement, dated as
of August 29, 1997, among the Registrant and the Lender named
therein, as amended
10.6** Master Repurchase Agreement dated as of September 11, 1996 among
Merrill Lynch Mortgage Capital, Inc., Merrill Lynch Credit
Corporation and the Registrant, as amended
10.7** Tax Indemnification Agreement among the Registrant and the
Registrant's shareholders prior to termination of S corporation
status.
10.8** Founders Registration Rights Agreement
11.1** Statement regarding computation of per share earnings
21.1** List of Subsidiaries of the Registrant
23.1* Consent of Tobin & Tobin (included in Exhibit 5.1)
23.2 Consent of KPMG Peat Marwick LLP
24.1** Power of Attorney (set forth on the signature page)
27.1** Financial Data Schedule
99.1** Consent of Director pursuant to Rule 438 for Mark L. Korell
99.2** Consent of Director pursuant to Rule 438 for Leonard Auerbach
99.3** Consent of Director pursuant to Rule 438 for Mark E. Lachtman
99.4** Consent of Director pursuant to Rule 438 for Steven M. Abreu
</TABLE>
- --------
* To be filed by amendment.
** Previously filed

(b) Financial Statement Schedules:

All other schedules are either inapplicable or the information is included
in the Company's financial statements and therefor have been omitted.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, less in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of Prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of Prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or (497)(h) under
the Securities Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective; and (2) for the purpose of
determining any liability under the Securities Act of 1933, each post-
effective amendment that contains a form of Prospectus shall be deemed to be a
new Registration Statement relating to the securities offered therein and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof and the undersigned registrant hereby undertakes to
file an application for the purpose of determining the eligibility of the
trustee to act under subsection (a) of Section 310 of the Trust Indenture Act
in accordance with the rules and regulations prescribed by the Commission
under Section 305(b)(2) of the Act.

II-3
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
LARKSPUR, STATE OF CALIFORNIA, ON JANUARY 6, 1998.

HEADLANDS MORTGAGE COMPANY

/s/ Peter T. Paul
By: _____________________________

PETER T. PAUL PRESIDENT

PURSUANT TO TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:

SIGNATURE TITLE DATE
<S> <C> <C>
President and
/s/ Peter T. Paul Director January 6, 1998
- ------------------------------------ (Principal
PETER T. PAUL Executive Officer)

Executive Vice
/s/ Becky S. Poisson President-- January 6, 1998
- ------------------------------------ Operations and
BECKY S. POISSON Director

Executive Vice
/s/ Gilbert J. MacQuarrie President, Chief January 6, 1998
- ------------------------------------ Financial Officer,
GILBERT J. MACQUARRIE Secretary and
Director
(Principal
Financial Officer)

Senior Vice
/s/ Kristen Decker President and January 6, 1998
- ------------------------------------ Controller
KRISTEN DECKER (Principal
Accounting
Officer)

- ------------------------------------
* BY , ATTORNEY-IN-FACT

</TABLE>

II-4
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
<C> <S> <C>
1.1* Form of Underwriting Agreement
3.1** Composite Articles of Incorporation of the Registrant
3.2** Amended and Restated Bylaws of the Registrant
4.1** Specimen Common Stock Certificate
5.1* Opinion of Tobin & Tobin as to legality (including consent
of such firm)
9.1** Voting Trust Agreement dated September 15, 1997, as amended
10.1.1** Employment Agreement of Peter T. Paul
10.1.2** Employment Agreement of Becky S. Poisson
10.1.3** Employment Agreement of Gilbert J. MacQuarrie
10.1.4** Employment Agreement of Steven M. Abreu
10.2** 1997 Executive and Non-Employee Director Stock Option Plan
dated July 22, 1997
10.3** Description of Bonus Incentive Compensation Plan
10.4** Amended and Restated Mortgage Loan Capital Loan Warehousing,
dated as of August 29, 1997, among the Registrant and the
Lenders therein named, as amended
10.5** Amended and Restated Servicing Secured Credit Agreement,
dated as of August 29, 1997, among the Registrant and the
Lender named therein, as amended
10.6** Master Repurchase Agreement dated as of September 11, 1996
among Merrill Lynch Mortgage Capital, Inc., Merrill Lynch
Credit Corporation and the Registrant, as amended
10.7** Tax Indemnification Agreement among the Registrant and the
Registrant's shareholders prior to termination of S
corporation status.
10.8** Founders Registration Rights Agreement
11.1** Statement regarding computation of per share earnings
21.1** List of Subsidiaries of the Registrant
23.1* Consent of Tobin & Tobin (included in Exhibit 5.1)
23.2 Consent of KPMG Peat Marwick LLP
24.1** Power of Attorney (set forth on the signature page)
27.1** Financial Data Schedule
99.1** Consent of Director pursuant to Rule 438 for Mark L. Korell
99.2** Consent of Director pursuant to Rule 438 for Leonard
Auerbach
99.3** Consent of Director pursuant to Rule 438 for Mark E.
Lachtman
99.4** Consent of Director pursuant to Rule 438 for Steven M. Abreu
</TABLE>
- --------
* To be filed by amendment.
** Previously filed

II-5

<PAGE>

EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
Headlands Mortgage Company:

We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus. Our report refers to a
change to the Company's method of accounting for originated mortgage servicing
rights in 1995 and its method of accounting for transfers and servicing of
financial assets in 1997.

(signed) KPMG Peat Marwick LLP

San Francisco, California

January 7, 1998