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February 27, 2005

Raymond Kwan

raylkwan@

155 North Wacker Drive ( Chicago, IL 60606

Accredited Home Lenders Holding Co (LEND-NASDAQ) – $40.32

Overview

Accredited Home Lenders Holdings Co. is a nationwide mortgage banking company that originates, finances, sells, securitizes and services non-prime mortgage loans secured by residential real estate. Accredited focuses on borrowers who may not meet conforming underwriting guidelines, because of higher loan-to-value ratios, the nature or absence of income documentation, limited credit histories, high levels of consumer debt or past credit difficulties. During the year ended December 31, 2003, approximately 89% and 11% of its loan originations were originated through its wholesale and retail channels, respectively. During 2003, wholesale loan originations were originated through approximately 6,800 brokers, and the retail channel originated mortgages through 285 loan officers working in 29 retail branches and generated leads, primarily through telemarketing, direct mail and the Internet. The Company’s head office is located in San Diego, CA with employees totaling 2,694. Additional information about the Company can be found at:

Analysts have identified the following factors for evaluating investment merits of LEND.

|Key Positive Arguments |Key Negative Arguments |

|LEND reported 4Q’04 EPS of $1.76 per share versus the consensus of $1.69 per|Company continues to experience depressed margins due to a flattening yield |

|share. |curve and a rising interest rate environment. |

|Company’s loan originations jumped $1.1B from a year prior to $3.5B in |Declining home prices will negatively impact the Company’s origination |

|4Q’04. |volumes and lower loan servicing net income. |

|The average weighted FICO score of the Company’s borrowers was 639 in FY2004|The mortgage banking business is highly competitive and has relatively low |

|compared to 632 in FY2003. |barriers to entry. |

|Management reaffirmed EPS growth guidance of 15% over the next three years, |GSEs such as Freddie Mac and Fannie Mae have recently embarked into |

|despite rising interest rates and a competitive mortgage lending landscape. |non-traditional residential loans which are in direct competition with LEND.|

|Delinquency rate was 1.7% at the end of 2004 versus 1.8% from a year prior. |Securitization of the Company’s loans is highly dependent on the fixed |

|Net interest income in the fourth quarter was $66.1 MM, up 6.7% |income market. In an uncertain and volatile market, execution of these |

|sequentially. |Asset Backed Securities may be difficult. |

|Company maintains a unique business model compared to its peers. For | |

|instance, LEND compensates their saleforce based on not only loan volume but| |

|the profitability of the loan as well. | |

Accredited Home Lenders Holdings Co. posted exceptionally strong 4Q’04 results. EPS was $1.76 per share versus the Street consensus of $1.69 per share due to a lower than anticipated tax rate and higher than expected gain on sales. Despite an overall competitive marketplace and a rising interest rate environment, analysts continue to tout the Company in a positive sentiment. That being said, analysts expect LEND to trade markedly higher over the next 12-18 months.

Revenues

Interest Income

|Fiscal Year Ends: December |FY2004A |1Q05E |2Q05E |3Q05E |4Q05E |FY2005E |

|$ in millions | | | | | | |

|Digest High |357.1 |126.0 |139.8 |154.4 |169.7 |589.8 |

|Digest Low |357.1 |118.8 |129.2 |137.9 |146.0 |532.0 |

|Digest Average |357.1 |123.4 |136.1 |147.5 |158.7 |565.7 |

|Digest % of Total Sales |54.05% |62.94% |62.55% |62.93% |65.29% |63.48% |

Gain on Sale of Loans

|Fiscal Year Ends: December |FY2004A |1Q05E |2Q05E |3Q05E |4Q05E |FY2005E |

|$ in millions | | | | | | |

|Digest High |292.5 |69.2 |78.8 |82.3 |80.0 |308.2 |

|Digest Low |292.5 |57.0 |67.1 |75.3 |76.2 |279.5 |

|Digest Average |292.5 |63.8 |73.9 |78.7 |78.1 |294.6 |

|Digest % of Total Sales |44.27% |32.55% |34.00% |33.57% |32.12% |33.06% |

Total Revenues

|Fiscal Year Ends: December |FY2004A |1Q05E |2Q05E |3Q05E |4Q05E |FY2005E |

|$ in millions | | | | | | |

|Digest High |660.7 |196.1 |217.5 |234.4 |243.1 |891.1 |

|Digest Low |660.7 |196.1 |217.5 |234.4 |243.1 |891.1 |

|Digest Average |660.7 |196.1 |217.5 |234.4 |243.1 |891.1 |

|Digest Average YoY Growth |#DIV/0! |64.79% |32.78% |31.61% |21.67% |34.87% |

The Company reported total revenues in the 4Q’04 that was up 12% sequentially due to higher than expected gain on sale of loans and interest income. Looking forward, analysts expect double digit revenue growth in FY2005, buoyed by higher interest income as a percentage of total revenues.

Please refer to Zacks Research Digest spreadsheet for specific revenue estimates.

Margins

| |FY2004A |FY2005E |FY2006E |Trend |

| | | | |(up/down) |

|Pre tax Profit |12.91% |11.43% |10.84% |Down |

|Margin | | | | |

Pre-tax profit margins for FY2005 and FY2006 are expected to markedly lower than ’04 levels. Elevated loan loss provisions and interest expenses as a result of higher expected interest rates are the main factors leading to the lower margins going forward.

Please refer to Zacks Research Digest spreadsheet for more details on margin estimates.

Earnings Per Share

|Fiscal Year Ends: December |FY2004A |1Q05E |2Q05E |3Q05E |4Q05E |FY2005E |

|$ in millions | | | | | | |

|Digest High EPS |6.07 |1.42 |1.77 |1.89 |1.93 |6.88 |

|Digest Low EPS |6.06 |1.35 |1.64 |1.82 |1.82 |6.75 |

|Digest Average |6.07 |1.39 |1.71 |1.85 |1.87 |6.81 |

|Digest Average YoY Growth |21.91% |31.90% |6.56% |11.30% |5.97% |12.24% |

Please refer to Zacks Research Digest spreadsheet for more extensive EPS figures.

Target Price/Valuation

Target prices for LEND range from $52.00 to $60.00 with an average price of $56.50. The low end of the target price is based on sum of parts evaluation equating to 7.5x 2005E EPS, while the high end of the target price is modeled on an 8-8.9x 2005 or 2006 EPS estimate.

Please refer to Zacks Research Digest Spreadsheet for further details on valuation.

Long-Term Growth

The home mortgage lending sector is a highly competitive marketplace with essentially no barriers to entry. This coupled with the rising interest rates environment translates into lower industry wide originations as well as a weaker fixed income market for Asset Backed Securities. According one analyst (JMP Securities), industry sub-prime volumes for FY’05 is predicted to drop to ~$400B compared to $500B from a year prior. Despite the somber outlook, analysts still see Accredited Home Lending Holding Co. bucking the trend. The Company expansion into new markets should bolster origination volumes and LEND’s emphasize on loan profitability will continue differentiate itself from other sub-prime mortage companies. Over the next 3 years, both management and analysts target a 15% annual EPS growth rate.

Individual Analyst Opinions

POSITIVE RATINGS

Friedman Billings – The stock is rated OUTPERFORM with a $52.00 price target. Firm believes LEND’s three year EPS growth target of 15% is achievable given the Company’s focus on profitable loans and above average operating performance. Analyst also believes the Company should be priced at a premium valuation compared to its peers.

JMP Securities – The stock is rated MARKET OUTPERFORM with a $60.00 price target. Analyst believes the Company’s margins will be depressed in ’05 and 06 as a result of rising interest rates and the competitive environment for the sub-prime mortgages. Nonetheless, analyst still views the stock positively and ranks the LEND as one their top mid-cap picks in the non-prime mortgage segment.

Piper Jaffray – The stock is rated OUTPERFORM with a $60.00 price target. Analyst views LEND as one of the best managed sub-prime mortgage companies that is differentiated by their commitment to profitability, discipline not to convert into a REIT, and credit culture.

Roth Capital – The stock is rated BUY with a $54.00 price target. Firm believes the mortgage industry will be faced with execution issues on securitization and loan sales in late 2005 or early 2006 which will de-emphasize the benefit of incremental loan production. In the analyst’s opinion, those companies that establish their business model based on return on loans rather than volume will be able to generate above average returns going forward.

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Research Digest

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