After the stock markets close on Wednesday, The Ryland Group will release its 2Q2008 earnings. The results will be a financial testament to how well the home builder's new first-time home buyer focus is working.

The entry-level buyer segment comes contingency free, meaning they don't have to sell an existing home before buying a new home, a fact that should help shelter sales numbers while keeping cancellation rates in check. Moreover, the company's average closing price--$257,000--falls within FHA loan limits, making obtaining buyer financing less of an obstacle.

Despite this strategic shift, UBS Investment Bank analyst David Goldberg anticipates sales, backlog, and closings will continue their downward trending. In a research note released this morning, he estimated unit orders will be down by 30% while backlog and closings will fall 35% and 18%, respectively.

In 1Q2008, the company booked 2,159 new orders while delivering on 1,543 units during the quarter. The company counted 3,485 units in backlog at the end of the quarter.

Although Ryland's access to FHA financing is a plus, there is some stakeholder concern over the company's exposure to down payment assistance (DPA) programs. The hotly contested programs could be eliminated if representatives fail to keep the seller-funded assistance programs in place as part of a housing bill making its way through the House. The Senate already passed its version of a housing bill that put an end to the programs.

Depending on the degree to which Ryland buyers rely on these programs, a significant portion of the company's first-time and first-time move-up business could be poised to evaporate if the programs are banned. JP Morgan housing analyst Michael Rehaut estimates that public builders are relying on these programs for as much as 17% of their loan originations.

While an obvious barrier to sales, the elimination of these programs would also negatively affect Ryland's inventory levels. Management has been diligently working on reducing inventory levels, raising incentives to 16% of closing price in the most recent quarter to move spec inventories over 120 days old. At the close of 1Q2008, the company had 686 total specs.

Ryland management also will be looking to show improvements in SG&A, which were nearly 16% of revenues in 1Q2008. In a Bank of America investor call in mid-June, management fingered higher than normal cost of sales and severance costs as main contributors to the high overhead costs for the quarter. CFO Gordon Milne alluded to several cost-cutting initiatives underway and said that he expected SG&A to be back in line at 11% by 4Q2008.

Despite these issues, the company remains an analyst top pick. The company's low debt levels and decent cash cushion puts Ryland in a good position to weather some more challenging quarters. At the end of 1Q2008, the company had $213.3 million in cash, up more than $202.4 million from the previous year, and debt of $839.4 million, which was down 16.8% from 1Q2007.

In addition, the company made a third amendment to its senior credit facility in early July. The changes made were related to tangible net worth and leverage ratio covenants, a move that FTN Midwest Securities Corp. analyst Jay McCanless said points to future charges in 2008. In a research note from July 7, McCanless estimated that Ryland would incur roughly $207 million more in land impairments, as well as a $151.2 million deferred tax asset charge, by the close of fiscal 2008.