To Our Clients, Colleagues and Friends:    

· Update on the 1st Quarter for Indy Mac: Their loss for the first quarter should decline by roughly 50% to 65% from the 4^th qtr. Of 2007, and roughly 25% of this loss is coming from one-time severance and office closing costs. Their credit costs in Q1-08 will be down approximately fourfold from the $863 million they had in Q407.  This is a good sign for the entire industry.

· Remember Oakland A’s slugger Jose Canseco?  He just lost his Encino, California home to foreclosure.  Why aren’t we all that surprised? 

· Well over 500 warehouse borrowers started looking for new lines when Wamu and First Collateral closed down.  We spoke with people at First Collateral recently, and we were surprised how many companies are still with them.  Their commitments go out till late this year, and they’re just taking their time (or being unsuccessful) in finding replacement lines. They should really get moving on this.  It’s getting harder, not easier, getting lines.

· And guess whose birthday it is today?  Willie Mays, the original Say Hey kid.  Happy birthday Willie, and even though you turn 77 today, you’ll always be that 27 year old kid chasing down fly balls, stealing bases and hitting home runs.

· Maybe fixed income investors are just naturally suspicious, but that community is concerned about the Bank of America’s refusal to make an unequivocal statement that they will stand behind the Countrywide bonds. Some of their views approach conspiracy-type scenarios, but still, it is a possibility that the BofA could close on the deal and throw Countrywide into bankruptcy to protect against litigation and all the problems Countrywide is currently dealing with. We tend to doubt it, but we’re eager to see how it evolves.

· In a regulatory filing, the BofA said that about $59 billion of revolving credit facilities and FHLB advances would be repaid once it closes on Countrywide. But it specifically failed to make any reference to the remaining $38 billion in Countrywide debt, later amending the filing to state that they could “allow it to remain outstanding as obligations of Countrywide.” (i.e. not the BofA). And in a statement from Ken Lewis that could scare the heck out of Countrywide bond holders, BofA Chairman Lewis said that “They are a separate legal entity that has their obligations. And we have no incremental obligations around that.”

· We’ve been sent in by warehouse lenders to do a FOCIS Risk Assessment on a number of smaller mortgage bankers lately.  The disturbing pattern we see is that too many of them have persistent, ongoing losses and no real plan to eliminate them.  “Volume will pick up in the spring” is not a plan.  When we see companies that may have lost money in, say, 7 of the last 9 months, we worry about them.  Many are living on borrowed time. And we see a major trend among warehouse lenders who are becoming less tolerant of thee ongoing losses.

· We recently heard one client mention that he thinks it’s premature to go into reverse mortgages. True, the baby boom retirement years are just getting started, but wouldn’t you rather get in a bit too early than a bit too late?  Besides, companies we know who are doing Reverse Mortgages are doing good volume and making great margins on them. 

· We made a mistake last week. When we said Freddie Mac owned $2.1 trillion in mortgages, it turns out that this number includes loans they own as well as mortgage backed securities they guaranty. Oops.

· Have you wondered why airlines like Southwest always make money, and most if the rest lose just tons of money?  One big piece must be that Southwest hedges much of their fuel costs.  Last quarter, they hedged 70% of these costs.  Continental hedged 22% of their fuel costs, Delta hedged only 27%, and United hedged 30%.  As a result, Continental paid $2.80 a gallon of fuel, whereas Southwest, which had locked in costs when they were lower, paid only $1.98 a gallon the first quarter.

Mark Twain wrote a very short preface to Huckleberry Finn:  “Persons attempting to find motive in this narrative will be prosecuted; persons attempting find a moral in it will be banished; and persons attempting to find a plot in it will be shot.  By order of the author”.  Funny. And by the way, even though Huck Fin is not that popular a book anymore, it’s still hilariously funny, and it gives great insight into what the United States was like in the days just before the Civil War. 

Joe Garrett and Corky Watts  -  Garrett, Watts & Co.