Special note: Contact Joe Garrett to receive 3 special attachments:   1  Ten Keys to Survival, 2.  Being Small, and   3. FHA Card

To Our Clients, Colleagues and Friends:    

· We spoke with a co-owner of a good sized mortgage company which had gone through a near-death experience earlier this year.  His big lesson learned?  If we can’t afford to pay cash, we’re not buying it. There’s a time when using debt makes sense, but we found his comment interesting and one that’s hard to argue with.  He added that debt is slavery, and yes, if you have no debt, you have many more options.  One other way to phrase it, and we’ve been telling clients this for years, is that cash is king and that building liquidity is always a smart thing to do.

· A reader at Indy Mac Bank told us that Cow Pasture Bank is no more.  Wells Fargo bought them and shut down the airstrip!  Wells is probably the best bank in the country, but how could they do this?  Having an airstrip for depositors was about the coolest thing in the world. Dick Kovacivich, have you no sense of cool?

· How many passwords do you have for various websites, ATMs, etc.?  It had gotten to the point where each of us had way too many passwords, so we started, and just finished, a tedious process of changing them all to the same password.  Memorizing ten different passwords just doesn’t work.

· This is probably as irrelevant a statistic as you’ll see this week, but did you know that virtually 100% of all FHA are loans are securitized soon after they’re originated? Along with all the reasons for holding an MBS rather than a whole loan. we can think of only one reason.  And that’s that GNMA will only securitize new loans and not seasoned loans.

· On This Day in History, June 27^th 1967, the world’s first ATM was installed in London . Banking is not terribly innovative, but ATMs must rank as one of the great innovations of the industry.

· The world is not coming to an end. Delinquencies in the total portfolio at Freddie Mac were 1.88% in April, so a little 3^rd grade arithmetic shows us that 98.12% of all their borrowers made their payments in time.  Hardly sounds like a disaster in the making.  Would everybody just take a deep breath and relax.  Everything’s going to eventually be just fine.

· The States of Illinois and California are suing Countrywide as well as CEO Angelo Mozilo for “unfair and deceptive practice”, and for putting borrowers into “risky mortgage instruments.” Give us a break!  We were never the biggest fans of Countrywide, but if they’re going to sue the company, they should name a few thousand other mortgage companies as well. And while they’re at it, shouldn’t they sue a few million borrowers who only decided they were deceived after housing values started to decline?

· And why isn’t the BofA re-pricing their deal to acquire Countrywide?  We don’t get it.  Why not walk away from it or pay much less because of the mounting legal liability?  All we know is that the Countrywide bonds have not really moved up much, and that tells us something is afoot.  One theory is that the BofA will own Countrywide as a separate corporeity entity, letting it sink or swim on its own but legally unable to drag the bank down with it.

· We read that Wachovia has hired investment banker Goldman, Sachs to figure out what their $120 billion of pay-option arms could fetch if sold. These are the so-called pick-a-pay loans they acquired when they bought World Savings.  We suppose it depends on the eventual price, but what a horrible time to try selling these.

· Tales from the Crypt:  > From time to time we’re going to share some horror stories with you, all things we’ve seen the past several years. Today’s Tale may be as scary as they come.  It has to do with 2/28’s, but it’s really about controls.  We went into Northwest shop on behalf of their warehouse lender.  To cut to the chase, they were selling loans at huge losses, and we were supposed to find out why.  Their doc draw person was drawing docs on 2-28’s, with a 4% start rate and a 5% life cap. Being smart (but untrained) she assumed a 5% life cap meant that the rate could never exceed 5%.  And lacking any controls or second signatures on docs, she drew the loans up this way.  The borrowers had a 4% teaser foe the first two years, with the loan then capping out at 5% for the next 28 years.  The company lost about 11 points on each deal.  The lesson is self evident:  Trust but verify.  Require a second signature on all docs before they go out. Increase training. But have that second signature.

We’re running the Ten Keys To Surviving 2007 attachment again, as all the lessons of 2007 still apply in 2008.  As one client put it, his company now makes every loan as if they’re a portfolio lender and will own the loan forever.  “It’s amazing how that mind set affects our underwriting.  We turn down a lot of loans we might have made a year or two ago, but we just feel safer about our future this way.”

John Maynard Keynes, British economist in the 1930’s, also must have believed in maximizing your cash position.  His semi-famous quote was that “Markets can typically stay irrational longer than most investors can remain solvent.“ 

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