To Our Clients, Colleagues and Friends:

· Would you rather do 50 loans with a margin of 100 bps or 100 loans with a margin of 75 bps?  While the answer is obvious, we see companies who have huge margins, but who just don’t do a lot of volume. We also see companies that do lots of volume but with a tiny margin. This issue is very much worth studying, and perhaps testing. There’s no point in having big margins if it causes you to get diminished volume with less overall revenues, and there’s no point in doing lots of incremental volume if you sacrifice too much margin and you get less overall revenue.

· We were interviewed by the L.A. Times and CBS on the bad quarter at Downey Savings. They seemed to want us to say that Downey was the next Indymac. Our response was that while they had serious loan problems, Downey didn’t have issues with funding, and the two thrifts were not analogous. Downey has a very good deposit gathering franchise, with over 170 branches, and they don’t have a single dollar of brokered CD’s.  They have a lot of work to do on their loan portfolio, but we just don’t see them failing.

· Today is Vida Blue’s 59th birthday. Blue was the 21 year old pitcher who went 24-8 with a 1.82 ERA his rookie season with the A’s.    Oakland . A’s owner Charlie Finley offered him a Cadillac if he’d change his first name to True.  True Blue.  Vida was appropriately insulted.

· Wachovia Chief Financial Officer was ousted last week: Funny when the CFO, the guy who just reported the bad news, gets ousted, and not the people who created the bad news.  It’s a tough world out there.  Be careful.

· Happy birthday, Mick Jaggar, and if you were an American citizen, today you’d now be 65 and eligible for Medicare.  The Rolling Stones have been making great rock ‘ n roll music since 1962, and does that make you feel old?

· We wrote last week that Paramount Equity had its license revoked by the State of Washington .  We were wrong! This is what we get for not being good investigative reporters: We’d heard it from several sources, but we never checked it out.  Turns out that while Washington regulators have made very serious allegations and filed charges, Paramount believes these charges are unfounded and that they will be vindicated. People, try to check out stuff before you blindly send it to us.  And we’ll promise to be more careful.  Our apologies to the people at Paramount .

· The Bank of America announced that, to our shock and awe, Countrywide’s net worth is down to $100 million after reserves and mark-to-markets. It had been $8.4 billion.  Shocking!  The write-downs came as a result of big holdings of HELOCS, Pay Option Arms, and subprime loans.

· The U.S. leads the world in the percentage of its population currently in jail.  We generally seem like a law-abiding people, so it seems so strange that we lead the world in people incarcerated.  Have we criminalized too many activities? What’s the deal?  But the countries that execute the most people are China , Iran , and Saudi Arabia . We executed 42 people in the U.S. last year; China executed more than 5,000.

· The airline industry may be even tougher than the mortgage industry, but one company defies the odds.  Southwest Airlines not only reported good profits for the quarter, but earnings were up 15%. Kind of amazing, isn’t it? Maybe it’s worth hiring a Southwest executive or two to help you with your mortgage business. Airlines and mortgage companies are both in a commodity business, so maybe the Southwest people have some good ideas that can be applied to the mortgage industry.

· The FDIC has about $53 billion available to resolve failed banks. They estimate that Indymac will require $4-8 billion. That will still leave a lot of money in the Fund, but if we’re going to have a lot more banks fail the next few years, and two more failed this past Friday, they’re going to have to raise their assessments on the healthy banks to replenish the fund. 

· As you know, we do a lot of FHA approvals.  We recently got an approval from HUD in five weeks, down from 3-4 months earlier in the year. But we take no credit.  It just seems that HUD has gotten through the backlog of companies applying for FHA approval in early 2008.

· HERE is an article we wrote a long time ago.  It’s still valid.

Try experimenting with different pricing at different branches for a few days to see whether the additional volume at lower margins generates greater overall revenue.  And vice versa.  You’ll learn a lot about the margin that generates the greatest overall profit for you. And are you enjoying the summer?  Make the most of it – it’s about half over. Mortgage banking may be tough right now, but that will change, and in the meantime, a day at the beach or a nice hike are good ways to forget about business and realize there are more important things in life.  As Oscar Wilde said, “We are all in the gutter, but some of us are looking at the stars.” 

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