To Our Clients, Colleagues and Friends,

· We just looked at the new 3-page HUD-1, and it seems almost as confusing as the old one.  Aren’t we trying to make it easier for borrowers to know what they’re paying?  What do you think of it?  By the way, we think the new GFE form seems much better than the old one.

· Who’s running the TARP program, Paulson aside?  It’s 35-year-old Neel Kashkari who was an investment banker at Goldman Sachs in the technology field.  He has no real experience with banks or financial services.  It would make us feel better if he had.

· Can depositories just doing mortgage banking survive?  We know some regulators who question this, and we share their concerns.  We’d say that yes, they can survive, but the likelihood of their success increases the more they grow their retail deposits.  If a monoline is funded with brokered CDs and FHLB advances, the odds of making it longer-term diminish.

We do lots of work for various warehouse lenders, typically helping them assess the safety, soundness, risk characteristics and viability of their warehouse borrowers. A few years ago they were all knocking on your doors to offer you lines.  Now, getting new lines is almost impossible.  Here are four important things you can do to stay in the good graces of your lenders: 

1.    Keep your lender 100% aware of everything going on. Tell them the good, the bad  and the ugly.  No surprises!   They hate surprises.

2.    Send in detailed monthly financials that show that you collect all the metrics on your business that you need to show why you’re profitable – or why you’re losing money.  Break things down such as your gain-on-sale and your cost-to-originate in basis points. Show all re-purchase demands. Do cash flow projections.

3.    If you aren’t profitable, you absolutely must show your lender a believable plan to get back into the black. Then, every month, show how you’re doing relative to the plan. If you’re losing money, don’t wait to be asked for this plan.

4.    Leave your money in the business.  Stay liquid and maintain maximum capital.  Warehouse lenders get very worried when they see you pull capital out.

· For our depository clients, we’re a bit surprised that more aren’t using the FHLB Mortgage Program for low-LTV, low-risk loans.  Yes, you take on some of the credit risk, but you get paid a credit enhancement fee rather than paying a G-fee to Fannie or Freddie. Actually, we haven’t checked lately, but we assume this program is still around.

· Everyone knows that Davy Crocket was a famous frontiersman, that he served briefly in the U.S. Congress, and that died defending the Alamo .  What we didn’t know was that he actually harbored Presidential ambitions. We’re part way through his autobiography (which he insists he wrote himself) and saw this:  “I was living below Winchester when the Creek war commenced, and I must give an account of the part I took in defense of the country.  If it should make me President, why, I can’t help it.  Such things will sometimes happen, and my pluck is, never to seek nor decline office.”  How cool would it have been to have a President who wore a coonskin hat?

· The Washington State Cougars have now been shut out in three of their last four games (this is ugly, but 58-0, 69-0, and 28-0).  In conference play, they’re now 0-8 and have been outscored 437-61.  But this weekend they play arch-rival University of Washington , winless all year.  These two schools have very rich and proud football traditions, and we predict both will be back on top within a few years.

• We’re still getting nominations for scariest movie of all time.  One reader informed us that a real person, Ed Gein, was the inspiration for three horror movie characters:  Norman Bates (Psycho), Leatherface (Texas Chainsaw M assacre), and Buffalo Bill (Silence of the Lambs).  We Googled this serial killer from the 1950’s, and it’s too gruesome to put in a family-oriented newsletter like ours.  But you can look him up yourself. Be warned though: It’s not for the faint-of-heart.
• Freddie Mac disclosed Friday that JPMorgan Chase may refuse to repurchase bad mortgages that Washington Mutual  sold to the GSE. But if the New York bank follows through on its threat, Freddie holds a big sword — it said it would not let JP Morgan Chase service the loan portfolio it inherited in its purchase of Wamu. We’ll have to see how this plays out.

· With premiums almost non-existent for sellers of SBA loans, it occurs to us that this might be a great time to be a buyer.  At prime plus 2.75 with a 5-4-3-2-1 prepayment penalty, and with the full faith and credit of the U.S. government behind them, what’s not to like about holding them for the yield? 

· And did you notice that you can now float SBA loans over LIBOR?  Till now, they had to be based on the prime rate. This should make them more attractive.

· In 1933 Art Rooney bought the Pittsburgh Steelers for $2,500. He left 80% of the team to his five sons.  One of them is now buying out his four brothers for $750 million, putting the team’s value at about $950 million.  Does someone out there want to calculate the annual rate of return on his original $2,500?

· Business Week listed what they considered the 30 best Business Schools in the United States . We saw that 25 of the 30 had been named.  That is, Penn’s business school is called Wharton, Northwestern’s is called Kellogg, and Dartmouth is Tuck and so on.  The ones that didn’t have some benefactors name were Harvard, Stanford, Columbia , Yale and Georgia Tech. For the right amount of money, you can probably get one of those named after you.

· Freddie Mac disclosed that for the third quarter,  gross proceeds from the sale of foreclosed homes averaged 29% less than the unpaid loan balance.  This compares with 14% a year ago.  When you take into account repairs, commissions and related costs, we’d estimate that the 29% loss climbs to about 35%. Does that sound about right to you?

· Are credit cards profitable?  We just looked at the Master Trust Data for American Express for October. Their portfolio yield was 20.02% and the charge offs were 6.96%. This gave them a net portfolio yield of 13.06%.  A year ago, charge offs were significantly lower, and the portfolio yield was 19%.

Those who know us also know that we consider the CFO position to be of utmost importance.  It always dismays us to see how much mortgage companies invest in loan production staff – and how little they invest in the financial reporting department.  As we always, always say, you can’t manage it if you can’t measure it.  By the way, this article is something we wrote maybe four years ago.  We think it’s more relevant than ever.  And how about turkeys for employees this year instead of Christmas bonuses?   It’s something to think about. 

Garrett, Watts & Co.

Joe Garrett and Corky Watts
510-469-8633 or 408-395-5504