To Our Clients, Colleagues and Friends,  

· The new Good Faith Estimate does not show total cash to close anywhere on the form. How can this be an improvement over the old form?  As we said a year or two ago, all disclosure forms should be written by high school English teachers. They are constantly hounding their students about clear and concise writing, something HUD officials are not very good at.

· It was exactly 45 years ago today that President John F. Kennedy was assassinated.  If you were alive, where were you that day? Even after all these years, we bet you remember precisely where were you were and what you felt.

· We were reading about the Producer and Consumer Price Indexes, and we saw that usual language how “Exclusive of food and energy, the index….”  Doesn’t that just slay you? Housing aside, is there really that much beside food and energy?  When they refer to “food and energy aside” what’s the “aside” that’s so important?  Jelly bean production? Outlays on Rhubarb Pie?  Tweezers output?

· We do a lot of FHA mini-eagle approvals, and we know first hand how busy HUD is.  But we were still surprised to read that there are now 36,000 lenders with FHA licenses, up from 16,000 in mid-2007. 

· Here’s a bit of scary news:  China has now overtaken Japan as the largest foreign owner of U.S. government bonds.  China owns $585 billion of our Treasury bonds, versus Japan which owns $573 billion.  Couldn’t China bring us to our knees, without firing a single shot, by simply dumping these bonds on the market? Yes, it would hurt the value of their holdings, but our bond prices would plummet, our interest rates would soar, and the Chinese could use our hyper-inflation to defeat us without any military actions at all.

· Do you know what the dry bulk market is?  It’s essentially how much you pay per day to rent a ship that delivers dry goods (i.e. not oil) such as grains, ore, coal etc.  As recently as M ay 22, the daily rate for a basic ship was $70,500.  They’re now quoted at $5,600.  The really big ships have seen their daily rates drop from $234,000 in June to $4,000 today. 

· A number of  readers have already calculated Art Rooney’s return on his original investment in the Pittsburgh Steelers.  It came in at 18.7% as the annualized rate of return.  He paid $2,500 for the team back in the 1930’s and it’s now worth over $1 billion.

· A survey quoted in the Wall Street Journal says that more than 80% of all multimillionaires who had extra-marital lovers are planning now to cut back on the “allowances” to their mistresses.  Boy, times are tough for everyone.  A friend who’s President of a small bank tells us that no, mistresses will not be eligible for a TARP bailout.

· Although we don’t look for Mergers & Acquisitions work, we’ve found ourselves working on two M &A deals recently.  We now have a buyer who’s looking for a California wholesale shop with $12-$15 million per month of production, who is profitable in 2008, and which is at least 75% wholesale. 

· We spoke to about 125 members of the Seattle Mortgage Bankers Association this past week.  What a great group.  Upbeat, positive, and realistic about the challenges.  Would your local M BA meetings have 125 peoples show up?  And isn’t Seattle a great city? And great restaurants to rival San Francisco (almost) and New York .

· For all the English majors, how about 2-3 sentences on the state of the mortgage market?  Write a few sentences as if written by F. Scott Fitzgerald and a few sentences as if written by Hemingway. We’ll give out a real prize for the best one, and we’ll kick this off ourselves with something Fitzgerald might have written:   The mortgage rates fell like the gentle dew on a cold and clammy day, ignoring the brighter sunshine he knew was waiting, whisp-like, behind the gossamer clouds of their hidden despair.  Now for Hemingway:  Rates were dropping. It was cold.  He was scared.   Okay, all you English majors, your turn.

· We wrote last week how warehouse lenders hate seeing owners take capital out of a company.  Here are a few ways we’ve seen owners try to do it without being caught: (1) Having the company pay for their big ticket items like boats or airplanes, (2) paying huge consulting fees to companies that they own, and (3) leasing space at above-market rents in a building they own.  We even view some outrageous expenses accounts as a means of extracting equity from a company’s balance sheet. A friend who used to be very senior at First Collateral sent us a list of 5-6 other ways people try to do this.

· Book value is not necessarily an accurate number during periods of economic disruption, so take this with a grain of salt, but here are the price-to-book ratios for the mortgage insurers.

Either book value hasn’t fully recognized credit losses, or these companies are cheap stocks.

· When people ask us if we know of any jobs, we keep telling them the only growth area in financial services that we know of is with the regulatory bodies.  We just read that the FDIC has signed a three year lease in Irvine , California that will accommodate 600 employees.  They’re opening it to help manage the cleanup of failed banks in the Western states. If we were looking for work, we’d be looking at the FDIC, along with the OTS, the OCC, the Federal Reserve, and the state banking authorities.  And the GAO which provides oversight of TARP.

Do you have some sort of Red Flag alert report? There are maybe 6-7 very important things you need to know every day, and you should consider having one report that gives the metrics on each of these. One that quickly comes to mind is cash-on-hand.  Pick a number which, if you fall below it, is a danger sign.  What about warehouse capacity? Or the number of loans in warehouse for over 30 days? Or loans closed but not shipped for more than 7 days?  Make up your list – and then have someone prepare a daily report giving you these numbers.  Here’s hoping your favorite football team wins tomorrow, and that you’re making a good profit on each and every loan.  See you next week.

Garrett, Watts & Co.  -  Joe Garrett and Corky Watts
510-469-8633 or 408-395-5504