To Our Clients, Colleagues and Friends,  

· Kate Berry of the American Banker (Nov. 24) wrote a great article on loan modifications.  Turns out that a huge number of them go into default again after being modified. One study of monthly trustee reports from 19 servicers found that 30% of borrowers who received any form of modification in the 4^th quarter of 2007 became 60 days delinquent within eight months.  If it involved reducing the rate and payments, 44% defaulted, but if it involved actually reducing the balance owed, the re-default rated dropped to 23%.

· Embattled Citigroup has its problems, but it has one of the 1-2 greatest global banking franchises.  As we recall, they have 200 million customers in 106 countries.

· We’re still reading Davy Crockett’s autobiography, and we just got to the part where he sounds like a Republican, a party that hadn’t even been started yet.  The President, both cabinets and Congress, to boot, can’t legislate poor men into rich men.  Hard knocks, and plenty of them, can only build up a fellows self. He’s a philosopher as well as a bear hunter.  He does come up with an interesting word when he refers to an old sanctimoniouslyfied fellow. Somehow, that word just never stuck.

· We got lots of comments about Rickey Henderson.  There was a movie years ago called The Brother from Another Planet, and it occurred to us, that this is Rickey.  He’s not egotistical and he’s not dumb. He’s just from another planet.  This just might explain everything.

· According to the Federal Reserve, consumer debt was about 77% of disposable income twenty years ago and 121% of disposable income now.  Here’s how it looks over time.             

It will be interesting to see if that trend reverses itself as consumers start taking on a lot less debt in reaction to the current economic troubles.

· Were you hooked on The Shield?  The final episode was jarring, but in a thousand ways, wasn’t it absolutely perfect?  Shane and Mackey were two of the best roles ever created for TV, and wasn’t M ackey’s end – having to wear a suit and work in a cubicle – his own version of hell, especially when he hears the sirens and the action on the street?

· Before he became a famous Manager, Joe Torre was a pretty good baseball player, except on July 21, 1975.  That day he hit into four straight double plays.  It never happened before, and it hasn’t happened since.

· From what we read, appraisal fraud is the most common type of fraud uncovered at P M I.  Another M .I. company we spoke with says it’s about evenly divided between appraisal fraud and mis-stated income fraud.  Interesting.

· How do you value a mortgage company?   A good reference point is the KBW Mortgage Finance Index (made up of 24 mortgage related stocks), and a good starting point is its PE ratio.  Unfortunately, there’s no PE ratio for 2008, as you need earnings to come up with a PE.  What about price-to-book?  The companies in the index currently trade at 0.6% of book value.  We all think our kids are the best looking and our mortgage company the most valuable one in the area, but this is the benchmark, 60% of book value.

· A true story:  If you recall, Rickey Henderson had that funny, bent-over batting stance. We asked him once “Hey, Rickey, when you were at Oakland Tech, didn’t any of the coaches ever try to change your stance?  He told us “Why would they? Rickey never batted less than .560.”   A true statement – but like so much of what he said, it just came out sounding funny.

· What follows is from an article on salesmanship we read years ago in the New Yorker.  We actually think sales is what makes the gears of capitalism keep moving, and we think highly of people who are good at it.  So please don’t take it the wrong way.  We just think it’s well-written – and funny:    
“Salesmen have a horrible reputation, but I love them.  They look you in the eye, use your name a lot, hold your shoulder while they talk to you, and they laugh really, really hard at your jokes.  They take you to expensive restaurants too.  They ask where you went to college and all about your kids, their ages and their activities.  They suggest through body language and facial expressions that they would like to marry you.  In other words, sales people treat you exactly the way you wish everyone would treat you.”   Isn’t this great writing?

· Be very careful if asked to be a minority shareholder in a mortgage company, or any other company.  We saw a situation recently where things have gone wrong with this Southwest mortgage company.  The majority shareholders are, essentially, looting the company for their own benefit, and the minority shareholders have very limited rights.  A better legal agreement could have solved some of the problems in advance,  So if you’re going to do this, get a good lawyer up front.  Don’t wait till things go wrong.

· Ever think of checking into the Betty Ford Clinic? The latest New Yorker has an article on rehab clinics, and the non-profit Betty Ford Clinic is $24,000 for thirty days. The for profit ones can run as high as $68,000 a month!

· With stock prices do depressed, the Carlyle Group was able to raise a $15 billion buyout fund. M akes sense, and the investors in it will probably make a ton of money over the next 3-5 years.

· When Davy Crockett toured New England , Harvard offered him an honorary LL.D. degree, which he promptly refused.  With a re-election campaign so close, he knew his constituents would make fun of him if accepted the degree.  He figured they’d think it was pretentious and joke that it stood for Lazy Lounging Dunce.

· Keefe Bruyette and Woods has dropped the following from the KBW Mortgage Finance index:  Corus Bancshares Inc., Downey Financial Corp., Flagstar Bancorp Inc., MGIC Investment Corp., PMI Group Inc. and Radian Group Inc.   Some of them probably shouldn’t have been in the index in the first place.

Now that everyone’s retirement accounts and investments in general are off 25-50% or more, what does it really mean?  It means a few less vacations, keeping your old car a few years longer, splurging less often at expensive restaurants, maybe taking your next vacation here in the U.S. rather than Europe , possibly working a few years longer than planned. None of this sounds that truly horrible, does it?  It’s not what anyone planned on, but it’s not the end of the world. Life goes on.  Let’s be thankful for what we do have, and not remorseful for what we no longer have.

Garrett, Watts & Co. -  Joe Garrett and Corky Watts  -  510-469-8633 or 408-497-3135