To Our Clients, Colleagues and Friends,

• A random question:  Why do people have those e-mail messages that say “I am out of the office but will return tomorrow?” Do they really accomplish anything?

• A serious question:  What if banks gave out frequent flier points for deposits?  Wouldn’t that attract some business?  We think so.
• Our all-time favorite deposit strategy was a bank in Argentina . Every week they had a lottery, the winning number being the last seven digits on someone’s checking account.  As we recall, the winner got a substantial prize.  The only thing we’d do differently is to make the size of the prize a function of the size of the account.  The larger the balance, the bigger the prize.

• If we were in the mortgage servicing business, we might do a variation on this lottery idea.  How about a once-a-month lottery where the winning lottery number is someone’s loan number and the winner could get his payments waived for a year? And once a quarter, the winner would get his mortgage paid off in full.  There are probably tons of regulatory hurdles for this idea, but we think it would be worth it.
• When we do FOCIS Risk Reviews, we often ding a company if they sell 100% of their loans to one investor, and we do see that from time to time.  What about all those mortgage companies who sold all of their loans to Citimortgage?  It’s a concentration risk we don’t like to see, and it’s a part of Counter Party Risk that you should be reviewing constantly.  Citimortgage is a great company, and they do a great job.  But they’re going through a temporary re-tooling, and some of our clients who sold all their loans to Citi and are having to learn how to sell to new investors.
• A year ago, the Prime Rate was 8.25%.  What is it today, 3.25%? Amazing.
• Bill Ridder was the founder of First Collateral and really the Dean of Warehouse Lending.  Before he retired, he wrote a list of things that WH lenders should beware of.  We include it as an attachment, and we hope you don’t recognize yourself there.  See end of this post for Bill Ridder’s list.
• It’s still not too late to register for the Western Secondary Marking Conference next week in San Francisco .  Go to www.cmba.com for details.
• Now that the hype over Michael Jackson is dying down a bit, we started thinking about him v. Chuck Berry, and we side with Chuck Berry as being more talented.   First, Chuck Berry was the poet laureate of teenagers in the 50’s.   His lyrics spoke to a generation and defined teen life.  Jackson ’s songs were imminently danceable, but his lyrics were pretty forgettable.
  Second, watch some old YouTube black & white videos of Chuck Berry and then ask yourself if Jackson had better moves.  Jackson was a wonderful dancer, but his style and moves can be seen every night in any good Broadway musical.  Watch the dance scenes in West Side Story and then see if you still believe Michael was one of a kind.  He was great, but he just wasn’t all that original.  The Moonwalk? James Brown had been doing that 25 years earlier.  All that spinning around? Pure Jackie Wilson.  Watch some of Berry ’s black and white videos on YouTube.  His moves had never been seen before, nor have they been duplicated since.  When he Duck Walked across the stage, it was absolutely electrifying.  Also, remember that Chuck Berry was a crazy-legs dancer while playing the guitar at the same time, something Jackson never did.
  Third, while both were kind of perverts, and Chuck Berry actually served time, he messed around with teenage girls, not pre-teen boys.
  Finally, Jackson didn’t make a move without managers, agents, PR people, make-up artists, plastic surgeons, his monkey and God-knows-who-else in his entourage coming along.  We produced a Chuck Berry concert in college, and he didn’t even have a manager.  You just called him up at his home and cut a deal.  “Just rent me an amp and get me a back-up band.” When he got off the plane, it was just him, his suitcase, and his guitar.  When we asked if he’d like to set aside the afternoon to practice with the band we got for him, he said “No need to.  Everyone knows Chuck Berry music.” And he was right.  But watch his old YouTube videos. 
• California home prices were up for the third month in a row, climbing 4.2% in May.  Even better, the inventory of unsold homes continued to drop and is now at only 4.2 months supply.  In May of 2008, it was 8.7 months.  Things are looking up!
• The model for companies that purchase charged off credit card debt is to pay $.05 on the dollar and try to collect $0.20. One of the public companies doing this is Portfolio Recovery Associates, and they just bought $961 million worth of charged-off loans for $52 million, or 5.4 cents on the dollars.  Asset Acceptance Corp just bought a $747 million portfolio for 2.9 cents on the dollar.  An interesting business.
• Remember Brenda White?  She was the superstar investment banker for mortgage company deals when she was at Solomon Brothers in the 80’s and 90’s. She died of cancer last week at the too-young age of 55.  We never met her, but we sure heard good things about her,
• A client in Michigan recently told us.  “I get 50 reports and I don’t read any of them because they don’t mean anything.”  Yes!!  We worked with him to get him the kind of financial, production, and secondary reports he truly needs.  We got it down to about 6-7 reports, and this will make a huge difference.   Along with You can’t manage it if you can’t measure it, our other mantra is that You’ll make better decisions with better reporting.  It’s just so critical that you work with your Controller or CFO to get the right sorts of daily, weekly and monthly reports that help you better manage the business.  A big part of our Profitability Review is helping clients develop such reports.
  

We’ve read some pretty nasty things about Detroit of late, and we beg to differ.  It might be a dying city, but it’s hardly a dead city.  We were impressed with Woodward Avenue , and when we took a cab to meet friends for dinner, the street was as busy as any financial district in America .  Besides, one of the biggest banks there is Comerica Bank, an institution we greatly admire. 

Finally, let’s thank South Carolina Governor Mark Sanford for giving us a new euphemism.  From now on, “Hiking the Appalachian Trail ” will take on a new meaning and be code for “Cheating on your wife.”  Hiking the Appalachian Trail indeed!

Garrett, Watts & Co.  -  Joe Garrett    (510-469-8633)  -  Corky Watts    (408-497-3135)

“Helping mortgage lenders increase revenues, control costs, and better manage risk.”

Early Warning Signs of Possible Fraud by Bill Ridder

1. Customer buys own loans off of the line

2. Cumulative, recurring problems:

a. Large number of investors rejections

b. Recurring overdrafts (cash flow shortage)

c. Delinquencies

d. Stale loans

e. Double fundings (double notes)

f. Late financial statements and/or tax returns

g. Promises not kept; numerous excuses

h. Wet funding issues

i. Recurring exceptions

3. Financial statements don’t make sense

a. Different CPA each year

b. Discrepancies / not “tie” together

c. Overly complex for the size of the company

4. Too good to be true

a. Customer doesn’t “fit” standard customer profile

b. Too eager – not question terms / pricing

5. Vendors /support services appear to be affiliated

6. Customer avoidance of questions – evasiveness

7. Principal not materially involved in the day-to-day operations of the company

8. Collateral deficiencies

a. White outs

b. Missing documentation

c. Conflicting information

9. Flamboyant lifestyle of principals

a. Conspicuous “wealth”

b. Arrogance – lack of humor

10. Nepotism

11. Overly complex corporate structure

12. Changing ownership – staff turnover rate high

13. Principal not willing to provide personal guarantee