To our Clients, Colleagues and Friends, 

• Lenders have been urging Congress to raise the loan limit on SBA 7(a) loans above the current $2 million limit.  There’s talk of going to $3 million and maybe even to $5 million.  When the secondary market returns for 7(a)’s, can you imagine doing a $3 million loan and getting the usual 10 points for it?
• Do you know who edited Michael Jackson’s 1988 autobiography Moonwalk?  None other than Jackie Kennedy! After being married to the President of the United States , she must have found it a bit, well, unusual to deal with Michael and all his eccentricities.  But maybe he found her strange, too.

· Advanta issues credit cards to small businesses, and they just reported that the default rate on their cards was a shocking 56.9% last month.  One more victim of the recession. · Alt-A has gotten a bad rap the past few years, and deservedly so, but the original Alt-A product was an excellent investment.  It was created by Peter Paul , owner of Headlands Mortgage, and these loans performed perfectly well for years and years. What screwed it up were other lenders who kept raising the LTVs.  There’s absolutely nothing wrong with a stated-income loan. It just needs to be married to a lower loan-to-value, and this was the original Headlands Product. · Awhile back we saw an ad in the Daily Californian looking for an egg donor.  The childless couple’s requirements were that the donor be Asian, be a certain height and weight, and have verbal and math SAT scores over 700.  We were trying to think this through and then decided, why the heck not.  What do you think? · We’ve attached an article we wrote that some of you might find interesting.   It’s kind of a “What I did in college” type reminiscence.  But don’t try to read it on your screen or you’ll probably get a sore neck.  It’s best to print it out and read it that way.   My Brush With History   · By the way, we still think Citigroup made a big mistake by shutting down First Collateral and exiting the Warehouse Lending business. Whenever we talk to ex-First Collateral people, we’re reminded of what a great team of people they had. · Women, whatever problems you’re having with your hair, aren’t you glad this isn’t 1963?  If we went back in time, this is the hairstyle you’d probably have.  These three are the Ronettes, a hugely popular girl group back then.  The one on the left was married to musical producer and psycho-killer Phil Spector. These hairstyles were called bee-hives and they were achieved by “ratting” your hair.  There was one girl who had a whole nest of black widow spiders living in her beehive (once you ratted the hair that high, you’d go for 12-18 months without washing it) and finally died of spider bites on her scalp.  Some people think this is an urban myth, but it really happened.  We read about it in the National Enquirer. · When we referenced Hank Aaron as the home run champion, about 10 or so people got it and the rest sent us e-mails saying we’d made a mistake and that it was actually Barry Bonds who holds the record.  Um, no, we didn’t make a mistake.  · Many of our clients are moving to mandatory selling and have asked us about hedging. Here’s a one paragraph history of how it evolved:  (1) All hedging today is derivative of a model developed by Paul Tuttle , he of the imaginatively named Tuttle & Co.  Until Paul came along in the late 70’s, hedging was a lot of hocus pocus.   (2) Secondary marketing types would have models that looked at unemployment, the CPI, money supply, and goat entrails to figure out how much to cover.  Paul changed all that and built a mathematical model that ultimately looked at which loans should fund (i.e. pull-through) and then locked in the pricing on those loans.  It all seems so obvious now, but it wasn’t back then. · From our August 17, 2007 newsletter:  “If you do decide to shut down, do not stiff your warehouse bank. It’s a small community, and while you might possible get away with not buying back loans, the one entity you want to pay off in full is your warehouse bank.”  

• One of the things that all successful companies seem to have is a very clear set of goals that everyone knows about and is working toward from top to bottom.  At a minimum, you should have at least one goal, plastered on signs through your offices, one that everyone knows about.  Think about it.  Do you have one common goal that every one of your employees is working toward?  If you asked ten employees what the company’s top goal was, would you get the same answer from all ten people.

· Words have power, and we’ve always been fascinated by the use of language to hasten the end of the Soviet Union . “Mr. Gorbachev, tear down this wall!” and labeling the USSR the Evil Empire both were instrumental in de-legitimizing the Soviet government. Just as important was what Pope John Paul II told the people of Poland :  “Be not afraid.”  In our travels in East Europe , people have told us that these three simple words gave them the courage to stand up for their freedom.  Be not afraid. Three simple words that gave people the courage to change the world. And three good words for us to keep in mind in our own lives.  May all of us have the courage to do what we need to do.  Whether it’s problems with our health, our careers, or our personal relationships, let us not be afraid. · If you ever took an English course, somewhere along the way you read one or more short stories by O. Henry.  A little known fact is that he served time in prison for defrauding a bank in Austin , Texas .  He fled to Central America when he was indicted, but eventually returned to serve a three year prison term. And speaking of bank fraud, we’d like to encourage you to conduct at least one session a year on ethics.  Too many people in our industry bend the rules thinking it’s okay “because everybody does it.”  Your people need to know that some of those people will go to prison.  Everyone should attend, and especially the loan officers.  Maybe you can talk to your local FBI office to get a guest speaker, possibly an agent, and possibly someone who actually served time for bank or mortgage fraud. We’ll be up in Seattle much of this coming week, with all our meetings being with FDIC-insured banks.  We love having banks for clients. For all their problems with bad loans these days, they’re very well managed when compared to most mortgage banking companies, and they do a much better job of financial reporting.  We like that.  See you in a few days. Garrett, Watts & Co.  -  Joe Garrett    (510-469-8633)  -  Corky Watts   (408-395-5504)