To Our Clients, Colleagues and Friends,   

• An interesting juxtaposition in foreign policy circles:  (1) Jimmy Carter’s onetime National Security Advisor Zbigniew Brzezinski says that if Israel planes take off to bomb Iran’s nuclear facilities, we should shoot them down.  But (2) Hillary Clinton warned the Iranians that if they launch a nuclear attack on Israel , we will “obliterate” them. 
• It’s interesting that when we ask mortgage bankers about their pull-through ratio, a lot don’t take it all that seriously.  We met with someone recently who had a 45% pull-through and told us, “Well, sure, I guess we’d like to get it to 50%, but, like, it’s not a big priority.”  He seemed unaware (or, like, unfazed) by the several ways this was hurting him.
  But we also meet people with terrific ratios who don’t use them to negotiate better pricing with investors.   We were with someone with a 93% pull-through this week that got vanilla best efforts pricing.  They were leaving good money on the table!
• We get asked occasionally who the bank clients are that we help in getting Warehouse Lending programs going.  They’re typically $100-250 million in size and want to issue $10-20 million in total commitments. They intend to issue lines to 2-3 local mortgage bankers, all of them within their footprint and all of them existing bank customers.

We helped one mid-Atlantic bank that had already started warehouse lending, and we were able to find and fix some fairly serious flaws in their process and documentation.    As the bank CEO said with a laugh, “I guess if we’re going to have sex, you’re going to at least make certain we practice safe sex.”  A funny guy.

• Everyone knows we think you are too obsessed with volume.  It’s an important metric, but we’d like to see you equally focused on margins, credit quality, cost-to-originate and a few other metrics.  Yes, greater volume typically leads to greater revenue, but doesn’t increased volume also mean increased problem loans?  Or at least the potential for increased ones? It’s something worth thinking about.
• No one’s probably hitting the cover off the ball like Golf Savings just north of Seattle . And in case you’re wondering, Golf Savings is not in a town named Golf, nor is it named after a founder named Joe Golf.  It got its name, quite simply, because the founder loved the sport of golf and thought it was a memorable name.  You should look up their Call Report (actually their TFR) and see just what kind of returns you can make doing mortgage banking inside a bank or thrift.  It will blow you away.
• Golf’s parent is Sterling Financial, and Sterling needs to raise capital. We’d like to see Matt Mullet and Donn Costa , the two people who run Golf, manage some sort of leveraged buy-out of the bank.  Carve-outs like this can do pretty well, and we think they’d find lots of private equity groups or LBO funds willing to back them.  Sterling would lose all of Golf’s earning power, but its sale could also bring in some much needed capital.
• A year ago in Zimbabwe , inflation was 12.5 million percent, meaning that a candy bar that cost $1 a year earlier would now cost $12.5 million. Printing money with wild abandon never leads to a good lending.  Put another way, how the heck can Zimbabweans afford a Snickers Bar when they feel the need?
• General Manager Billy Beane of the Oakland A’s thinks that the most important statistic is the On Base Percentage.  Since we’re huge A’s fans, we decided to see who were some of the very best.

We couldn’t find Willie Mays or Ernie Banks in there!  And what about Hank Aaron?  We only looked at the top fifty, and maybe they just didn’t make the cut.

• An auditor cleaning up loans from the old Wamu portfolio recently came across a HELOC made to O.J. Simpson in 2007.  There’s a huge judgment against him from his former in-laws, and that judgment takes precedence over other debts, such as his Wamu loan. An underwriter’s note was found in the file:  “When I asked the loan officer how we could possibly foreclose on it given that judgment, he said there was a letter in the file from O.J. Simpson saying ‘the judgment is no good, because I didn’t do it.’ “  Oh.
• While many younger mortgage market participants have barely experienced the down-cycle of a mortgage market, those who’ve been around know that we live in a highly cyclical industry.  We’re reminded of this every time we think about the attached “Carpenter’s Laws of Lending.”  The author, Gene Carpenter, was a legendary old-time banker who had seen it all and then laid out these principles to the other bankers at NatCity.  
  Frank Hattermere first saw it as a young banker in Louisville and passed it onto Mike McAuley, and they used to pin this on the walls of their offices and refer to it whenever they were looking at proposed deals.  In boom times in the mortgage industry, they focused on Law No. 13 (”If it grows fast, it’s probably a weed.”)  In down cycles, they concentrated on Laws No. 7 and 8 (”The odds that forecasts supplied by borrowers are too optimistic are infinite” and “Anything that goes up sharply in price will subsequently come down sharply in price”).  During workouts, they learned all about Law No. 3 (”Collateral always liquidates for less than it should”).   You should have this permanently taped to your wall! Carpenter’s Laws of Lending
• We’ve done some FOCIS-plus Reviews recently for very healthy mortgage bankers.  The general message we got was along the lines of  ”I assume  you mostly do these for companies doing poorly and who want to get better, but we’re doing pretty well.   We just kind of look at it like going for annual physical, and we don’t want to wait till we’re really sick and screwing things up.   We see it as a preventative tool.”  We agree.  And by the way, even in those companies doing really well, we always seem to find ways for them to do better.
• A big anniversary is coming up in a few days. November 9^th is the 20^th anniversary of the fall of the Berlin Wall and the ensuing fall of the horrible Soviet Union . Historians can debate forever what macro-forces brought it about, but the immediate answer is that it was member of the German Politburo named Gunter Schabowski.
  One November day, the Politburo was debating some temporary bureaucratic procedures to someday make it slightly easier for East Germans to cross over to see relatives in West Berlin . Schabowski was out of the room when the decision was made, and he later just skimmed the new regulations before holding a small press conference. When he was asked when this executive order might go into effect, he casually and inaccurately said it was effective immediately.
  Word spread like wildfire and tens of thousands stormed the Brandenburg gate.  The Sergeant manning the gate had heard the news of Schabowski’s press conference, and he assumed it went into effect immediately.  After opening the gate and seeing tens of thousands pouring through, undoing what had happened would have been like trying to put toothpaste back in the tube.

We’d like to suggest that someone establish an annual award for the person who unintentionally sets off the most dramatic action based on making the most dramatically stupid mistake.  It could be like the Oscars or the Nobel Prize, and we’d suggest it be named The Schabowski Award. There could be a big Hollywood event every year when they give out The Schabowski’s.

• The tabloids on display at Supermarket checkout lines are predicting which stars are most likely to die within the next year.  Nice.  Kirstie Alley tops the charts as most like to croak, due to her 350 pound girth, but Lindsay Lohan is in second place  due to her drug use.  It’s interesting reading, and aren’t you glad you get your Hollywood gossip in the same place you get your banking information?  And speaking of Lindsay Lohan, won’t you always remember her as Annie in Parent Trap? Wasn’t that a perfect movie?
  
  Kirstie at 350?  Looking at this picture, Kirstie doesn’t look like she weighs a pound over 300.

We’re looking at our calendars, and we’ll be in Phoenix , Philadelphia , Columbus ( Ohio ) and Beverly Hills in the next two weeks.  Most of this will be after our dinner next Thursday, which we’re really excited about, and while travel can get tedious occasionally, a night at the Beverly Hills Hotel makes it worthwhile.  It’s absurdly expensive, but don’t you love having a drink in their Polo Lounge and hoping to get a glimpse of Lindsay Lohan or maybe Kirstie Allie?See you guys at the Palace Hotel next Thursday evening.   Garrett, Watts & Co.  Helping mortgage lenders increase revenues, control costs, and better manage risk.

• Corky Watts         408-497-3135
• Joe Garrett         510-469-8633
• Mike McAuley      281-250-2536