To Our Clients, Colleagues and Friends:   

· We’ve noticed that HUD is getting slower and slower in approving FHA applications.  They received 1,290 applications in the 4^th quarter of 2007, and that was up from 330 applications a year earlier.  That’s a four-fold increase in applications, and you can be certain that FHA didn’t increase staffing by four–fold.  Some applications are now taking up to 3-4 months or longer!  This is ridiculous.

· We were listening to a senior management team discuss vendor selection for a back-end tracking system.  We heard lots of interesting ways they analyzed the companies, but perhaps one of the most critical was a key question the CEO asked about each vendor. He wanted o know, quite simply, how many people they had working full-time on their system.  His point was excellent.  Sales people aside, he wanted to know how many staff were available to answer questions, fix things, and work on new improvements. And it matters.  It matters a great deal.  So we’ll pass this along as a key question to ask of each and every technology vendor you deal with. You’d be surprised at how thinly staffed some of these vendors are.

· We saw that Australia ’s Macquarie Bank has stopped issuing their first lien HELOC mortgages here in the U.S. They said that “If home prices are devalued, we are in essence making borrowers unsecured loans when the home equity line of credit is drawn. So the value of the home is decreasing, while the borrower’s indebtedness is holding steady, which increases the risk…”  Guys, use lower LTV’s and your problem goes away!

· Where does Macquarie Bank make a ton of money?  They buy government infrastructure around the world and manage it for the cash flow. They own tolls roads in Illinois , Indiana , Virginia , England and France , along with bridges, dams, airport parking lots and airports themselves around the world.  In fact, they’re currently trying to buy Chicago ’s Midway Airport .   It’s a fascinating business model they have.

· Do you like biographies?  One of the more interesting ones we’ve read lately is a biography on Woodrow Wilson, written by (and this will surpris you) Sigmund Freud. And yes, of course, it’s all done from a psycho-historical perspective.  Freud’s premise is very interesting, and, of course, very Freudian.

· A year ago Countrywide’s servicing dept. handled about 1,175 loans per servicing employee, and that number is now down to about 980.  The reason,, obviously, is that delinquencies and foreclosures are more labor intensive.  Servicing is a great business during good times with low delinquencies.  We’d be curious to know what the return on invested capital is for this business during tough times like these.

· We’ve done FOCIS Risk Audits recently on several private equity (i.e. hard money) lenders.  When done right, this can be a great business, and we’re intrigued that some of the traditional warehouse lenders are financing these companies.

· In an environment when margins are being squeezed, it’s worth looking up the numbers on Bridge Bank ( San Jose , CA ). There are three things we like about them: (a) They reduced exposure to construction lending from 19% of the portfolio at the start of 2007 to 13% by year-end, (b) fully 29.6% of all deposits are non-interest-bearing, (c) their net interest margin was 6.93%.   It’s pretty amazing how much money you can make when you get lots of low-cost or no-cost deposits.

· For some reason we’ve always liked those “if you had invested $1,000 in…..”   scenarios.  The latest one we’ve seen is that if you had invested $10,000 in Russian bank Sberbank the day Putin became president of Russia , the shares would be worth over $1.25 million today. 

· We mentioned above that Macquarie Bank likes to buy government infrastructure.  Did that strike you as kind of weird? Well, Philadelphia is having financial problems, and the Mayor has proposed selling off Philadelphia International Airport .  We think this could be the wave of the future.

Have a good week, don’t take interest rate risk, and whatever you do, don’t take credit risk.  Oh, and try to learn something about the depth and bench strength of your various technology vendors.  See you next week, same time, same place.

Corky Watts and Joe Garrett  -  Garrett, Watts & Co.