To Our Clients, Colleagues and Friends:

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· We’re always disappointed to see mortgage companies have their annual audit done by a CPA firm which is competent, but which doesn’t know a great deal about mortgage banking. We always advise our clients to get an audit firm that does lots of mortgage companies, and then meet with them 2-3 times a year. A good audit firm can help you avoid many, many pitfalls.

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· You hear a lot about which colleges sent the most football players to the NFL, but never about how many they sent to Major League Baseball.  We’re not all surprised that USC ranks #1, but when we were putting this together, we found a lot of surprises.  By the way, this is really just a listing of those schools we were curious about.  If your school isn’t in there, our apologies.  For anyone renewing their subscription to this Newsletter in January, we will look up your college and give you their numbers.

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1    U.C. Davis 34   San Diego State 1    Gallaudet 38   Brown 2    Johns Hopkins & M.I.T. 56   Cal    (U.C. Berkeley) 10   U.C. Riverside 56   Univ. of Santa Clara 11   Cornell 62   Saint Mary’s College of California 12   N.Y.U.   (where exactly do they play?) 63   UCLA 13   Oral Roberts 67   Notre Dame 15   Harvard 74   Stanfurd 18   U.C. Santa Barbara 77   Holy Cross 20   Pepperdine 88   Arizona State 24   Yale 95   University of Texas   ( Austin ) 27   Dartmouth 100  USC

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We found Gallaudet interesting if only because it’s a school for the deaf.  Tom Lynch graduated from Gallaudet in the late 1800’s when it was known as the National Deaf Mute College and then went on to bat.258 during his career with the Philadelphia Phillies.

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· Countrywide Financial has scheduled its earnings call for January 29 at noon, Eastern Time.  This one will be interesting. Especially the questions, assuming Countrywide allows them.

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· Here’s one of our favorite sports statistics:  In 1972 the Philadelphia Phillies were the 2^nd worst team in baseball, with a 59-97 record.  But ace pitcher Steve Carlton was 27-10 that year with awesome numbers, leading the league with a 1.97 ERA, 30 complete games, and 310 strikeouts.  You wonder how one pitcher can win almost half of his team’s victories, and when you look at his stats, you can see why! By the way, four of his losses were by one run (2-1, 2-1, 4-3, and 3-2).  With a little run support, he’d have been 31-6.

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· Regulators get concerned if your loans-to-deposit ratio gets too high, and Boards obviously should monitor this closely.  We were checking on this ratio for some of the European banks, and we guess we weren’t surprised to see troubled Northern Rock at 321%.  Of course, this is after their run on deposits.  A few others that seemed on the high end:  Royal Bank of Scotland (132%), Bank of Ireland (174%), and Swedbank (235%). All three, however, are very solid and well run, and we don’t doubt their ability to manage their liquidity.

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· The Romans understood it all. Here’s a Latin phrase that applies to all mortgage bankers who fought the odds and somehow survived 2007:  Credo quia absurdum est. I believe because it seems unreasonable.  Or even better would be Credo quia impossibile. I believe because it seems impossible. Change that to first person plural and it could actually be a pretty nifty corporate motto.

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· We’re seeing more and more data showing that 40% of all borrowers on some sort of repayment plan still end up being foreclosed on.  We’re not all that surprised, and frankly, we’re surprised, pleasantly so, that for 60% of them, the repayment plan actually accomplishes something.

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• It’s absurd to think that FNMA could go bust, but here’s the deal.  FNMA owns and/or guarantees something like $2.6 trillion in loans, and they have about $42 billion in capital.  Let’s forget about everything they have other than their $300 billion in sub-prime loans.  We’ll ignore their Alt-A, their high LTV’s, and any other higher-risk mortgages.  Now let’s just pick a number and say that ultimately 25% of their sub-prime loans go into default and that they lose, oh, maybe 30% on these. That would be a loss of $22.5 billion in losses, wiping out half of their net worth. 
• The American Dialect Society is an organization founded in 1820 that’s made up of linguists, lexicographers, etymologists, and related academicians. Every year they vote for the Word of the Year, kind of like Time Magazine’s Person of the Year. This year’s winner was the word Subprime.  Runners up included words such as waterboarding, Facebook, tapaficiation (the tendence of restaurants to serve small portions, as in tapas) and wrap rage (anger brought on by the frustration of trying to open a factory sealed package).  Funny.
• We still own a bunch of Indy Mac 8.5% preferreds (trading at a deep discount to yield over 20%). But awhile ago we bought puts on Indy Mac’s common, going out till next January.  Our thinking was that (a) Indy Mac is going to be a survivor, (b) it will take till most of 2008 for the current mortgage difficulties to resolve themselves, and (c) the puts are simply a good insurance policy.  Nobody expects their house to burn down, but people still get fire insurance.
• The paragraph directly above on Indy Mac has an egregious grammatical mistake.  We will give a free two-year subscription to the Garrett, Watts Report to the first 10 readers who correctly find it and point it out to us.
• Have you ever heard of wrong-site surgeries? This tern applies to having (a) the wrong procedure (oops, we amputated your leg when you were actually here for prostate surgery), (b) wrong site (oops, we were supposed to amputate your left leg – but accidentally amputated your right one) or (c) wrong person (oops, are you sure you aren’t Mr. Smith who came for the sex change operation?). The number of reported cases of wrong-site surgery has actually been increasing — for a total of nearly 550 since 1996.  The American College of Surgeons recommends that patients take a felt marker and actually mark the body part meant to be operated on.  How weird is that?
• On a recent conference call about the Countrywide acquisition, Bank of American Chairman Ken Lewis was asked about his plans for Angelo Mozilo: “I would want him to stay until the deal gets done and then probably I would guess that he would want to go have some fun…..”…”  So next time you’re at the beach or elsewhere having fun, look around.  You just might see Angelo nearby, also having some fun.

Joe Garrett and Corky Watts   - Garrett, Watts & Co.  -  http://garrettwatts.com/