To Our Clients, Colleagues and Friends:

· We’ve come to really admire Flagstar Bank, and we should apologize to them for the bad things we thought about them in the past.  We once said they were stodgy and behind the times by being mostly a FN M A/Freddie M ac oriented bank. This was when everyone was doing Alt-A and sub-prime. Well, they were right and everyone else was wrong.  Ourselves included, so to all the good Flagstar people, we apologize.

· Having apologized, can we now comment on a somewhat minor thing we’re concerned about with Flagstar? Although only 10% of their assets are loans on commercial real estate, about a third of them was originated in 2007, when the market was approaching its peak.  Guys, watch those loans very carefully!

· Indy M ac completed a $335 million securitization that settled yesterday, and we see it as a sign that the non-GSE market may be back: It was prime jumbo and alt-A hybrids with an average FICO of 728 and an average LTV of 72%. Interestingly, investors were okay with stated doc loans, as 56% were stated income. The security traded at 99.7%, and like we said, this is great news for Alt-A originators – and the entire market.

· We’ve written about the natural advantage banks have over mortgage bankers when it comes to liquidity and FDIC-insured deposits.  But a close second is access to Federal Home Loan Bank borrowings.  To demonstrate our point we would look no further than G M AC Bank. They have $13 billion in deposits – and $11 billion in FHLB borrowings. .

· We were asked recently which program we thought were truly innovative.  As we pondered the question, almost all the candidates were just tweaking an existing program. So we chose two loan programs that were radically different and truly innovative.  We’d nominate the Reverse M ortgage and C M G’s Home Ownership Accelerator M ortgage.  In fact, we’d say that these are the biggest innovators in the least several decades.

· Weird relationships:  Pyetr Il’yich Tchaikovsky’s worked as a music teacher as well as a clerk in the M inistry of Justice, but his beautiful compositions rescued him from this work.  An older woman named Nadejda von M eck started paying him the rather large sum of 6,000 Rubles a year, enabling him to quit both jobs and work full time on his compositions. Now get this: His one condition was that they never meet.  This continued for fourteen years, and they never once did meet.  But it was during this period of time that, with her financial help, he was able to write Sleeping Beauty, Nutcracker Suite, and the greatest of all ballets, Swan Lake .  What a weird relationship!

· In the lexicon of interesting bank names are those banks named after various food categories (Apple Bank, Tomato Bank etc.)  So we just read with sadness that Citrus Bank is being sold to CIB M arine Bank and will change its name to that of the acquirer.

· We wrote last week about Tom Sawyer’s aunt investing his $12,000 at 6.0%.  Well, if it were left to compound all those years since 1876, what do you think it would be worth? The answer is $121 million.  If she had just left it alone till Tom turned 70, he would have been worth about $3.9 million.

· Napoleon once wrote that “When China awakes, it will shake the world”. Here are two examples of how it already is shaking the world: China is spending 35 times as much on crude oil as it did only eight years ago, and 23 times as much on copper. As it builds skyscrapers and freeways, China alone consumes half the world’s cement and a third of its steel.

· An interesting line from Prussian military theoretician Von Clausewitz “Identifying the kind of war on which they are embarking is the most far reaching act of judgment that the statesman and commander have to make.” How right he was.  How often have we, and other nations, embarked on one kind of war, eventually to find out that we are fighting a much different kind of war? In recent memory, there was Vietnam . What started as an effort to assist a nation resisting a guerilla movement ended with North Vietnamese Army tanks rolling through the streets of Saigon . Whatever one’s view might be on Iraq , it certainly is a different war today than when we first embarked on it five years ago.

· Things we wonder about: Remember all those “Captive” deals where M ortgage Insurers would give some percentage of the M .I. premium (usually 25%) to the lender and the lender would agree to take on some of the risk in the event of losses?  First, we bet many of those lenders who set these up and just kicking themselves now.  And second, what happens, if anything, when some of these lenders go broke?  Curious minds want to know.

· We read a recent Keefe, Bruyette analysis of the mortgage insurers, and we found the metrics below quite interesting.  Also quite explanatory of why the M I’s are having problems. The percentage is of their total book of business.

	M GIC	Radian
100%  LTV insurance in force	30.1%	23.8%
95%  LTV  insurance in force	27.5%	30.6%

The report didn’t break out other insurers into the same categories, but it did show P M I with 24.6% of their portfolio of insured loans at 97% LTV or higher and Old Republic at 26.4% over 95%.

· The same report referenced above also showed how much insurance some of the captives had exposure to.  We’re not certain why the numbers weren’t more current, but they listed the following amounts of insured loans as of the end of 2006:

Countrywide	$236 billion
Chase	$  76 billion
Washington M utual	$  66 billion
Wells Fargo	$  66 billion
Bank of America	$  35 billion

Things are looking up in the industry, and we see bits and pieces of optimism. If you have a good business plan, optimism and persistence will go a long way.

Corky is still in the M iddle East till April 25^th.    

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