As I had mentioned last quarter, I didn't think that the sub prime problems would spill into the prime market, and that hasn't happened. However, with the rising lending standards in the sub prime, there has been a diminished pool of buyers on the low end. The standard to qualify for a loan in the last two years was just a hair above fogging a mirror. Today, they actually want you to have a verifiable job and you can't use someone else's social security number.

   The other challenge that has come about is the evaporation of cash-out refi's. These were readily available to prime borrowers. This is no longer the case; their only option is usually a rate and term loan. There will be more adjustments in the market and lending standards as we move forward. I am not letting out any industry secrets. Everyone is aware of these changes and they are making adjustments.

   On the national scene there are weekly reports about new-build inventory, resell inventory, permits, applications for mortgages and average selling price of a home. These numbers can swing wildly from one month to another and often have revisions. From a Phoenix metro standpoint, we have seen some of the same things happening. There is still good demand for housing. We have a strong employment market and people moving to the state every day. However, we do suffer from a large inventory glut of both new builds and resell homes. The builders have dropped prices to move their inventory. The resell homes are not being as aggressive. There is a still a large amount of houses listed with unrealistic prices.

   If you agree the peak in our market was around August of 2005, many of the smart people said it would take 18 months to two years to come back in line. We have about 60 days to hit the end of that mark, and I don't think we'll be there yet. There may be another six months or more of adjustment in inventory.

   Despite what seems like a page full of negatives, I still have strong demand for money and many of my regular borrowers are moving their houses, though it's taking them longer than they would like. I do not have any loans in foreclosure which, from speaking to other lenders, is quite unique. I have lost a few deals to other lenders because they are willing to lend more then I am, but I feel that sitting on some idle cash for a day or two until another deal arrives is better then taking a marginal deal with a new borrower.

   I have added a net $1,100,000 of new investment money; we have $13.4 million in the portfolio. By the time you read this, I will have funded my 1,000th loan! That's over $130 million dollars in loans.

   I have updated the pictures of the current properties on the website. Thanks for your trust, investment, and referrals.

   Denny J. Chittick