Let me give you a short explanation of how we got in to this "credit crunch." Some real smart Wall Street guys came up with a way to take the typical mortgage back securities and get an AAA rating on them. They sold them to banks, pension funds etc. Because the yields on these bonds were much higher then other AAA rated bonds. This created a huge demand. They went back to the mortgage companies and said give us more! To give them more, the mortgage co's had to lower their lending standards, which allowed more people to buy house and set off the gold rush. Now you might be thinking how in the world would a bond which is made up of 95% loan to value mortgages get a triple A rating equal to what GE gets on their bonds? Well there is a simple answer. The rating agencies (Moody's and Standard & Poor's) are paid by the issuer of the bonds. That's right; the entity that is to have an unbiased view of the value of the security is being paid by the guy asking for it. Thus, you would guess they would be influenced to give a favorable rating to get more business. The rating agencies all say this didn't happen, right… Now you would think all these smart guys on Wall Street, someone would stand up and say hey, this doesn't look right? This is a true mob mentality at work. One person does it, gets away with it, gets paid (greed factor vs. ethics), it must be ok! Everyone does it and gets paid!

   Now the banks are writing off these securities in droves. The rating agencies have dropped them to junk, because, gosh, the default rate is slightly higher then GE. Herd mentality again, they are dumping these things in the hundreds of billions of dollars. My guess is that some time next year or year after, these write offs come back in to the P/L as a recapture, because not everyone of these people are going to stop making their payments. But I'm sure it will be a footnote not a headline.

   So how does this all affect DenSco? Many of my borrowers were doing the fix/flip with the houses. The ability for them to resell the home in a timely manner and at a profit was quite readily achievable. The problem now is that we have huge inventories and the lending standards have risen (basically back to where they were and should be). Now most of my borrowers are doing fix and refi. If you have a good credit, it's not difficult to get a conventional loan, and at some very attractive prices!

   How are things going to get better?

   The government is going to save the day! Not a week went by that some government department, secretary or congressman was touting a solution to the problem! If anyone is naïve enough to believe that the government is going to solve or fix this down turn in the market, head to New Orleans to see government disaster management at its best!

   I'm a pure capitalist. I have more faith in the markets correcting the ills of the past then I am of any hopeful political figure. First off, it's not nearly as bad as everyone says. Yes all the numbers you hear in the news are happening, but it's not calamity in the streets. Homes are selling, yet at a slower pace then 2005 or 2006, but there was no chance that sales wouldn't slow down after those years! Yes foreclosures are going up, but again, Arizona, isn't ranked in the top 10 in the country in that category. If you watched the local news, you would think we are leading the country.

   With the Fed dropping interest rates, fears of the economy falling in to a recession next year, and dropping dollar, this has caused mortgage rates to fall also. Many of the ARM's hoping to get relief because of the Fed's actions will be disappointed because now, many more are tied to Libor rate.

   Our biggest problem in Phoenix has been an oversupply of inventory. The numbers are falling steadily currently. However, I think that is seasonal versus a trend. Arizona did add 170,000 new residents in 2007, with most of those coming to Maricopa County. Trends like that will help us in 2008.

   More and more of my borrowers are buying and then refinancing immediately. The buy prices they are getting are nearing 2005 prices. The price inflation that we saw over the boom years is now settling back down. To protect from the falling prices, I've requested my borrowers make monthly payments. Many of them are out of the loan before the first payment is due.

   When there is distress in a market, there are always buyers, and I'm seeing plenty of demand from people hoping that they can get a buy of a lifetime, looking back in a few years.

   I have added a net $300,000 of new investment money; we have $14.3 million in the portfolio. I am hoping that in 2008, I can reach $17 million. At year end, I've completed, since inception, 1056 loans for a total of $140 million dollars.

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

   Denny J. Chittick