The Garrett, Watts Report (Last issue, 2009)

To Our Clients, Colleagues and Friends,

• Last week we made fun of the Wells Fargo 2010 calendar for showing black and female stagecoach drivers, chiding them that they looked like they were trying to be politically cool.  Naturally, we heard from several Wells Fargo-ites, and sure enough, a Delia Rawson carried the U.S. mail for Wells Fargo back in the 1880’s. And in an 1869 photograph, an unidentified African-American driver is seen guiding the Wells Fargo stagecoach out of Salt Lake City .
• Not that many of you are using private mortgage insurance, but here are the M.I. companies ranked by how much insurance they have in force. MGIC was the first private mortgage insurer, and without interruption for over 50 years, they’ve always been the biggest.

• The First Lady in Japan recently told people in a TV interview that she visited Venus in a UFO and that in a previous life she knew Tom Cruise, who was Japanese.  Her husband, the Prime Minister, seems unconcerned.  Can you imagine if Michelle Obama said something as weird as that?  Or Mamie Eisenhower? Footnote to History:  If Ohio Congressman Dennis Kucinich had been elected, we would have had a First Lady with a pierced tongue.  And probably a few tattoos.
• A client at an Idaho bank asked us about Scorecards for loan officers, and we suggested that the following be tracked:  (1) Volume, (2) gain-on-sale margin on all their loans, (3) delinquencies, (4) early payment defaults, (5) early payoffs, (6) percentage of business that is purchase v. refinance, and (7) pull- through.  This would allow you to compare each loan officer to the companywide average.  Maybe give them a point for each of those seven areas where they’re better than the company average and take away a point when they’re below.   That way, the higher the score, the better the loan officer, with a 7.0 being the best. For a bigger organization, maybe score them by what quartile they’re in.
• We should note that Comptroller of the Currency John Dugan’s term expires in the summer of 2010.  We don’t see you national bank CEO’s shedding many tears.
• On Christmas day in 1776 George Washington had one of his few early victories by crossing the Delaware River in the middle of the night and defeating the mercenary Hessians in Trenton .   It may have been his first victory.
  
  After you’ve read about every great American and every great President, you always come back to Washington as the greatest of them all, the greatest American and the greatest President.  Jefferson may have been the greatest American in defining what human rights really meant, but he never freed his slaves, even upon his death.  Washington did.  His will stipulated that his slaves should be freed when he died.
• Another historical event on or around Christmas was December 26, 1991 when the Supreme Soviet met and formally dissolved the USSR .  Karl Marx wrote of enslaved workers throwing off their chains, yet nothing enslaved more people and did so more cruelly than the Communism he spawned.  Although he didn’t murder millions like Stalin or Mao, he deserves a spot in Hell right next to them.
• We wrote last week about Franklin Resources paying a dividend continuously since 1981, and someone wrote us that “ Franklin’s dividend history is impressive but pales in comparison to Proctor and Gamble (PG).  PG has paid a dividend every year since 1891 and has raised its dividend every year for the past 52 years.   And IBM paid its first quarterly dividend in April 1913… and hasn’t missed a quarterly dividend since that time.”  Impressive.
• A certain number of our clients are starting to retain servicing, so we’d point out that the biggest sub-servicer is Cenlar with $92 billion, with Dovenmuehle #2 with $70 billion.  Both have very good reputations.
• “A Toyota ’s a Toyota .”  It cleverly reads the same forwards and backwards. By the way, if you’re a member of the Grammar Police, is it forward or forwards?  We can never remember how that works.
• We were reading a report on Colony Financial, a newly public REIT.  They just made a loan to giant homebuilder Wm. Lyon Homes, at, get this, 14% + an origination fee of 3%.   It’s a first lien five-year loan.  Sounds like Wm. Lyon was pretty desperate.
• There have always been lots of good reasons to live in Baltimore , and one of them used to be  watching the Baltimore Orioles.  Their manager for years was Earl Weaver, who holds the record for being tossed out of more games than anyone in baseball history. This is a hilarious video of his being tossed out of game once.  By the way, did you ever wonder what happened to the St. Louis Browns?  In the 1950’s they moved to Baltimore and changed their name to the Orioles.  You’ll really laugh out loud at this:  http://www.youtube.com/watch?v=kl-4FSRYagc
• We have a thought on what capital levels should be, essentially just requiring more capital as you get bigger. Our theory is that with increased size comes increased complexity, and managing extraordinarily complex organizations such as $2 trillion banks becomes, at best, extremely difficult. We’d propose something like this:

We’re making this up as we go, but we do think the general idea might have some merit.

• As for complexity as a function of size, think about a small community bank. They really only have 4-5 moving parts:  The vast majority of their earnings are a function of (1) the yield on their loans, (2) the cost of their deposits, (3) fee income, (4) overhead, and (5) credit quality.  Now think about Citigroup or Wells Fargo or any other mega-bank.  How many moving parts do they have?  Dozens?  Hundreds?  Do Vikram Pandit or Jamie Dimon really know what’s going on in every division and every nook and cranny of their banks?
• In a sign of tough times for families, the WSJ reported that 4.3 million families had their gas and electricity turned off this year.  We read years ago that people will pay their Cable TV bill even when they don’t pay the mortgage.

· We just read that a little over 20% of mortgage insurance claims are being denied these days. Moody’s says that the historical denial percentage has-been around 7%.

· We’ve noted here before that the most profitable mortgage banking operations close 8-10 units per salaried employee, and that the very best close 12 per employee.  Joe Cliver of DocuTech wrote that he was at a company in Massachusetts a couple weeks ago that funds 15 loan per FTE.

Even with about 140 bank failures this year, there have been less than 175 in the last three years.  That’s out of 8,000 banks for a total of 2.18%.  If you look at the last three years, what percentage of mortgage bankers folded up, 20%….30%…40%?  More?  Now look at some interesting stuff from the Banc Investment Daily, showing that the average bank in this country is 57 years old.  If you measure it on an average that’s weighted by asset size, the average bank is 90 years old.  Is there even one mortgage bank that’s 57 years old, let alone 90 years old?

Happy New Year, and have a great 2010!

Garrett, Watts & Co.

Helping mortgage lenders increase revenues, control costs, and better manage risk.

Joe Garrett         ([email protected])

Mike McAuley      ([email protected])

Corky Watts         ([email protected])