To Our Clients, Colleagues and Friends,
- If you’re older, you remember when mortgage rates were always over 10%. If you’re really old, you remember when they were always under 10%. For the five years ending in 2009, they averaged around 5.41%. Pretty amazing.
- You know how government projections are always wrong, and how they always underestimate how much programs will cost? The Jan. 7thWSJ had an article about how the Congressional Budget Office originally projected Medicare prescription drug benefits to cost $640 billion over ten years, but that it’s now down to $410 billion.
- And how about that office building that opened in Dubai last week? At 2,717 feet, it’s a full 1,000 feet higher than the world’s previous highest building, and assuming about 10 feet over floor, it’s well over 200 stories high. It will contain more than 1,000 apartments, a hotel, and offices up to the 160th floor.
- Things are looking good in Texas . While 29% of subprime loans nationally are at least 90 days delinquent, the number is only 17% in Texas . In the third quarter, Texas banks were five times as profitable as banks in the other 49 states.
- We just thought of a good title for the past year: The Year of Living Dangerously. This was actually the title of a 1982 movie, starring a young Mel Gibson and Sigourney Weaver, but it probably applies to your bank. If we need a name for the coming year, how about Fear Strikes Out (if you’re an optimist) or Requiem for a Dream (if you’re a pessimist), No Country for Old Men (if the past year made you feel old) and Jaws or maybe A Touch of Evil (if that’s how you perceive your regulators). And finally, referring to all that capital that vanished into the sinkhole of bad loans, how about Gone with the Wind?
- A new biography outlining the supposed bedroom doings of Warren Beatty claims that the actor has had sex with “12,775 women, give or take.” Just how did the book’s author figure this out? Anyway, step aside, Wilt Chamberlain.
- Back when New England was a very conservative area, H.L. Mencken wrote that “The most serious charge against New England is not Puritanism but January.” We just looked at the weather in Hanover , New Hampshire , and it was 2 degrees out.
- Center Financial of Los Angeles (where it’s about 70 degrees now) is raising $73 million in new capital, and the securities have about the longest name we’ve ever seen: Mandatorily Convertible Non-Cumulative Perpetual Preferred Stock, Series B. Can you say that three times really quickly?
- Why should you strive for absolute perfection in every aspect of your operations? Why 100% and not 99% accuracy? Let’s say you do 300 loans a month. If you’ll settle for 99% perfection, that means you’ll screw up 3 loans every month, or 36 loans over the next year? Think about it. The most profitable companies we know aim for 100% perfection, for zero mistakes.
- Remember the Misery Index, the rate of inflation + the unemployment rate? Ronald Reagan cited this index throughout his 1980 campaign when the index peeked at 20.8. For all of 2009, this index averaged 8.1.
- Regarding stage coach drivers, yes, it turns out that there were both black and female stagecoach drivers. Shana Chrisman contacted a Wells Fargo historian who wrote “We do have several examples of African-American drovers, one being George Monroe who drove stages into Yosemite Valley and who was generally acknowledged to be one of the finest reinsmen in California and who impressed former President U.S. Grant. There were a few female stage drivers as well: Delia Haskins Rawson drove in Mendocino and Lake County , and “Charlie” Parkhurst, who posed as a man throughout her driving career and whose gender was revealed only after her death.”
- If you’re from San Francisco , you know all about the history of the Bank of America, how A.P. Gianinni founded it as the Bank of Italy, how he made loans to families and small shopkeepers right after the 1906 earthquake, and how the Bank played such a big role in the growth of California . These days, we can’t find the history of the BofA anywhere on their website. We did an internet search and came up with the history of the North Carolina bank founded in 1874 which became NationsBank which eventually bought the BofA. This is a long-winded way of saying how much we admire Wells Fargo for honoring its past. Their downtown San Francisco museum is a must-see.
- Lending Tree just got an extension on its $50 million warehouse line from PNC. PNC had previously announced that they were getting out of the warehouse lending business, but this shows why maintaining a good relationship with a good bank makes all the difference in the world. PNC obviously will work with borrowers. Had they been a Wall Street firm, they would have yanked the rug out form under Lending Tree without blinking an eye.
- Hey, want to have another contest? How about nominations for the silliest novelty songs you can think of. You may not be able to define what a novelty song is, but we bet you know one when you hear one. Wooly Booly would count as one. It was by Sam the Sham and the Pharaohs, proof that the sixties were not entirely the Golden Age of Rock.
As we vaguely recall, the lyrics to Wooly Booly had nothing to do with Pharaohs or anything remotely Egyptian. - If you want to watch the Tampa Bay Devil Rays play the Yankees or Red Sox, you’ll pay 82% more than you’d pay for a ticket against (and it kills us to say this) the Oakland A’s. A ticket to Avatar in 3-D costs more than a ticket to The Princess and the Frog. Is there some lesson in here for mortgage bankers? For commercial bankers?
- About $650 billion in commercial real estate mortgages come due in the next four years, but we’re not worried about those maturing in 2012-2013. The economy will be doing just fine by then. The problematic loans are those coming due this year, and the number is $150 billion. It’s a big number, but spread over all the banks and other lenders, it’s a manageable number.
If you’re looking for a key metric to monitor during the year, look at leakage, or what some call seepage. It’s the difference between the profit margin you build in on your rate sheet versus what you actually realize. There’s no reason those two numbers should vary by more than 2-3 bps. If you’re off by more, you need to find out why. This may be the biggest contributor to underperformance we consistently see out there.
And in the next few days, we’ll be in Cleveland and Columbus , Ohio , Dallas and Seattle. Brrr.
Today’s Bonus: How to use Return on Capital
“Helping lenders increase revenues, control costs, and better manage risk.”
Joe Garrett (510-469-8633)
Corky Watts (408-395-5504)
Mike McAuley (281-250-2536)