The Garrett, Watts Report (February 18th, 2010 with tons of snow outside the window)

To Our Clients, Colleagues and Friends,

• We have an Orange County commercial bank client looking for someone to run their  Warehouse Lending operations.  If you or someone you know is interested and has experience working for a warehouse lender, please send resumes to us at [email protected].  For all you snow-bound people, Orange County has the best weather in the world. It was 71 degrees when we there a few weeks ago.  
• You baseball fanatics will remember the name Rabbit Maranville, the Braves Hall of Fame infielder.
  

Look at his baseball cap.  He played in a time when caps didn’t have team logos on them, so it looks like he had his customized to show a swastika.  You might have to enlarge the picture to see it, but it’s there.  There’s also a picture of Tinkers, Evers and Chance we’ve seen, and one of them also had a swastika on his cap.

• We stopped at Valley Forge last week when it was covered with snow and around 20 degrees, and it made us appreciate what the winter of 1777 must have been like for George Washington and his troops. Despite disease, lack of food, and bitter cold, he held the Continental Army together and showed a perseverance which is a hallmark of Americans today. The more you read about him, the more you realize he was not just our greatest President but one of our greatest Americans as well.
• We were walking through a campus bookstore recently, and we saw about 15-20 required books we really wanted to read.  Then we saw something by Jean Paul Sartre. Yuck. It’s hard to know which was the worst part of college, reading Sartre or reading Marx?
• Sometimes the easiest part of succeeding is to simply do what successful competitors do. Probably 90% of highly successful companies who use a hedging advisory service are using MCM, CMC, Compass, SI, MIAC or Flatirons.  (We’re writing this at 2:00 am, so maybe we missed one.)  These are who the top performing mortgage companies use. If you’re using Bill & Ted’s Excellent Hedging Service, and if no one else has ever heard of them, you might have a problem.  If you are using Bill & Ted, you should still contact one of the companies named above and start to learn how they operate.   We’re 99% certain you’ll find out how much better you could be doing.
• Last week we told the joke about Bank of New York, but we accidentally combined it with some other item that made it look not-so-funny.  So here it is again:
  Bank of New York was founded by Alexander Hamilton, and as you remember from American History, he was killed in a duel with Aaron Burr.  If you’ve done business with this bank, you also know that it can be stodgy and slow moving.  The joke is that as he got ready for his duel, Hamilton told the bank staff “Don’t do a thing till I get back.”  We find this hilarious,
• Spring training is starting, and isn’t there something exciting about that? We once read a book with a title something like Why Life Begins on Opening Day, and doesn’t that say it all?
• WSJ reporter Bob Hagerty does some of the best investigative journalism we’ve seen, and we noticed yesterday a WSJ article written by James E. Hagerty.   Who’s this other guy?  He also writes beautifully.
• PMI reported a tough quarter with paid claims of $518 million, but the good news is that delinquency growth slowed and new delinquent notices were down.  All M.I. companies have had some tough times lately, but PMI is definitely a survivor.
• Think big or think small:  When we’re in a shop that is under leveraged, we like to run 3-4 scenarios showing what greater loan volume would to earnings.  When we see high volume shops, we like to run 3-4 scenarios showing loan volume shrinking by various percentages and margins doing the same. You can do these scenarios on your own with a basic spread sheet, and we think you should be running these every month.  When things change in this business, they change quicker and to a greater extent than anyone could have imagined, so knowing in advance what the impact might be can be good preparation for when the market turns.
• The management at PHH noted in an earnings release that their mortgage production breakeven level is currently $28 billion annually or $2.3 billion a month.  If a big public mortgage company thinks it’s important to know their break-even number, every mortgage company should know theirs.
• Is your Succession Plan current.  Think of your top 3-4 people.  If one of them got hit by a truck tomorrow or gave you two weeks notice, do you know exactly how you’d handle their absence? Do you already have 2-3 names of possible replacements? Well-run companies plan ahead. Top employees come and go, and maybe some will get hit by that proverbial bus, but you just don’t want to get caught flat-footed.
• We made reference to CMG Mortgage Insurance Co. being out of business, and boy were we wrong!  They’re still in business and quite actively insuring new loans.  They’re among the highest-rated private mortgage insurers in the country and an eligible mortgage insurer for Fannie Mae and Freddie Mac. They’re meeting all existing loan obligations and have sufficient capital and reserves to pay all claims for new and existing business. The company continues to be an approved mortgage insurer with both Government-Sponsored Enterprises.
• College endowments got clobbered last year, but some did worse than others. We saw one study that lusted the ten worst:

The study looked at bad performance in a number of ways, but they weighted the amount loss along with the percentage lost, and they rated Harvard worst in the nation.  Not only did they school lose 30% of their endowment funds, the amount lost was a shocking $10.9 billion!  The top performer was Pepperdine which lost only 4% and Washington State which lost only 9%.  Go Cougars!

• It’s well into February.  Do you have a 2010 budget which allows you to compare actual performance versus budget performance?  We’ll flat out tell you that top performing companies almost all have budgets, and poor performing companies rarely do.
• We find it frustrating and maddening when companies don’t realize the healthy margins they build into their rate sheet.  This is typically due to a variety of operational problems, poor pipeline data management, and so on, but the one that’s most frustrating is when a company uses one of the nationally known hedging advisory services and still doesn’t get the margins they thought they’d get.   We know these services – MCM, Compass, CMC, SI, Flatirons etc. – and their models work.  If you follow their model, you’ll get that margin!   What is so frustrating for us is to see companies retain one of these advisors and not stick to the model.  It’s a prescription for failure.  If you don’t want to use a hedging advisor, that’s your choice.  But if you do use one of these advisors, don’t try to think you’re smarter than them, and don’t try to rebuild the model.  It flat out won’t work.

We periodically send out the attached list of Ten Keys to Survival and are always pleased to see people print it out and stick it on their wall.  We like it too!  Anyway, here’s hoping for better weather!  See you when we get back to sunny California .

Garrett, Watts & Co.

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

• Mike McAuley   ([email protected])
• Corky Watts      ([email protected]) 
• Joe Garrett      ([email protected])