The Garrett, Watts Report (March 10, 2010)

To Our Clients, Colleagues and Friends,

• California’s General Obligation bonds yield about the same as bonds from Greece , but anyway, 30-year California G.O.’s are paying 6%.  Because they’re exempt from state and federal taxes, higher-income Californians in a 40% combined federal and state tax rate get the equivalent of a 10% yield. Not bad.
  
• Audited financials are starting to come in, and they’re confirming what we saw all year.  Top performing mortgage bankers made 90-100 bps per loan.  That means that for every $100 million you closed, you should have (and could have) earned $900,000 to $1 million.  If you didn’t make this much, you need to look carefully at why you didn’t.  Or call us for a FOCIS-plus diagnostic to see what you can do to boost earnings per loan.
  
• The top quintile of companies we saw during the year all made over 100 bps per loan, with the top performer making 121 bps. For every $100 million they closed, they made $1.21 million.
  
• We got a tidal wave of Cult Movie nominations.  These were the top vote getters:

Rocky Horror Picture Show was the runaway favorite, but the rest are not listed in any particular order.  The Great Lebowski was a big favorite, and Night of the Living Dead just barely missed. For those of you new to this newsletter, Rocky Horror is a musical about an innocent couple that stumbles upon a castle filled with transvestite vampires.  This was one of Susan Sarandon’s first movies.

• What most mortgage company Boards are somewhat clueless about is their earnings broken down into bps per loan.  We see companies that did, say, $1 billion last year and earned 35 bps per loan.  Although that makes the company a big underperformer, Directors or outside investors go “Gee, how about that, we made $3.5 million. Hot damn!”  The reality is that they could have made at least 90 bps, which translates into $9 million! 
  
• Last week we noted that there are 200 billion stars in our own galaxy, and we asked just how many galaxies there are.  In response, someone sent us this fascinating video clip .    Watching it makes you wonder about all those things like just how big the universe is, does it have an end, if it ends, what’s on the other side, and, hey, aren’t there some Love Boat re-runs on TV right now?
  

• What do you think of mortgage companies that use the word Bancorp in their name?   It’s illegal to use the word bank unless you’re a real bank, but using the word Bancorp is legal.  We know some very decent people that have Bancorp in their name, but we think it’s deceptive. If you’re not a bank, you shouldn’t use language to imply that you are one.

• This is depressing: We just read Time magazine, the one with Tom Hanks on the cover, and it has only 60 pages.  We still have the November 6, 1989 Time which featured the breaking apart of the Soviet Union , and that issue was 119 pages. The latest issue of People magazine is 164 pages.  We don’t even want to know what this says about our culture.
• We knew Marion Berry was a crack head, but we didn’t know what a comedian he is.  He was recently stripped of his committee chairmanship on the Washington , D.C. City Council for illegallly funneling city money to his girlfriend.  Anyway, his response was “You can take away my committee Chairmanship, but you can’t take away my dignity.”  What?   His dignity? This is the mayor who was caught on tape snorting crack, and he’s defending his dignity? This guy should do stand-up comedy. 
  
• If you worry that there will be no one left to refinance soon, you should know that about 37% of all people with a mortgage have loans at 6% or higher.  That’s $1.2 trillion sitting out there, and yes, many can’t be refinanced, but many can.
• And how about good old Suburban Federal Savings ( Crofton , Maryland ) with a 614% Texas Ratio?  Does their President ever get a good night’s sleep?
• A year ago, everyone thought the world was coming to an end and that stocks were going to zero, but that was precisely when things bottomed out and started to turn around.  Here are the top performs of the past 12 months.

A few others: Microsoft (88%), IBM (52%), Coca-Cola (38%), McDonalds (63%) and Wal-Mart (47%).

• When you look at how Fannie Mae and Freddie Mac have changed things, one of the biggest changes is making refinancing much, much easier.  Pre-1986, there was no premium pricing, and thus, there was no such thing as a no-points or no-cost loan.  In about 1986, the two agencies started buying loans at prices above par, and the 1-2 point rebate allowed lenders to pay the loan officer’s commission and some of all of the closing costs.  Prior to this, a refinance would cost the borrower points plus costs, and as a result, it didn’t make sense to refinance unless you could lower your rate by 2.0 points!  Overnight, borrowers could refinance to save an eighth.

• The New Jersey Nets of the NBA are 7-56 for a .111 winning percentage.  If you extrapolate that onto a baseball over a full season, their record would be 18-144.  Even the Washington Nationals aren’t that bad.
• We were talking to a friend at lunch recently and somehow the topic came up of how much safer the world used to be. We’d read that crime rates have been dropping dramatically, so we looked up some FBI data on murder.  
  

This chart shows that the homicide rate is about where it was in 1950.  Here’s a graph going all the way back to 1910.  Look at how close 2008 and 1950 are.

A lot of why we think crime is higher is that the media plays up violent crimes more than in the past. The 24-hour news cycle means that editors are constantly looking for items to fill the hour, so even smaller crimes of violence get bigger play.

• We had a good response to the Steve Dalkowski item, so here’s one more tidbit.  At the end of his career he had a season with a really low ERA.  Manager Earl Weaver had his IQ tested, and when he learned that Dalkowski had an extremely low IQ, he figured out the problem.  Dalkowski just got too mentally flustered trying to handle a fastball low and inside followed by a curve low and away. Weaver told him to only throw one pitch the whole game, all fastballs right down the middle. His theory was that it didn’t matter if the hitter knew what was coming.  At 110 mph, no one was going to hit the ball anyway. See the attached article for more.
• With so many banks re-capitalizing, we remember what Allan Garrett (1917-1992) told us.  He said you should never invest when a company does a recap.  “Always wait for their second offering.”  His view was that most companies underestimate how bad things are and will have to come back to the market at least once more. The guys in the first recap will get diluted, so wait till the second one.

• Have you ever wondered which members get to vote for the Academy awards?  There are 5,777 people who get to vote, broken down per the following.

Can you actually get an Oscar for hair?

• Mike Abdelaaty of Islamic-oriented Bank of Whittier sent us a copy of the Qur’an (Koran) and we finally got around to reading it. It seems very respectful of the Jewish and Christian Bibles, and in some ways, it seems a continuation of both. Prophets such as Moses and John the Baptist are treated with great respect, and it seems to believe in the God of Abraham as well as of Jesus.  There is a popular belief that the Koran preaches violence and intolerance, and we have to tell you, we didn’t see any of that.
• From micro-cap bank newsletter The Vulture’s Roost: “When the FDIC has gotten rid of all its nasty little banks, and the banks that have struggled but didn’t get closed are cleaned up, we think there will be more banks for sale than you can shake a stick at. The Directors and management will be sick of banking. Directors join Boards of banks to hang with their buddies, eat lunch, and fall asleep while management recites its boring litany. They join Boards to be big shots in their communities, but the Directors of problem banks end up being worthless dogs who have lost money for their shareholders and who have to call in the loans of friends. Therefore, we predict that there will be a ton of banks that are ready to sell….”  What’-his-name at the Vulture’s Roost is a sharp bank analyst and a great writer.
• And three cheers for tiny Saint’s Mary’s College here in California .  They finished the season at 26-5 and are headed for the NCAA championships.  Go Gaels!

• The Combined Ratio is a good way to measure insurance companies, and it seems to be just as meaningful for mortgage insurers.  If the number is under 100, you’re making money. If you’re over 100, you’re losing money.

The M.I. companies are going through very difficult times, but the mortgage industry needs them more than ever, and they’ll come back strong.                           
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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] )