The Garrett, Watts Report (March 20, 2010)

To Our Clients, Colleagues and Friends,

There’s that saying that “In a consolidating industry, (a) you either are the consolidator, (b) you sell to the consolidator, or (c) you go out of business. The following charts shows huge consolidation in loan origination market share. Read it and gasp.

Can you say BofA-Chase-Citi-and-Wells?

We were speaking to a smaller company in the Pacific Northwest which plans to build their own software. These are very smart guys, but we can’t think of the last company which successfully built their own software. Countrywide did, but they had the resources. The most profitable retail, wholesale and call center shops we’ve seen the past several years all use the obvious suspects: PC Lender, DataTrac, Encompass and even Calyx Point. If these companies can all make over 100 bps per loan using off-the-shelf software, why not mimic them, why try to re-invent what has been proven to work just fine at highly successful companies?
Grammar Police Alert: Find the grammatical mistake in the above paragraph and get a free two year extension on your subscription to this newsletter.
We read, unfortunately, lots of Cease & Desist Orders. (Sorry, we meant Consent Orders.) They’re all ugly, but some are uglier than others, and we often have bank Presidents tell us “Yeah, we got one, but it’s not that bad” and they’re often right. We propose that Consent Orders be categorized into four types, from least bad to worst: High Ugly, Mid Ugly, Low Ugly, and Butt Ugly. We doubt the regulators will formally adopt this protocol, just as they never adopted the Texas Ratio, but we’d hope the Ugly Index would become part of the national vocabulary.
Teeny, tiny Saint Mary’s College of California (27-5) won the first game in the NCAA March Madness, and we’re rooting for them all the way. We taught there many years ago and developed a fondness for the school as well as the Christian Brothers who ran it. Perhaps the LaSallian Christian Brothers are not quite as intellectual as the Jesuits, but they were sure a lot more fun.

The Order owned a big winery back then, and while their wines were okay, they made a fortune off their Christian Brothers Brandy, its being a huge hit with inner-city drunks. The faculty lunches featured the same inedible mystery food the students ate, but with one huge difference. There were always five big wine goblets at each setting, and each table had bottles of five different wines. Let’s put it this way, even though the Brothers had all taken vows of Celibacy, there were apparently no vows taken regarding having a good time.

We heard of a Southern California firm which recently hired someone who’s blown up numerous companies. Don’t people check references anymore?
Can you believe that Davy Crockett is dead? Every boy growing up in the fifties wore a coonskin hat and watched Fess Parker play Davy Crockett on TV, and if you rent some of his old shows, they still hold up. And it’s interesting to watch him in the Alamo . You see him fighting the Mexicans as they swarm into the Alamo and over run the Texans, but you never really see him die. It’s all sort of vague what happens to him as the movie fades out with Davy still there fighting away. Presumably the Disney people knew there’d be a national trauma if the little kids of America saw their hero actually die. Fess Parker did a great job of playing Crocket, and he was the first hero to most boys of our generation.
The real Davy Crockett was very fascinating. While he was a trapper and backwoodsman, he managed to get elected to congress, and amidst all the dandy dressers there, he showed up in deerskin clothes. He made a few trips up north to solicit interest in his running for President, but nothing ever came of it and he got defeated for re-election. Disgusted with the voters, he told them “The hell with all of you. I’m moving to Texas .” He did, and of course he died there defending the Alamo . If we find it, we’ll include here his Inaugural Address to Congress when he was sworn in.
A number of the banks we assisted in setting up Warehouse Lending divisions are now bringing us in to review and audit their operations now that they’ve been up and running for 4-5 months. It’s an effective check-up and a good way to catch flaws and weaknesses in controls before they get too big. For those WH lenders who are interested in having this check-up and audit, give us a call. An ounce of early prevention is worth a pound of loan loss provisions.
Advanta Bank was seized on Friday, an at one time, they and an affiliated company were among the biggest issuers of credit cards to small businesses. At one time they were huge. Now they ‘re just a memory. And a $636 million loss to the FDIC.
We just read the Davis, Polk Summary of the March 15, 2010 Draft of the Restoring American Financial Stability Act introduced by Senator Chris Dodd. It’s quite sweeping and, in the review, it “Abolishes OTS and terminates the power to grant new thrift charters, unlike the House which maintains the thrift charter but creates a Division of Thrift Supervision in the OCC. “ Wow.
If we read it correctly, the Act requires that the FDIC insurance premiums will be based more on asset size and not on deposit size. It makes sense, since even though the FDIC is insuring the deposits, it’s assets that create the risk. And look at the BofA and other huge banks. They often have twice as many assets as deposits.
The Iraqi War is now seven full years long, March 19, 2003 till March, 19, 2010. By contrast, we entered World War II on December 7, 1941, and it was all over on September 2, 1945, less than four years later.
We’ve done well over a hundred FOCIS-plus Reviews the past couple of years, and we can’t think of a single one in which we didn’t find ways for the mortgage banking clients to increase earnings. With loan activity slowing down and earnings dropping, now might be a good time to bring us in. We remember one time in 2003 we were only able to find 3 bps of additional revenue for the client. Lately, it seems like we’re finding a minimum of 20-25 bps of additional revenue for our clients.
Sprint Nextel has lost almost nine million customers over the last three years. Unbelievable! As bankers and mortgage bankers, you know how costly it is to attract new customers and why it’s much better to retain one existing customer than to bring in one new one. There’s got to be lesson in Sprint’s plight.
Who were Irving Bank, MCorp, and Continental Illinois. Bankers Trust and Security Pacific? What about First Union, Barnett Banks, Citizens & Southern, Sovran, Norstar, Rainier , Seafirst and Shawmut? Never heard of them? Under age 30? What these banks all have in common is that all were among the nation’s biggest banks in 1985 and none of them survived.

The whole paperless thing is still in the infancy stage when it comes to squeezing out significant costs, but it’s absolutely inevitable. One of the paperless vendors we run across is DocVelocity, and it looks pretty good from what we’ve seen.

When we talk to clients who are pretty far down the road in going paperless, it’s not always clear that they’re saving money. It is clear, however, that the future will be a paperless one, and it’s probably better to be a bit early to the game than a bit late.

What about Loan servicing? Has the consolidation there been as pronounced as in originations? The answer is a resounding yes as evidenced in the servicing market share chart below.

We remember being real newbies back in the late 70’s, and Mortgage Banking Magazine (which was then called Mortgage Banker) had an article featuring the nation’s largest servicer. It was Lomas & Nettleton with the then astounding portfolio of $10 billion.

The attached flier describes FOCIS-plus very briefly. We need to update it, though, as it refers to our looking at over 60 areas of your operation. We now look at over 70. And when we find ways to increase earnings, we’ve been able to do so regardless of the channel. We’ve had successful FOCIS-plus Reviews (successful means we found ways for them to increase revenues) for wholesale, retail and call center companies.

The Saturday Wall Street Journal has a big article on why schools should have classes on Saturday. If you were a Dartmouth Freshman in 1967, you always had Saturday morning classes, and if you don’t believe it, ask Tom Reddy! Do any recent Dartmouth alums know if they still have this barbaric practice. Did any of you out there also have Saturday classes.?
We found it. Here’s Davy Crockett’s Congress, and while we’ve run it here before, we can never tire of it: “Mr. Speaker, gentlemen. A fellow called the M aster at Arms told me that a new Congressman is supposed to make an introductory speech. Well, here she goes. I’m Davy Crocket, fresh from the back woods. I’m half horse, half alligator, and a little snappin’ turtle. I’ve got the fastest horse, the prettiest sister, the surest rife and the ugliest dog in Tennessee . My father can lick any man in Kentucky and I can lick my father. I can hug a bear too close for comfort and I’ll eat any man alive opposed to Andy Jackson. Now some Congressman take pride in saying a lot about nothing, like I’m doing right now. Others don’t do nothing for their pay but listen day in and day out. I wish I may be shot if I don’t do more. Next time I get up before you, I’ll have something to say worth saying.” His speech was greeted with an outburst of wild cheering.

* *

If you can’t read the caption on the cartoon, it says “From now on, Ted, I will speak only when adequately resented by Counsel.”
Upcoming travel has us in Seattle , Boston , and Florida , but this is pretty tame stuff. My brother, Anthony Garrett, is on a quick in-and-out trip to Afghanistan and Pakistan . There are definitely some bad people in that neighborhood, but it also sounds romantic as hell.

And one final thought: If you’re not making at least 70-75 bps on all production, you’re not making as much money as you should be and could be. Simple divide your pre-tax earnings by your total loan volume, and that’s the number. We have a fair number of clients who earn over 100 bps per loan, and if your company doesn’t, we’re here to tell you that you absolutely can.

Cheers!

Garrett, Watts & Co.

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