The Garrett, Watts Report (December 18, 2009)

To Our Clients, Colleagues and Friends, 

· Here’s something weird:  2009 will be the first year ever in which more cars were sold in China than in the United States .  Maybe what’s so shocking is that it’s not shocking.· Here’s a list of the biggest bank failures of the last few years and how much they cost the government.

And no need to write us that we forgot Washington Mutual.  They were sold to JPMorgan Chase before actually failing and costing the FDIC money.· If you’re a Texas Rangers fan, you’re in for a real treat with your new starter, Rich Harden.  Harden has averaged 9.35 strikeouts per nine innings over the past seven years, best in the majors.  He’s injured a lot, but when he’s healthy, he’s dominating the way Sandy Koufax and Bob Gibson once were.  When he was with the A’s , he’d throw pitches that started off as sliders and ended up as curves or fastballs that morphed, midflight, into change ups.· We wrote about the net yield on the credit card yields after charge offs, and we should have noted that this is the gross spread and isbefore overhead such as mailings, salaries, rent etc.· An interesting benefit to real estate bubbles is that during them, a fair number of developers take great risk in developing projects that no sane person would ever build.  And they find lenders to go along with their dreams. As a result, we get some unusual and often fun things after the bubble bursts.  One interesting such project is The Shire, an Oregon development with fake thatched roof homes modeled on the hobbit villages in Lord of the Rings.  The Bank ( Umpqua ) and the builder have lost money on it, but at least the community will have an interesting neighborhood for years to come.· One of our disappointments is seeing how few mortgage banking companies have an annual Plan and Budget.  The budget can have much less than a dozen assumptions, and if you set up your spreadsheet properly, you can change assumptions throughout the year as your business changes.  In many cases, it’s the CFO who fails to produce a budget, but in other cases, and it kills us to say so, it’s the senior management or ownership which fails to demand one.· Wasn’t it Martha Stewart who said you should bake cookies simply to create a wonderful smell in the house?  We have a better idea.  Bake yams and your house will smell better than cookies.  Speaking of smells, we were asked recently what we thought was the worst thing about the sixties.  It took us half a second to answer the question, and the worst thing about that decade was, in one word, Patchouli Oil  Well, two words. (It’s pronounced puh-choo’-lee oil.)· We just watched a demo for DataQuick’s Collateral Validation (CV) and it impressed us as  more sophisticated than the many automated valuations we see.   Although CV can be used as an AVM, it was apparently designed to test other valuations (appraisals, BPO’s, AVM’s) to let lenders know if the value is supported.  It comes up with valuations based on 4-5 different appraisal methodologies, reviews them all, and comes up with its own valuation.  We also liked that they also show you a price you’d get if you had to sell the property very quickly, kind of a fire sale price. You’ll find DataQuick on the internet somewhere,· The University of Texas football program took in $87 million last year, $20 million more than 2^nd place Ohio State .  That’s a lot of ticket sales and sponsorships!  · Here’s an interesting video of the always amazing Chinese acrobats: http://amazingacts.blogspot.com/2008/07/dont-try-this-at-home.html  Any country whose people are that disciplined has to be taken seriously as a world power.· Attorney Dave Medlin helped lots of you negotiate your way through the jungle  of repurchases, but he’s also a great mortgage banking attorney in general. He’s also a funny guy.  The coffee mugs with his firm’s logo on them look pretty ordinary till you look on the back.  There, it lists important phone numbers:  California Governor’s Office (916-445-2841), The White house (202-456-1414), The Vatican (001-39-6-6982), and finally, Medlin & Hargrave (510-832-2900).· The three principals at Garrett, Watts are Presbyterian, Jewish, and Catholic.  And during this Christmas season, it occurs to us that everything that makes Western civilization great is the teaching of those three religions.  
Moses and the ancient Hebrews created the idea of the rule of law, without which we’d be living in a Hobbesian world where  “there is no place for industry, because the fruit thereof is uncertain; and consequently no culture, no knowledge, no arts, no letters, no society, and continual fear and danger of violent death; and the life man is solitary, poor, nasty, brutish and short.”   Hobbes thought that it was the Leviathan (i.e. the King) who kept us from living in a state of nature where might made right, but he was wrong.  It’s the rule of law that civilizes man, not kings or Presidents.
It was Martin Luther, the first Protestant, who really conceived the idea that the individual mattered. Before the Reformation, the people could only speak to God through the Priests. Luther thought individual men could have a direct relationship with God, and whether or not you believe in a God, this was a revolutionary idea, the idea that each man mattered as an individual.Finally, Christ’s teachings defined the role of compassion as a prerequisite for any civilization. Has there been a more powerful statement in the last 5,000 years than “Love thy neighbor as thyself”?If you think about it, these three lessons apply to believers and atheists alike, and they all helped create the Western concepts of freedom and democracy.  Our culture could not exist without (a) the rule of law that Moses brought us, (b) the value we place on the individual over the State, and (c) the fact that we’re all in this together and that we must care about our fellow humans.These were the great lessons of these three great religions, and what better a time than the Christmas holidays to remember them.Merry Christmas and Happy Hanukkah.Garrett, Watts & Co.  Free to read:  Board Decisions, by Joe GarrettHelping mortgage lenders increase revenues, control costs, and better manage risk.

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