The Garrett, Watts Report (February 4, 2010)

To Our Clients, Colleagues and Friends, 

We mentioned recently that Google was sitting on $24.5 billion in cash.  Apple has $40 billion in cash, and even after paying out huge dividends, Microsoft still has $37 billion in the green stuff.

For all you baseball fans, here are the all-time leaders in at bats:

It would be interesting to make some assumptions about the seasons that guys like Ted Williams and Willie Mays lost while in the military and see where they rank.

From a friend at the FDIC:  “We are doing a LOT of hiring right now, in case you want to make your readers aware.  These are temporary jobs (2+ years) mainly located in So. California , No. Florida , Chicago , Dallas and some other spots here and there.  These are bank resolutions jobs – closing banks and liquidating them. Jobs link:  https://jobs1.quickhire.com/scripts/fdic.exe/runuserinfo?Haveusedbefore=5   Okay, you guys. This may be a great way to get back on the merry-go-round!

Unless you think California will default on its bonds, you can buy California Lease Revenue Bonds maturing in 19 years and yielding 5.82%.  Since they’re tax exempt, this is the equivalent of about 9.5%.Since we mentioned movies last week (1) Avatar has now grossed $594 domestically and $2.04 billion worldwide, and (2) The Sound of Music sure does have its fans.  We’ve got about 15 e-mails defending it, about half of which were mildly sarcastic, as in “Are you out of your mind?  I hope you know more about banking than you do about movies.”

Writing this Report is easy, but it’s editing it that’s hard.  Oscar Wilde once wrote out editing one his works: ”I was working on the proof of one of my poems all the morning, and I took out a comma. In the afternoon I put it back in again.” 

Most mortgage bankers we speak to are planning to expand and do even more volume in 2010 than in 2009. We don’t want to name names, but we spoke to one Orange County (CA) owner whose company closed about $530 million last year who told us that that “We’ll close $400 million in 2010 if we’re lucky, and will probably do $350 million.”  It’s so refreshing to see such a realistic approach.  And it’s no wonder that their warehouse lender likes them so much.
·         Look at some of these Neighborhood Watch scores. Kate Berry of American Banker did some excellent investigative reporting on this.  Notice how poor the scores are for the homebuilder controlled companies?

These numbers are as a percentage of the national average.  This means that Bank of America’s loans default only 41% as often as the national average. HUD has made it clear that every three months it will review all FHA loans originated over the preceding two years.  It also said that it can terminate any lender whose default and claims rate was more than triple that of its region.
·         A friend got a massage recently and we guessed “The masseuse told you that you were really tight, isn’t that right?” They must teach that in massage school.  Same thing with fishing guides. Probably the only thing they learn in Guide School is that whenever the clients aren’t catching anything, you just say “I can’t believe it.  Yesterday we limited out by noon.”

Wizard of Oz didn’t make the top ten grossing movies of all time, but here’s the original ending before the Hays Commission censors forced MGM to make it more acceptable.  

We were looking at Obama’s new budget and we have a few thoughts on dealing with the deficit:  $135 billion for the Dept. of Agriculture? Except for food stamps, do we even need this department? What do they do, teach farmers how to farm?  Let farmers hedge their production with futures and forward sales.  $82 billion for the Education Department?  Education is run at the state end local level, so what does this department even do?   Have schools gotten better since this department was formed 25-30 years ago? NASA ($18 billion) and Commerce ($14 billion) are small potatoes, but would anyone even notice if we cut their budgets by half?  And $206 billion for a Labor Department? What do they do there?  They might need a little to run the National Labor Relations Board and a few things like that. If part of their budget is for unemployment, keep that but dump everything else they do.  As Ronald Regan once said, there may not be easy solutions, but there are simple ones.

We get asked every so often about accounting packages, and we pretty much like them all. QuickBooks is kind of weak on security, but it works.  We like Great Plains , MAS-90, and maybe our favorite is AMB, the only one we know of which is designed specifically for mortgage banking.

Leakage:  One company tells us they have a hard time tracking leakage loan by loan.  They asked if it would work to track it in the aggregate month-by-month. Absolutely yes. Even  if you can’t do it at a loan level detail, you’ll learn a lot if, say, you know you build in a profit of 150 bps on FHA loans and over a trailing three months, you averaged only 139 bps. That’s almost as good as doing it loan by loan.

A new group we just discovered: Vampire Weekend.  Good music from the U.K.

We wrote about Bob Gibson last year, and here’s what Hank Aaron had to say about him:  “Don’t dig in against Bob Gibson or he’ll knock you down.  He’d knock down his own grandmother if she challenged him.  Don’t stare at him, don’t smile at him, and don’t talk to him.  He doesn’t like it.  If you happen to hit a home run, don’t run too slow, and don’t run too fast.  If you want to celebrate, do it in the clubhouse. And if he hits you, whatever you do, don’t charge the mound.”  We spoke with Willie Mays once, and he said he never dug in against Gibson.  “It just made him even angrier.”  Here’s a rare photo of Gibson actually smiling.
We once sent the above quote (”Don’t stare at him, don’t smile at him, and don’t talk to him……”) to a friend who wrote back, saying “My wife shares some of those same characteristics.”
·         One of our clients is looking to sell its retail mortgage bank.  The Company has its full HUD Eagle and is located in California .  Please contact Corky Watts 408-395-5540.”

·         You know about DiTech, right? The fellow who founded it, Paul Reddam, initially built a company called SC Funding which really cracked the code on getting mortgages from credit unions. It was fabulously successful. He then founded DiTech and then sold it to GMAC. And if you’ve ever seen those TV ads for Cash Call, we hear that’s his company as well.  We haven’t seen Paul in years, but he really had the knack.  By the way, before going into mortgage finance, he was a professor of philosophy at USC.  And a nice guy, as well.

·         We’d like to have a serious poll. Can you send us your best estimate of the average cost (i.e. loss) to you of a re-purchase? If you have a sense of what it is in dollars, can you translate that into your best guess in basis points and send that in as well?  We really appreciate your help.

Garrett, Watts & Co.

Bonus:  How To Use Return On Capital To Determine Profitability

“Helping lenders increase revenues, control costs, and better manage risk.”
Corky Watts      ([email protected]) 
Mike McAuley   ([email protected])
Joe Garrett      ([email protected])