The Garrett, Watts Report (March 31, 2010)

To Our Clients, Colleagues and Friends,

We have a client looking for someone to run their rate lock desk. This is a great company located in the heart of Beverly Hills , and we’re impressed with their management and their business model. Please send resumes to Joe Garrett ([email protected]). This is a great job for the right person.
We got some good captions for this photo, and the best ones were: (1) from Mike Olden up in Seattle . He had Geithner thinking “Why did I let him talk me into taking all those damn Big East teams in my bracket?” And (2) from Susan King “How did I ever get mixed up in this disaster?”

Our caption for what the President is thinking: “If things don’t work out, I’ll just blame it all on the guy on my right.”
TARP dividend payments to the government were due February 15, and it looks like about 75 institutions missed their quarterly payments. Not good. Saigon National Bank in the L.A. area has now missed all five payments. In fact, once you miss six of them, the guy on the left in the photo gets to appoint two people to your Board.
We’ve now successfully assisted nine banks in getting into the Warehouse Lending business. What’s so gratifying is that with banks having a hard time finding good loans to make, these WH lines generate a good yield with very good collateral. And yes, WH lending is really asset-based lending, but you typically have very strong mortgage banking companies guaranteeing the lines. Almost all mortgage companies made tons of money last year, and most are flush with cash.
And a special note of congratulations to Joe Adams, Steve Haynes and Erin Burr at First Security Bank up near Seattle . Of all the banks we helped set up Warehouse Lending operations, First Security made it happen quicker than anyone. They called us all the time the first 3-4 weeks, and we liked it. It meant they not only wanted to get it up and running quickly, but more importantly, that they didn’t want to miss anything, however minute. Way to go, Steve, Joe and Erin and the rest of your team.
If Erin Burr ever wants to get out of commercial banking and warehouse lending, we‘d love to see her go back to graduate school in American history. Wouldn’t it be cool if she taught early American history, with a specialty in the life and times of Aaron Burr? And what if a rival college had a professor of early American history named Alex Hamilton, as in Alexander Hamilton? Can’t you just see the two them having a debate? Erin Burr v. Alexander Hamilton. Just like the old days.

Does anyone remember actor Bud Cort, who played the young fellow in the 1970 cult classic Harold and Maude? Today he turns 62. We never quite got it, but it was one of those movies where people would tell you they’d seen it 15 times and that it was the most brilliant movie ever made.

Speaking of movies, don’t be in too big a rush to see Crazy Heart. Jeff Bridges won the Best Actor Oscar for his role in this movie, but the full range of his “acting” was acting like a drunken slob the first 110 minutes and then, post-rehab, acting like a sober slob for the last 5 minutes. The role he played didn’t give the slightest hint as to why Maggie Gyllenhaal was so attracted to him. A better actor could have given a hint at what she might have seen in him, but there was none of that. He would have clearly deserved an Oscar if they had one for Best Actor Playing a Drunk, but they didn’t have that category this year.

Some of you have wondered about buying a bank, and in answer to some questions we’ve gotten, yes, a bank can be an S-Corp. In fact, whenever we see a small bank with a really high ROA, it almost always turns out to be an S-Corp., since they don’t pay taxes. While we’re on the topic, we think that 99% of mortgage bankers don’t have the temperament it takes to own a bank, but if you’re in that 1%, it could make sense. The piece we’ve attached gives some good reasons to do so, along with a concise description of who regulates which types of banks.
One big reason to own a bank is the lower cost of funds. Take last year’s income statement and adjust it to show that your cost of funds was 2.0% instead of whatever you paid on your warehouse line. Assuming you did $500 million last year and that your WH lines were at 5%, that 3% differential would have earned you a whole lot of money. And that’s not counting the fees. Go ahead and do the math. This is a really simplistic example and doesn’t consider all sorts of other issues, but you get the point.

Here’s good place to see what banks have received enforcement actions from their regulator. One of these days, instead of publishing a list of banks with regulatory orders, maybe it will be easier to simply publish a list of banks without them. It would be a shorter list.
Remember Washington State QB Ryan Leaf? Leaf averaged 330 passing yards per game in his junior year, was runner-up for the Heisman Trophy, and was #2 in the NFL draft. His pro career went nowhere, and he had a truly horrible career passing rating of 50.1 in his 25 games. His career and his life spun out of control, and last week this one-time can’t-miss pleaded guilty to drug and burglary charges. Sad.
We saw too many companies the past year which back up their data on servers located in the same building as the company headquarters. People, it should be backed up at a site at least 50 miles away. If you don’t understand, just think of the World Trade Towers on 9/11. Back up at a far away site.
On this day in history, March 30, 1981, Ronald Reagan was shot in an assassination attempt by a nut who thought he’d impress Jodie Foster. Reagan was shot less than three months into his Presidency, and it was his good humor about being shot that helped the American public decide that they really liked him. Just as the surgeons got started, he turned to them with a big smile and said, “Boys, I hope you’re all Republicans.”
After four years of double-digit inflation and high unemployment, plus the humiliation in Iran , the new President seemed larger than life and filled with humor and optimism. His first post-hospital appearance before Congress displayed a bi-partisan good feeling that hasn’t been seen since.
From a Wall Street Journal editorial: “There’s still no indication it has occurred to the Administration that less exuberant free-handedness over the past five years might have built the basis for sounder, more sustainable economic growth.” Hard to really disagree with this, right? Well, we opened an old book and found an editorial from the WSJ, and this is from that editorial. The date? September 12, 1966. The administration they were criticizing was Kennedy-Johnson, and the five years were 1961, when Kennedy was inaugurated, through 1966 when Johnson was President. As the French say, the more things change, the more they stay the same. La plus ca change, la plus c’est la meme chose.
Bartenders used to ask “What’s your poison” and to answer that question, here’s what Americans drank last year broken down by market share.

Vodka	Imported whisky	Rum	American Whiskey	Gin	Tequila	Other
30.9%	13.6%	13.3%	10.7%	6.0%	6.0%	19.5%

Have you noticed the subtle changes in the Wall Street Journal lately? There was a time when the only graphics were those black & white little-dot pictures, and now they have photographs, some of which are in actual color. We’ve wondered if this is maybe Rupert Murdoch’s way of gradually making the paper more like the tabloids he publishes. Just when we were about to dismiss this ridiculous notion, there was a front page article last week on, get this, Johnny Depp’s fingernails! Next we know, the Journal will have columns written by Lady Gaga, and weekly features called Madonna on Mortgages and Beyonce on Bonds.
Most people think of bounced checks as irritating, but not all that big a thing. Bankers know they’re a huge thing, as banks collected about $37 billion in fees on bounced checks last year. At our last bank, we had a restaurant account that generated $18-19,000 every year in Not Sufficient Funds fees. His business was doing poorly, but he covered every single check. We were really sorry when his place finally went bust.
Build or buy? If you want to start an FHA program, it can take awhile to find a good DE underwriter, do your test cases, and complete everything else. Why not find a small mortgage banker who’s tired of all the licensing issues, not to mention re-purchases, and have him join you in some capacity, possibly as a net branch, maybe a division, or possibly in some other capacity. If you structure it right, you can be up and running almost overnight.

If you never had the chance to see Philippine President Ferdinand Marcos in person, now you can. Here’s a photo of his embalmed body where it’s kept in a temperature-controlled mausoleum.

What if we had done that with President Nixon, or all our Presidents for that matter? They could keep them all in one huge room at the Smithsonian Museum .

Oakland A’s pitcher Catfish Hunter gave up two home runs in the 1974 World Series, and when asked about them, he responded “I had some friends here from North Carolina who’d never seen a homer, so I gave ‘em a couple.” This future Hall of Famer was the main stud on the Oakland team that won five straight pennants and three straight World Series. Catfish died way too young, from Lou Gehrig’s Disease.

What profit margin are you (a) building into your loans? How does that compare to (b) what you’re actually realizing? We know you know the answer to (a). We also know that most of you don’t know the answer to (b). Figuring this out and doing something to bring those two numbers together just might be the one most important thing you can do to improve profitability.

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See you guys soon. Do you realize that Opening Day is just days away?

Cheers!

Garrett, Watts & Co.

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