The Garrett, Watts Report (December 14th, 2009)

To Our Clients, Colleagues and Friends,

A friend wrote us that there are tons of openings at FDIC.gov. If you’re interested in doing failed bank clean-up work, you should also check out the contractors they use. One of them is Solomon, Edwards (solomonedwards.com), and there are others as well. We hear that it’s much easier to get hired by one of the contractors than by the FDIC.
This photo is a fake, but it’s still pretty cool. The setting is under San Francisco ’s Golden Gate Bridge .

If you’re a Husky, you can be proud that of all the public colleges and universities in the United States , University of Washington alums have been awarded more Congressional Medals of Honor than any other school. And next to Cal , their students rank #2 in students who join the Peace Corps. The University of Washington was a pretty good (but not great) University for years, till they made a stunningly brilliant move. Some number of years ago they appointed Bill Gates’ mom to their Board of Trustees, and over the years, tons of Microsoft dollars flowed to the campus. It’s now gone from pretty good to very, very good. Their medical school is considered one of the ten best in the nation.
Remember our mentioning Tightwad Bank as being in the Hall of Fame of Great Bank Names? Well, there really is such a bank (www.tightwadbank.net), and, no surprise, it’s located in Tightwad, Missouri . The town has a population of 66 people. And one bank.
What is a Brooks Machine? From a friend at the BofA: “I hate to admit it, but I know what a Brooks machine is. It’s a machine that would print out TIL information. I remember loans like GPM’s and the tapes the machines generated to show the loan payment stream. Those tapes were a mile long.” Debbie Lane from Monarch Mortgage in Virginia Beach wrote about the machine and its inventor and several others also wrote in with similar comments.
The comment from our friend refers above to GPM’s. If you never heard of them, they were Graduated Payment Mortgages. We used to like calling them gyp ‘ems. And speaking of giving names to loans or securities, when the 30 year Treasury bond was at 10%, we used to refer to them as Bo’s, as in Bo Derrick. Actually, you might have been in middle school then, but 25-30 years ago Bo Derrick was the drop-dead beautiful star of a movie called, simply, “10’, as in ‘”On a scale of one to ten, she’s a ten.” We all called a 10% bond a Bo, and we all thought we were terribly sophisticated and wildly clever.
We got an e-mail from Jeff McCalmon, one of the owners of Tightwad Bank telling us “We do enjoy the amusement of the name.”
We’re always hammering on clients to calculate their exact cost-to-originate every month, and not estimates (“It costs us about $1,200 to originate a loan” is not good enough). You need to know it precisely, and in bps. You need to be able to say “Our cost-to-originate was 127 bps last month, it’s 117 bps year-to-date, and it’s 113 bps year-to-date in our Manchester office and 142 bps in our Concord office.”
You need just as much specificity in calculating your gain on sale. You need to be able to say that “Our gain-on-sale was 155 bps last month and 147 year to date v. 163 for all of last year. So far this year it’s running 132 with conventionals, 188 with FHA, 193 for VA, and 201 for USDA. Our loan officer, John Galt, is our highest producer by volume this year, but the gain-on-sale on his loans has only been 83 bps, and the 2^nd highest producer by volume, Hank Reardon, has been averaging a gain-on-sale of 153 bps.” Get the picture?
If you can’t spit out numbers like this, you’re not managing your business in a way that lets you make the best decisions. And the crazy thing is that all this data is in your system somewhere. It’s just a matter of extracting it and presenting it. We were at Monarch Bank subsidiary Monarch Mortgage, and they have all this! They really have their numbers down. It wasn’t a surprise that they are also highly profitable, and it’s always that way. The companies that know the metrics of their business best are the ones that are the most profitable. And vice versa.
And how about that Bernie Madoff? Only 148 years and five months left on his sentence.
Here’s from someone we did a FOCIS-plus for, after she started tracking these metrics as we suggested: “We’re tracking the things you told us to track, and we’ve found that some of our highest producers are our worst performers for profitability and loan quality…”
Do first impressions really matter when important guests visit your office? We say they do and former warehouse lender Bob Murray agrees, providing this mental checklist: “What does the office look like? Is it spartan or decked out in all cherry wood paneling? Is the office clean and orderly, or is paper piled everywhere? Is the overall environment (the facility, staff, and tone) professional and understated or over the top? Good companies are busy but organized and they keep overhead down…. While these are only initial impressions, they often prove to be indicative of how owners/managers run the business.”
We still think you’d really enjoy Brothers. Toby McGuire was excellent, as was Natalie Portman. By the way, the Harvard educated Portman has a very interesting YouTube video at http://www.youtube.com/watch?v=v8e6-IeQ0aw. If you’re easily offended by a bit of foul language, do not watch this! But if you can handle it, it’s pretty hilarious given her squeaky clean, Ivy-educated image.
We wrote about the Schwab Bank portfolio of HELLOCS, and we got the following from a Schwab official. “I believe that in our case a much better measurement in terms of understanding both the concentration of risk and our basic approach to bank lending is to look at HELOCs as a percentage of total bank assets, not as a percentage of our loan book. Our client loan book is small relative to assets. Bank assets here tend to be concentrated more in securities, particularly government backed….. In addition, there is a high concentration among Schwab Bank clientele of Schwab brokerage clients, hence our high average FICO scores, and low default rates.” That makes us feel lot better as we’ve always thought of Schwab as a really well run company.
We were wrong. Indy Mac was not seized on a Thursday, but apparently Wamu was. Someone wrote us that it was on July 11 that Indy Mac was closed, and isn’t 7-11 supposed to be a lucky number?
It looks like BAC sent loans to Freddie with a Bailee letter stating that the funds were to be wired to BAC as collateral agent, with Freddie ignoring it and wiring them to Taylor Bean’s account at Colonial. BAC is now being sued by the warehouse lenders.
Possible the best mortgage newsletter is written by Rob Chrisman, and he reported recently mortgage brokers are originating less than 13% of residential loans. Wow. Remember when it was running at 60%? Most of our wholesale clients have spent the last year or two moving into retail, but interesting, we also have some who don’t feel the need to move big time into retail. We think there were always be wholesale, and we admire those mortgage bankers who are committed to staying in wholesale and seeing that it works.
Sport Quote of the week, from Joe Morgenstern of the Wall Street Journal: “Soccer is a gentlemen’s game played by hooligans. Rugby is a hooligan’s game played by gentlemen.” Don’t you wish you’d come up with that line?

With so many of us sending our kids off to college, it’s only normal to think about what we owe children for these first 18 years or so. It seems that we owe them love, a set of good values, a safe environment, and an education. Can you think of anything else?

Garrett, Watts & Co.

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