Troubled Banks and Construction Loans; More on the Cost of Loan Repurchases; The Size and Scope of NYC
Another comment from a client on the cost of repurchases: “One had so much equity that the investor allowed us to indemnify in lieu of repurchase. Unless the housing market falls another 35%, we'll never pay a penny out on it. The others we settled for about 50-60% of the estimated liquidated losses. It really helps to have an experienced attorney with these issues!”
Why do people seem to read this trashy little newsletter? We just finished re-reading a random sample of 30 e-mails we’ve received about this newsletter over the past two years. Four were related to something we wrote about the industry, and 26 were about such weighty matters as Michael Jackson’s dance moves, Pamela Anderson’s age, and why Spam and Twinkies are such good food items. If we never mentioned banking or mortgage banking ever again, would anyone notice? And if we dropped the human interest stuff, would anyone even read it? Two sobering questions.
Here’s another comment on how much you lose when buying back loans: “I have settled mine for an average of 60 cents on the dollar, and usually no cash, just a volume clip over 12 months.”
How big is New York City? Its $59 billion annual budget is bigger than all but 36 countries. Its 260,000 municipal workers would make it one of the 50 largest employers in the world. Its police force of 37,000 uniformed officers is larger than the FBI.
We were reading an analyst’s report on banks of the Pacific Northwest. Banks they cover there are trading at 44% of tangible book value. If you invest in a basket of community bank stocks and can wait 2-3 years, a few will have been shut down, but many will be 10-baggers.
Guess what we just saw at the grocery store? Budweiser in a can pre-mixed with Clamato juice. Mixing beer with tomato juice sounds bad enough, but clam-flavored tomato juice???? Does that sound disgusting, or what?
The Pete Davis who sent this item about France is sort of a legend in California. He took over a floundering Bank of Commerce in San Diego, grew it, and sold it for just shy of 5.0 times book! That was around 1998 or 1999 if we remember correctly.
One of the more interesting questions having to do with troubled banks is why they did so many construction loans. One answer is that they had yields quite a bit higher than many other loans. But if you assume the construction loan balance is essentially zero on day one and not fully funded till day 365, that means that the loan balance outstanding averages around 50% during the year. On a $3.0 million construction loan, doesn’t it then throw off the revenue of a $1.5 million loan? And doesn’t the smaller outstanding balance offset much or the entire higher yield?
Take your choice, a $3 million construction loan yielding 6.0% or a $3 million C&I loan yielding only 4.0%? All else being the same, 6% sounds much better than 4%, right? No way, Jose. And no way, Jose Conseco! Assuming an average balance on the construction loan during the year of $1.5 million, that loan throws off (at interest only) $90,000 during the year, but the loan at only 4% but which is fully disbursed on day one would throw off $120,000! You’d make an extra $30,000 on the lower yielding loan.
Have you noticed fourth quarter earnings releases show that about half the banks are reporting profits? You can’t have a healthy economy without healthy banks, so this is a very positive sign.
This Saturday is the 65th anniversary of the bombing of Dresden, Germany. In the evening of February 13, 1945, the British Royal Air Face Force sent 796 bombers that dropped 2,600 tons of incendiary bombs, starting a firestorm that burned 13 square miles of the Dresden’s urban center. A second wave of bombers later that night dropped bombs eastward and south of the city, and the next day, 431 Americans B-17’s released 700 tons of bombs over residential areas as well as rail yards. An estimated 25-40,000 people died within 24 hours. A massive attack on a population center was a rational move to hasten the end of the war, but it was still immoral. Generals should stick to bombing military targets, not population centers.
The three of us will be, separately, in Sacramento, Seattle, North Carolina, Houston, Dallas, Baltimore and Pennsylvania in the next two weeks. And come see us February 23 where we’ll be the speakers at the Seattle Mortgage Bankers.