Out of Business Mortgage Insurers; Hedging with TBA MBS; Ideas to Help Create Job Growth; Reasons to Buy a Bank
Lots of people sent us the video explaining how OneWest bank got a sweetheart deal from the FDIC. We responded to all of them by stating that we doubted it was true, and sure enough, the FDIC has put out a statement that clarifies the deal and shows how the video was not accurate. READ MORE
This past weekend was the surf contest at Mavericks, just south of San Francisco.
The photo below is from the contest.
The waves hit 50 feet this weekend, with one surfer saying he thinks they hit 60 feet, and if you don’t believe it, use a ruler and measure the surfer in the lower left corner and see how many would fit into this wave. The waves were so huge that some crashed onto the beach and injured the spectators.
We have two ideas on how to create real job growth:
- A position for people who will interpret, translate and explain hospital bills
- A position for people who will plan college tours that allow you to see seven colleges in six states in five days.
We got a good response from people who remembered the M.I. companies that now reside in the Mortgage Insurance Cemetery:
Commonwealth Mortgage Insurance (CMAC), Foremost, Amerin, Commonwealth, Home Guaranty Insurance, Investors Mortgage Insurance Company (Tiger IMI), U.S. Mortgage Insurance Corporation, GE Capital Mortgage Insurance, Integon Mortgage Guaranty, Verex Assurance.
That's 11 and counting.
Wouldn’t you feel angry and ripped off if you had donated money to the John Edwards presidential campaign? Could he even be elected dog catcher somewhere?
One reason mortgage bankers give us for buying a bank, no matter how small, is that once you own one, you can then get in the list to buy failed banks from the FDIC. Our general view is that the vast, vast majority of mortgage bankers lack the temperament to own and run a bank, but for those that do, this strategy can make sense. We advised one mortgage banking client on purchasing a bank, and after having closed on it only a few months ago, he’s already looking at more acquisitions.
From our October 30, 2007 newsletter: “On the Countrywide earnings call last week, management used the word conservative 25 times. “ Things sure can look weird when seen after-the fact. Weren’t things pretty much unraveling by that date?
Yes, times are very difficult, but great companies typically have visionary leaders. Mary Martin sang about it as Bloody Mary in the great musical South Pacific. ”If you ain’t got a dream, how’re you gonna have a dream come true.” Similarly, if you haven’t got a corporate statement of vision, how’re you gonna have a vision come true.
Leakage redux: Once again, leakage is the difference between the profit you build into your rate sheet and what you actually realize when the loan is purchased. If you build in 100 bps of profit for a given loan on your rate sheet, you darn well better realize 100 bps or really close to it when the loan is purchased. If you got only 90 bps, you had 10 bps of leakage. When we see companies really under-performing, it’s almost always leakage.
We saw one under-performing mortgage company that was paying pretty outrageous salaries. When we looked at their numbers, the high salaries explained 7-8 bps of under-performance. The other 57 bps of under performance was leakage. Right now, and especially if you’re a mandatory shop, fixing those leaks is the one best quick fix to generating good profits again,
The credit crisis of the last few years devastated those who had inadequate reserves to handle repurchases. Don’t make this mistake twice. The Romans actually addressed this 2,000 years ago. Bis peccare in bello non. “In war, you cannot make the same mistake twice.” Everyone had a great 2009, and before you complete your 2009 audit, it might make sense to significantly add to your loan loss reserve.
If you thinking of buying a bank or going on the Board of one, THIS IS A MUST READ
Where were you 36 years ago this week? In mid-February, 1974, newspaper heiress Patty Hearst was a student at UC Berkeley. Late at night she was kidnapped by a gang of self-styled urban terrorists with the absurd name of the Symbionese Liberation Army, a group of losers and misfits with delusions of starting a revolution. They demanded as ransom that her family spend $400 million to feed the poor people of San Francisco, and food riots broke out when the family tried to comply. Patty was kept in a dark closet for weeks, raped repeatedly and, ultimately, brainwashed into joining her kidnappers. She denounced her parents as fascist pigs and “enemies of the people” and participated in a string of bank robberies in which innocent people were murdered. Most SLA members were killed in a huge shoot-out with the police in L.A., and Patty was later captured. The once-pampered heiress served a number of years in jail, and is now a suburban house wife and soccer mom in Connecticut. Her autobiography Every Secret Thing is a terrific read.
We have an Orange County commercial bank looking for someone to run their back office operations. If you or someone you know I interested and has the experience, please send resumes to us at JGarrett@GarrettWatts.com. We were there last Thursday, and it was 71 degrees warm.
More on repurchases from clients: “Assume Orig. loan amount = 100% of loan value (most repurchases are identified via early term defaults, meaning the UPBs don't decline much from the original loan amount. So we'll keep it simple). - About two-thirds of the loans we repurchase are already in advanced delinquency or foreclosure by the time they are repurchased. So, once we buy back the loan, let's assume a 50% total default rate. If a loan is repurchased today, it will likely roll to loss in the next 12-18 months (depending on judicial/non-judicial state mix), meaning loss severity will still be elevated. We're seeing foreclosure liquidations over the past 12 months averaging in the low-mid 60% range. So, assuming maybe a small bounce back in home prices over the forward year & a half, let's call loss severity at 50%. Loan Balance * Default Probability * Loss Severity. 100% * 50% * 50% = 25% loss. 25 points. That's for a single loan that gets repurchased.”
Bank of New York was founded by Alexander Hamilton, and as you remember from American History, he was killed in a duel with Aaron Burr. If you’ve done business with this bank, you also know that it can be stodgy and slow moving. The joke is that as he got ready for his duel, Hamilton told the bank staff “Don’t do a thing till I get back.”
Many of you are doing TBA MBS forward sales with fairly obscure broker/dealers; we’d like to suggest this as a perfect opportunity to examine the counterparty risk with them.
We have a program where (1) we come in and measure your leakage, and (2) find where the leaks are and give you a plan to fix them. We were thinking calling it PLUMBER, standing for Profit Leakage Undermining Mortgage Bankers Emergency Relief. Let us know if it’s just a bit too cute. The service is pretty remarkable in making a huge difference quickly in earnings, but maybe we need a better name for it.