To Our Clients, Colleagues and Friends:

Washington Mutual has about $23-24 billion of capital. They also own $58 billion of Pay Option Arms, $19 billion of sub-prime loans originated by Long Beach , $40 billion of credit card receivables, and $62 billion of HELOCs. So despite their having raised $2.5 billion of new capital this week, we have to ask: Is $2.5 billion enough? What do you think?

Who has the most ATM’s? First is the BofA with 18,633 ATMs, followed by JP Morgan Chase with 8,943, and then in 3rd place is Wells Fargo with 6,841. And how do you like those envelope-free ATMS? We think they’re pretty cool.

A Northwest client asked us to look into why it was taking so long for their HUD mini-Eagle approval. We called someone we know at HUD and were told “Look, these people call us constantly, and off the record, we got fed up and just put them at the bottom of the pile.” Be forewarned.

Americans no longer lead the way with ownership of debit or credit cards. Here is the average number of credit or debit cards per person in various countries.

3.1 Taiwan
0.5 Malaysia
2.6 United States
0.3 Central Europe
1.8 Hong Kong
0.3 Russia
1,2 Western Europe
0.2 China
1.0 Singapore
0.1 India

We often hear mortgage companies tell us they would like to do FHA loans, but don’t want to spend $5-8,000 for an audit. First, that’s silly. You’ll earn that back with the first 2-3 loans you close. Second, we hear some say they want to see if HUD will drop the audit requirement and substitute a requirement for a surety bond. Here’s how we see it: given the potential risk a bonding company would be responsible for, isn’t it possible that a bonding company would have tougher net worth requirements than HUD? And isn’t it possible that cost of a bond would exceed the cost of an audit? If you want to do FHA loans, start the process now.

We have seen far too many companies burn through all their capital and end up in bankruptcy. We did a Risk Assessment on a company that had $39 million of capital at the start of 2006. With 2007 not even over, the company lost every penny of net worth, is out of business, and in bankruptcy. This Southwest company had a single shareholder. Two years ago he owned a company worth $39 million. Now, it’s all gone. We’ve seen this over and over and over, and it breaks our hearts. If a company has good financial reporting, it’s pretty easy to see where things are headed. And when things look hopeless, we always advise that the owner(s) shut thing down while they still have some net worth. If you’re not certain, give us a call. We’ll put together some projections and metrics that will show you clearly whether you can survive or not. When things are hopeless, you need to take your chips off the table and preserve whatever is left. As Jimmy Buffet sang, “You’ve got to know when to hold them, know when to fold them.” And in this environment, there is no shame in folding them.

A key part of the analysis of survivability is your cost to originate. When people have really horrible financial reporting and can’t seem to calculate this number, we have a simple, crude. but telling formula. You take all your fixed costs – rent, salaries, everything - and divide it into your loan volume. On the assumption that anything you spend money on is meant to generate closings, it’s probably a decent analysis. If you close $30 million and have fixed monthly expenses of $600,000, you have problems. According to this, your cost to originate a loan is 200 bps. Now compare this to your revenue per loan? You’re probably doing mostly Agency products, and let’s say you making 40 bps per loan. Well, if you make 40 bops per loan but spend 200 bps to originate it, you’re losing 160 bps per loan.
On the above example, it’s pretty simple. There’s not much you can do to increase your margin, so you’d better look to the expenses side. You’ have to shrink your expenses to 40 bps just to break even. If you can’t cut that much overhead, you’d better think about getting out of the business. Either that, or be prepared to lose money every month till you end up with nothing.

More and more our clients are doing hard money loans, with max LTV’s around 65%. We like this. This is what sub-prime was meant to be.

The loan portfolio at Downey Savings yields 7.45% and their cost of funds (mostly deposits) is 3.93%.for a nice spread of 3.52%. What if they were a mortgage bank using warehouse lines rather than deposits? Would they even have a spread?

If we remember our high school history correctly, tomorrow is the anniversary (December 16, 1773) in which Boston citizens dressed up like Indians and dumped over 300 boxes of tea in the Boston Harbor. It always surprises us that the Boston Tea Party occurred so much earlier than the formal Declaration of Independence.

Joe Garrett and Corky Watts
Garrett, Watts & Co.
http://garrettwatts.com