To Our Clients, Colleagues and Friends:    

· It’s kind of shocking, isn’t it, to see so companies sell at deep discounts to book value Downey Savings is at 30% of book value, First Horizon Bank at 68%,  M GIC at 61%, P M I at 22%, and Wamu at 50% of book value. It’s often because the market doesn’t trust book value to be accurate. But it could represent a great bargain.

· The FDIC says that as of April 30 it had received just 42 applications for deposit insurance for new banks this year, compared with 83 in the first four months of last year. We hear, and it makes sense, that they’re putting a lot more emphasis on the experience and quality of the proposed Board of Directors. Not management, but the actual Board.

· Here’s a direct quote from Credit Suisse research piece:  “We would note that Fannie said that fair value book value fell from $35.8 billion to $12.2 billion in the quarter. However, the fair value of preferred was $14.3 billion, leaving fair value for common of negative $2.1 billion or over $2 per share. Common GAAP book value fell to about $22.50 from just under $28 at year end. This will be increased slightly by the offerings. Half of the capital raise was consumed in the current quarter.”  We’re not quite certain how to interpret it, but it doesn’t sound terribly positive.  

· We’ve done advisory work at some of the banks in East Europe , and we’ve gotten to know the management at Raiffeisen International Bank pretty well.  It’s an Austrian bank (with American ADR’s) that’s a good way to make one investment and have exposure to all of Central and Eastern Europe .  They operate in Poland , Hungary , Estonia , Romania , Latvia , Lithuania , Czech Republic , Slovakia , Slovenia , Serbia , Croatia , Bulgaria , Kosovo , M acedonia , Albania , and all the other countries that used to be part of the Soviet Union .  By the way, their stock is up 46% since March, and we think it’s one of the stocks you can buy today, pretty much ignore for ten years, and wake up and be amazed sat how well it’s done.  East Europe is a very growth region, and when we were in Romania , we read about a Western software company that had been outsourcing to India but had just moved it to Romania . Well educated people at lower wages.

· Are loan officers complaining that rates are a bit too high?  Have them do some research and get back to you with where rates stood in M ay of 1981.  We’ll tell you the answer here: FN M A rates were about 19%.  FHA was 17.5% (with six points).  And for those whose warehouse lines were priced at Prime, the prime rate then was 22%,

· If you’re selling loans on a mandatory basis, what should you look for in a head of secondary marketing?  Clearly, risk management and hedging knowledge is right at the top of the list.  But shouldn’t product knowledge also be very important?  Of course, although maybe a bit less critical in a GSE/FHA world.  The reason we bring this up is simply to raise the issue as to what you look for in a secondary marketing person.  Hedging and product knowledge are largfely unrelated, yet most mortgage companies are too small to afford both.  If you’re selling mandatory and have someone good at hedging, we have a suggestion:  Since loan officers are usually very attuned to every little product change by the competition, how about a committee of loan officers to meet weekly to advise the head of secondary as to these product changes?  Just a thought.

· We were asked recently what the one, most common mistake we see mortgage companies make.  First, that’s a very good question.  Second, we didn’t hesitate a moment in answering it.  We answered that the biggest mistake we see the most often is the inadequate use of data to make better decisions. Now, you have to remember that we rarely get called in to the top, best running shops. So we see a lot of underperforming companies and companies really struggling.  Universally, if they had better reporting, if they made better use of their data, they could see what was obviously hurting them and could make better decisions.  It’s sad, because 99.9% of all the data they need is in their system somewhere (whether it’s Encompass, DataTrac, Point, et al).  It’s very easily extracted, and if it’s presented properly, it becomes very obvious what changes need to be made to stop losing money.  You will make better decisions through better presentation of data.  And remember that You can’t manage it if you can’t measure it.
We see companies making bad decisions all the time.  Or sometime just inadequate decisions: We lots of and lots of companies who think, “If we can just grow volume by $____ per month, we’ll be profitable.” And as just one example, the answer could be that this is true if it were all retail, but that every wholesale loan wipes out the profit for two retails loans, so they have to stop wholesale.  It’s pretty easy to run P&L statements by channel, and had this one company (a real example) done so, they wouldn’t have needed us to point out to them that wholesale was destroying them.  They loved the volume in wholesale and didn’t understand its impact on losses.  Sad.

The good news is that setting up the proper templates for your financial reports is a very easy process.  It’s having a commitment to maintaining them that takes leadership.

Joe Garrett and Corky Watt  -  Garrett, Watts & Co.