To Our Clients, Colleagues and Friends, 

• Here’s a very general view on the future of wholesale.  (1) Wholesale lending came about in the early 1980’s to meet the needs of lenders who didn’t have the ability to do enough loans.  M any if not most were S&Ls, and if nothing else, most S&Ls are gone.  (2) Distribution has changed.  As recently as 5-6 years ago, Chase had only 500 branches where they might be able to get some get loans.  Now, they have over 5,000 branches.  Why do they need brokers to help them get mortgages?    (3) The internet, call centers, and better technology also expand distribution.  (4) Even when it works well, wholesale is just not that attractive a rick-adjusted return on capital.  There are more profitable ways to deploy capital.  And (5) Wholesale generally has much more fraud than other channels. 

• Do the above points mean wholesale will disappear?  Probably not.  We know many smaller, regional wholesalers who are making money, and there will probably always be a need for them.  But the overall picture is not bright, and the smart wholesalers will be nimble and ready to make quick adjustments to their models.
• A letter to the local bank:  “Dear Sirs, In view of what seems to be happening with banks at the moment, I was wondering if you could advise me.   If one of my checks is returned marked "Insufficient Funds," how do I know whether that refers to me or to you?”

• Can super-investors make money in a bear market for stocks?  The three years of 1930-1932 showed Benjamin Graham losing 60%.  He was the intellectual father of value investing and author of a famous book on the subject.  He was also one of Warren Buffet’s professors at Columbia .

• How would you like to be a member of the Board of Directors of the Bank of America?  In 2007, each Board member got paid $240,000 a year or $20,000 a month.   How many days a month does their Board meet?   Maybe one, perhaps two days?  Nice pay for not that many days of work.  And by the way, didn’t those Directors do a pretty poor job last year?

• Looking for a job?  The FDIC is holding job fairs and calling up former employees who retired.  They need to hire 1,500 people ASAP to deal with all the failed banks.  The New York Times even referred to their search for employees as “frantic.”

• Will FNMA start making Warehouse Lines?  Our guess is that FNMA isn’t looking at a lot of new initiatives right now.  But what if rather than making WH lines, they bought them?  Or bought participations in them?  That’s a true capital markets function in line with their mission, and besides, we don’t see them wanting to deal directly with hundreds of crazed mortgage bankers.  But if they would buy participations in lines, that might entice more lenders to get into the Warehousing business.   We have no special knowledge that they might do this.  It’s just our surmising late in the evening while it’s dark and rainy outside.

• We have a solution to the Barry Bonds “problem.”  Yes, he’s a cheat and a liar, but it seems now that hundreds cheated with steroids and many of them lied about it.   Tejada, A-Rod, Sosa and others openly lied, some to Congress, and that’s got to be just as bad as lying to a Grand Jury.  So as much as we dislike Bonds, we suggest that the government stop trying to put him in jail.  In return, he agrees to admit that he lied, he agrees to let Major League Baseball take away his home run records, and we go back to Hank Aaron as the all-time home run leader.
• The nation of Estonia is going through a recession like the rest of the world, but rather than increasing government spending to stimulate the economy, they decided to cut their budget by 10%.  As their former Prime Minister Mart Laar put it, Estonians would rather let the invisible hand restore the economy than the visible hand.  Probably more than any nation on earth, Estonia runs its economy on libertarian principles and Austrian economics.  What we like there is that there is no income tax on businesses and a low, flat tax on individuals.  Elagu Eesti Vabariik.  Long Live the Estonian Republic .
• By the way, if you’re looking for a new place to explore, go visit Estonia .  Their capital, Tallinn , is a magical, medieval walled city.  You should stay at the Three Sisters Hotel.  Although it’s been very much updated and modernized, the hotel itself goes back to 1362.   It’s one of our 2-3 favorite hotels in the world. http://www.threesistershotel.com. In its own way, it’s nicer than any Four Seasons or Ritz-Carleton.
• We did a project 4-5 years ago for Hansabank , Estonia ’s biggest bank.  They had mortgage programs almost exactly like ours, with one critical exception.  Whatever our LTVs were for a given program, their LTVs were 10-20% lower.  If we did 90% non-owners, they only went to 70%, and so on.  They, too, had a housing bubble going on, but they still wanted actual equity and lower LTVs.
• We just read that the FDIC sold a pool of $560 million in loans they owned after taking over First National Bank of Nevada .  How bad were these loams?  The FDIC sold them for slightly less than 8 cents on the dollar.

As we’ve noted before, we’re seeing an uptick in FOCIS Risk Audits that mortgage companies request on their own.  Typically, it’s ordered by a Warehouse Lender who’s looking at a new prospect or a renewal.  But there are company owners who tell us, “I’m not looking for a new line, and I’m not up for renewal.  I just want to find out where the areas of risk are in my company.  I want to know what I’m not doing that I should be doing, and I want too know what I’m doing that I shouldn’t be doing.” 

One owner told us: “In your 22 page report, I learned about all the things I’m not doing or not doing correctly – and what the top performing companies are doing.”  Call us if you’re interested.  It’s a bit like an annual checkup, and not all that expensive.

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Joe Garrett and Corky Watts -  Garrett, Watts & Co.  -   510-469-8633