To Our Clients, Colleagues and Friends,

• Compass Analytics tracks and publishes the daily spread between best efforts and mandatory pricing.  We asked Rob Kessel there to share their methodology with us, and he told us “The true Best Efforts-Mandatory spread can only be derived by looking at mandatory prices across investors against their best B.E. prices, looking at specific, closed loans.”  
  He explained further that they do this daily over a 50 bps range of note rates, using best efforts and mandatory prices obtained by mid-sized sellers ($60-80 million). Both Corky and I used Compass Analytics in our past lives, and when you’re looking for a hedging advisor, you absolutely need to consider them. When I went to work for Baldwin & Howell in 1977, they used Compass (it was called Tuttle & Co. then), so they’ve been around for over thirty years.

• When I joined Baldwin & Howell, my boss was James Johnson (we called him JJ), and after 2-3 days I went to him and said “JJ, the goal here is to get as many loans as possible, right?  So if that’s the case, after all this effort in getting these loans, why do you just turn around and sell them.”  Naïve, or just dumb?
• We were performing a FOCIS-plus on a Missouri bank last week, and they have a cost of funds of about 13 bps.  This is not a typo.  One obvious recommendation to a company like this is: Slow down your shipping!
• Everyone knows what the Triple Crown is, where you lead the league in home runs, runs batted in, and batting average. But what about a Negative-Triple Crown, for the player with the worst numbers in these three categories?  After 388 at bats, Cesar Izturis of the Baltimore Orioles has only one home run, 24 runs batted in, and a .237 batting average.
  If he can keep his numbers down, he has a very good chance to lead the league with the worst numbers in all three categories.  This photo could explain his anemic numbers.  It’s awfully hard to be a good hitter when you insist on using a broken bat. 
  

• As more mortgage banking companies think about hiring a Risk Management Officer, we get asked from time to time what that person would do.  Along with developing systems to measure risk, a good starting point is to have that person constantly asking “What could wrong?”  A good CEO will do that anyway, and if he isn’t doing so, he should be.  No matter how long you’ve been doing something in a company, and certainly for new ventures, asking the question “What could go wrong” and then probing deeper and deeper is a good approach.
• Yet one more person in Mortgage Land whose kid is starting college this year.  Gary Egkan (originally Freddie Mac, now Radian) took his son to the University of Arizona . It seems like yesterday Gary gave me a chocolate cigar when his son was born.

• As usual, UC Berkeley’s incoming students reflect the changing face of America . The ethnic breakdown of the entering freshman class at UC Berkeley is 42% Asian American, 31% Caucasian, 12% Chicano/Latino, 3% African American, 3% Filipino, with 7% refusing to state their ethnicity or reporting it as "other."  I still have my yearbooks from Cal , and flipping through the pages, it looks like the school was about 95% white back then.
  The American Dream will be closer to being fulfilled when 1003’s, college applications, and all government forms stop asking people about their race. Anyway, Here’s a nice photo of the entrance to the Cal campus.
  

• We’ve preached for 25 years that banks shouldn’t own mortgage companies or have them as subsidiaries, that they should just be part of the bank.  Anyway, we recently advised a mid-west thrift in their acquisition of a mortgage company, and their CEO wrote the following to us: “The Federal Reserve called me last week as they are going to take over regulation of our holding company from the OTS. They had heard in the local press of our mortgage company expansion and wanted to know if it was an operating subsidiary of the holding company (it isn’t). If it was, they wanted to see a business plan, copy of board reports, policy, etc. etc   Because it is the actual bank operation they dropped the line of questioning.”  A perfect example of why you shouldn’t have your mortgage operations in a subsidiary.
• When my daughter was being recruited for some mid-Atlantic college equestrian teams, she sand I had dinner in Baltimore with secondary marketing executive Ellen Wilson.  Ellen wrote about Hannah starting college: “You must be very excited for Hannah.  Being a freshman is really FUN.  Six months from now, how many of can say we had a 100% increase in our total number of friends, at least a 50% increase overall knowledge, and a 75% increase in total alcohol tolerance?” Ellen definitely has a way with words.
• People think secondary marketing types lead boring lives, and I just heard that again the other day.  I won’t name names, but some of you North Bay types will remember the secondary marketing fellow who had two families.  He cheated on his wife, and when he got the woman pregnant, he maintained two families, secretly, maybe 90 minutes apart.  He’d tell one family he was going away on business and spend time with the other family, and vice versa.  I knew him fairly well and I didn’t have a clue.  He died of cancer maybe 20 years ago, and when he had only days to live, he confessed everything to both families.  Sad, tragic, maybe pathetic, but not just another secondary marketing guy living a life of boredom.

• Here’s one reason, we think, why mortgage companies sell for so little these days: If you don’t have servicing, probably 95% or more of your income comes from loan production, right?  And given that rates will someday rise, and probably to the point of eliminating a big percentage of refinances, aren’t you really making a huge bet on rates staying low forever?  Isn’t that like betting everything on red? MacDonald’s will probably keep selling Big Macs forever, but how long will mortgage companies keep doing refinances?  This isn’t a question of a Black Swan possibly lurking out there.  It is there, and everyone knows it’s there.  We just don’t know when the Black Swan of higher rates will show itself.
• On the above point, would you buy stock in a mortgage banking company that had no servicing and made all its money on loan production?  You would?   Really?  What multiple would you use?  Are you sure?
• Angelo Mozilo, what a great story of a butcher’s kid who built such a successful company. Anyway, two thoughts on a Saturday morning for those who would criticize him: (1)  You judge a man by the entirety of his life, and not just the last thing he did, and (2) We run into dozens and dozens of former Countrywide employees all over the country, and every one of them has always praised him.  Doesn’t that say a lot about a man, when his former employees universally have so much respect for him?
• Here’s an interesting question:  How do employees and Directors stand up to charismatic leaders with forceful personalities.   How do you tell them they’re wrong?  I’d like to think that if I had been on his Board, I’d have told Mozilo “Look, this hyper growth at the bank will not have a good ending.  You’ve got to slow it way, way down, get it under control, and let’s show regulators that we’re only going to only budget 15% growth.  You know mortgage banking a thousand-fold more than I do, but I know the regulators, and this rapid growth at the bank will kill us one day unless wee slow it down.” 
  
• President Kennedy knew that people tended to tell him what they thought he wanted to hear. So during the Cuban Missile Crisis, he often had all his advisors meet in the Cabinet Room without him, joining them only after they’d hashed things out. In the same spirit, we think Bank Boards should meet without their CEO in the room more often, especially if the CEO has a strong personality.
• The person next to me on a flight home from St. Louis was a Southwest airline pilot. He was quite talkative, and when I asked him about those Northwest pilots, he said “Yeah, they were probably sleeping, but it’s not dangerous as long as you don’t run out of gas.”  He told me that he’ll often tell his co-pilot that he’s going to close his eyes for a short nap, and he also told me he does lot of reading on longer flights.”  I kind of wish he hadn’t told me that
• That was kind of scary, but even scarier was the pilot started talking about rock music and insisted that statement that Little Richard was the true founder of Rock ‘n Roll.  Look, no one had better hair than Little Richard (photo below), but Chuck Berry’s lyrics spoke much more to the teenagers of the 50’s.  He sang about dating and cars, and even though he was kind of a pervert (he served time for messing around with a girl slightly underage) his songs were really about white, suburban teenagers and their clean-cut lives.  His songs were often lyrical:  “Last time I saw Marie, she was waving me goodbye, with hurry-home drops on her cheeks that trickled from her eyes…”  Hurry-home drops?  What great writing! 
  
  

By contrast, here are some of the lyrics to Little Richard’s all-time hit Tutti Fruity:   “Wop-bop-a-loo-lop a-lop-bam-boo, Tutti Frutti, all rootie, Tutti Fruity, all rootie, Tutti Fruity, all rootie a wop-bop-a-loo-lop a-lop-bam-boo…”   People, is there any doubt that Chuck Berry was truly the poet of rock and roll and not Little Richard?

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Garrett, Watts & Co.

“Helping lenders increase revenues, control costs, and better manage risk.”

• Corky Watts   (408-395-5504)
• Mike McAuley   (281-250-2536)
• Joe Garrett   (510-469-8633)

Bill Coppedge is ON VACATION and OFF THE GRID. 

The news clips portion of this blog returns Tuesday, September 7.

Mortgage broker is becoming a vanishing breed – Market downturn, subsequent regulations have squeezed many out of the industry – By Jeff Swiatek – IndyStar.com

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(in the end the consumer will pay) New Fees Weighed for Mortgage Industry – By DEBORAH SOLOMON And NICK TIMIRAOS – .. "To suggest the private market can come back in and take the place [of the government] is simply impractical. It won’t work," said Pacific Investment Management’s Bill Gross at last week’s summit. … – WSJ Real Estate

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Wells Fargo “Strongly” Opposes Accounting Board’s New Rules on Loan Value – By Dakin Campbell – …  said it disagrees with an accounting board’s plan that would require banks to report the fair value of loans on their books.  “We strongly oppose the expansion of fair value as the primary balance-sheet measurement attribute for virtually all financial instruments,” Wells Fargo Controller Richard Levy wrote in the Aug. 19 letter. “It will only serve to cement a short-term focus on fair-value measures.” – Bloomberg

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(has examples) Mortgage fraudsters find new schemes – Posted by Teresa Mears – Lenders have tightened the rules, but crooks are finding new ways to steal, including identity theft. – MSN Money
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US Commercial Real Estate Slump Not as Bad as S&P Feared – … The slump in the U.S. commercial property market didn’t quite plumb the depths of the downturn in residential real estate, but although we see signs that home prices are nearing the bottom, commercial real estate could fall further. Despite a surge in foreclosures in the U.S. commercial real estate market, there were fewer defaults in commercial mortgage-backed securities (CMBS) than Standard & Poor’s Ratings Services originally expected. … – Research Recap

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proposal worth reading – Alternative Housing Finance: How Does “SwapRent” Work – Posted by Larry Doyle -Sense on Cents
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Deutsche Bank Summarizes Future of GSEs, Government Guarantee – by JACOB GAFFNEY – HousingWire

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Report on Fannie, Freddie gives new theory for collapse – By Zachary A. Goldfarb – … But Thursday’s report from the Federal Housing Finance Agency said that Fannie and Freddie’s portfolios weren’t the major driver behind the companies’ losses.  Rather, it was the role the companies played as a guarantor of mortgages that led to most of their losses, the FHFA said. Geithner has also pointed to the weight of souring guaranteed loans as a source for the companies’ troubles…. – Washington Post

Bill Coppedge is ON VACATION and OFF THE GRID. 

The news clips portion of this blog returns Tuesday, September 7.

Wall Street debates prospect of bond bubble – By Adam Shell -  NEW YORK — Is a bubble brewing in the normally sedate U.S. government bond market? ...  In early April, the 10-year note yielded nearly 4%. On Friday, it was 2.62%, and last week, it hit its lowest yield since March 2009. Its all-time low yield was 2.06% in December 2008, three months after the collapse of Lehman Bros. nearly sparked a global financial meltdown. – USA Today
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The economy goes in and out, and from time to time the US manufacturing sector booms.  But this chart, put together by Paul Kedrosky, makes it pretty clear: as a share of total non-farm payrolls, manufacturing jobs are only going in one direction (down). … – Clusterstock at Business Insider

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Bernanke Must Raise Benchmark Rate 2 Points, Rajan Says – By Scott Lanman and Simon Kennedy – … Interest rates near zero risk fanning asset bubbles or propping up inefficient companies, say Rajan and William White, former head of the Bank for International Settlements’ monetary and economic department. After Europe’s debt crisis recedes, Fed Chairman Ben S. Bernanke should start increasing his benchmark rate by as much as 2 percentage points so it’s no longer negative in real terms, Rajan says. … – Bloomberg

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European Covered Bonds Shift Close to Sovereigns as Traders See Danger - by JACOB GAFFNEY – As the covered bond legislation in the United States sits in committee awaiting an eventual vote in the House of Representatives, traders in Europe – where the product is traditionally based – report that prices are being pushed to "dangerous" levels. – HousingWire

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`Greenspan Put’ Fading, Federal Reserve Loses Market Clout, UniCredit Says – By Alexis Xydias – Investors should not live in hope that fresh Federal Reserve stimulus efforts will underpin stock prices because the U.S. central bank has lost the clout to offset a slowdown, according to UniCredit SpA. … “A more pessimistic assessment of the ability of the U.S. central bank going forward to successfully counter-steer in the event of economic downswings or crises will probably have far-reaching ramifications for the behavior of equity investors.” … – Bloomberg

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(Bill Gross recaps his testimony in Washington) Mr. Gross Goes to Washington – by Bill Gross – PIMCO 
1.  Americans now know that housing prices don’t always go up, and that they can in fact go down by 30%–50% in a few short years.
2.  Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending.
3.  Private mortgage lenders will demand extraordinary down payments, impeccable credit histories and significantly higher yields than what markets grew used to over the past several decades.
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Mullen: National Debt is a Security Threat -  Michael Cheek -  The national debt is the single biggest threat to national security, according to Adm. Mike Mullen, chairman of the Joint Chiefs of Staff. Tax payers will be paying around $600 billion in interest on the national debt by 2012, the chairman told students and local leaders in Detroit.
“That’s one year’s worth of defense budget,” he said, adding that the Pentagon needs to cut back on spending  – Executive Gov.com

MORTGAGE COMPLIANCE

On August, 13, 2010, Fannie Mae clarified certain aspects of its Loan Quality Initiative requirements stated in its March 2, 2010 Announcement (SEL-2010-01).

In the March update, Fannie "required lenders to determine that all debts of the borrower incurred or closed up to and concurrent with the closing of the subject mortgage are disclosed on the final loan application and included in the qualification for the subject mortgage loan."

An unintended consequence of Announcement SEL-2010-01 was the interpretation by some lenders that Fannie Mae was implementing a new requirement that the borrower be re-qualified up until closing. Indeed, we have worked with lenders that were asked by investors to repurchase loans because the former did not re-underwrite prior to closing for undisclosed liabilities that had led to excessive income ratios – even though, prior to closing, the lenders had not updated credit and had no knowledge that the borrowers had undisclosed liabilities. We successfully rebutted these repurchase demands, but Fannie’s update lingered.

Many lenders believed that the March update required a new credit report just before the closing of the loan. The new Announcement (SEL-2010-11) now states that "this was not Fannie Mae’s intent."

Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.