To Our Clients, Colleagues and Friends:   

· Good news from (and for) Florida .  We just read that the real estate vulture funds which had been offering 30 cents on the dollar for land development projects in Florida just a few months ago are now offering to buy such projects for 50 cents on the dollar. Sounds like things have hit rock bottom and have now started moving up.

· Have you noticed that the generic Mortgage REITS are doing just fine?  Companies such as Annaly that just invest in GSE mortgage backed securities have been raising hundreds of millions in new equity recently. These are all positive signs.

• We spend a lot of time working with warehouse lenders, and there’s a bit of group think about 2008.  It varies a bit from bank to bank, but it’s essentially an understanding that 2007 was a bad year, but now is now. Okay you lost money last year, you and most everyone else.  That’s past history.   But if you want a warehouse line from us in 2008, you have to be profitable. If you’re not quite there, you better show us a credible plan to become profitable, and become so quickly. Buybacks are fading, it’s a Fannie/Freddie Market, and business is looking up.  The warehouse lenders just see no excuse for losing money in 2008, and they’re generally avoiding companies (or cutting them off) that can’t make money in this environment.
• What’s out in 2008:  Aggregating as many sales people as possible.  What’s in:  Thinning the ranks of sales people and getting rid of inferior producers. 
  We’re seeing more and more of this. It seems somewhat counter-intuitive in the midst of rising loan volumes, but we hear from operators that they’ve learned their lessons, and that weak people, even if commission only, drag down the efficiencies and morale of a company.  Tolerating weak producers sends a message that you tolerate mediocrity.  Culling out low producers sends the message that yours is a high performance organization which only has room for high performance individuals, regardless of their position.  Whatever the reasons, we applaud the move.
• Did everyone learn their lesson the last few years about paying overly big commission splits? Maybe you could convince us that it made sense to pay out a big slice of the origination fee if you were making 3-4 points on the back-end, but remember, you’re probably making less than 100 bps on the back-end now. Probably a lot less.  So one of the lessons you should have learned is that you absolutely need to make a decent profit on the origination of the loan. 
  In our observation, overly-high splits tend to be highly correlative with poor returns. If you’ve built a good company, you have a lot to offer a loan officer aside from a big split.
  
• Let’s get back to our discussion on dumping poor producers. We’ve certainly heard the argument that, “Well, even if this person only closes six loans a year, that’s six loans we wouldn’t have closed without him.”  Maybe. But how about looking at GE as a counter-argument? Very few companies have been as successful as GE, and they are famous for annually firing the bottom 10% of their producers.  We’re not certain what the exact right formula is, but we know that carrying licensees just because they close the very occasional loan is not what we see at our clients who’re doing really well.
• In Detroit , one out of every 33 households is in foreclosure.  It’s one in every 87 households Phoenix and in Richmond Virginia , it’s only one out of every 1,100 households. As they say, there is no such thing as a national housing market. It’s all local and regional.
• For the right person, a reverse mortgage can be the perfect thing, a real life-saver.  So we were intrigued to learn about Equity Key, whereby someone over 65 sells a percentage of the future appreciation in his or her home in return for an upfront payment. Any opinions on this?
• Corky and Joe’s thought for the week: Watch for risk-based warehouse lending.  The stronger you are, the more you’ll get. It’s not going to just be about your spread over Libor. If you’re losing money, you may only get a captive line, with bigger haircuts, and obviously a higher spread.  Strong performers will be allowed to warehouse more products; weaker ones could be confined to only the most basic ones. A number of warehouse lenders have shared their plans with us. And it’s just one more reason to stop focusing on volume and concentrate on profits and financial strength.
• Uh-oh. We asked a number of clients this past week about their Cost-To-Originate, and too many of them couldn’t tell us.  A few just had what they called a Guest-imate.  This is horrible.  Everyone seems to know their loan volume last month, but it’s about ten times more important that you know (a) your gain-on-sale margin, and (b) your cost to originate a loan. What successful manufacturer doesn’t know his cost to produce his product??  C’mon, people, stop screwing around and know this number every month, and once you start calculating it regularly, start doing it by channel and by branch.

Happy Valentine’s Day.  Remember to give a hug or a kiss to someone you care about on Thursday.  If your parents are alive, call them.

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