To Our Clients, Colleagues and Friends,

• Are you a glass is half full kind of person?  If so, you’ll like the fact that 78% of all banks were profitable in the first quarter. You wouldn’t think so after hearing all the talk about THE BANKING CRISIS, but while the banking system has to work through its construction and commercial real estate loan portfolios, it’s actually doing pretty well.
• David Frase, who runs Southwest Securities WH Division, points out that while ops departments certainly deserve accolades for getting loans purchased quickly, “… we should really thank the investors who decided to staff up, work very hard, and support their clients this time around.”  David recalled that in the 2003 refi boom, his warehouse program saw average turn times of 45 days and that some investors took 60 days. “Now, we see ….the fastest turns I’ve ever seen in my 16-year warehouse career. Hats off to the investors!” 
• And from Andrew Schmitt at DocVelocity, a reminder that when you ship files by paper, it can take days, or at least one full day.  When you’re paperless, it takes minutes.  By the way, if you want to go paperless, we happen to think pretty highly of DocVelocity.
• There’s a recurring theme whenever rates start moving up. Loan officers need “just a few days extension”, and loans are occasionally closed that were locked to the borrower but not with the rate lock desk.  You need very clear policies and controls.  A first line of defense is to have controls that prevent an LO from locking a loan to the borrower without getting approval from the rate lock desk and registering the loan. Doc draw people are a second line of defense.  They must never draw docs without confirming that the loan has been locked appropriately. We could go and on, but you know the drill.  You can be perfectly hedged but still lose money if you don’t have absolute control over the rate lock function and the integrity of your pipeline data!!!!!
• One company we know tracks the time from shipped to purchased by each investor.  We looked at their month-by-month report a few days ago, and Chase, Franklin American, and Wells seemed to buy their loans the quickest.  There were some months in which Citi was buying quicker than anyone. You should track these things.  As we have said many, many, MANY times, “You can’t manage it if you can’t measure it.”
  
• Did you know that the average bank branch is 3,500 square feet?  The last two banks we ran had branches just a wee bit bigger than a See’s Candy Store.  For those who live where there aren’t See’s Candy (which is, by the way, owned by Warren Buffet), they probably run about 250 square feet.  You can do just fine with a branch of 500 sq. feet or less.
• It makes us sad to see that Mark Hammond will be stepping down later this year as President of Flagstar Bank. His dad founded the bank, and Mark worked there over half his life.  He built a great institution which he should be proud of, and it must have been a big, big part of his life.   Everyone we’ve met over the years who worked there spoke very highly of him.
• Why do banks love their mortgage subsidiaries?  Let’s see, they hold a $250,000 loan at 5.75%, they fund it with borrowings from the Federal Reserve costing 50 bps, and they make $540 net interest income for the two weeks they hold it. We’re really lazy about checking our math in this newsletter (what do expect from something that’s free?), but we think that’s right.  If a bank-owned mortgage division did, say, 300 loans last month, they’d have earned $162,000 in net interest income that month.  Now, you’re not going to fund all your loans with Fed borrowings, but you’ll fund a lot.
• And today is Joe Montana’s 53^rd birthday. His famous coolness was best shown with one play left in one of their Super Bowl appearances. The 49ers were trailing, and they needed to score on the final play. Montana came into the huddle and told everyone, “Hey, did you notice John Candy sitting over in the first row?”   They scored and won the game with no time left on the clock.  That’s one cool guy.
• One hundred years ago today, a young pitcher Clarence Henley, for the San Francisco Seals threw the longest shutout in professional baseball history: 24 innings.”  Pitch count?  What’s that?

• Happy birthday, Laurie.  She’s my sister, and she reads this newsletter, although I don’t see why.
• Tomorrow (June 12^th) would have been Ann Franks 80^th birthday had she lived.  Although everyone knows her story, few know who Miep Gies was.  She was the Dutch woman who hid the Frank family from the Nazis in her attic.  We always thought there should be a Miep Gies Society, an organization devoted to honoring people who do extraordinarily brave things in the face of grave danger.   By the way, Mrs. Gies turned 100 in February and is still very much alive & well.
• Speaking of “honoring people who do extraordinarily brave things in the face of grave danger”, we include any banker who has the guts to challenge the regulators.  And speaking of regulators, isn’t the OCC ombudsman a joke?  Have they ever once gone against the OCC and found in favor of a bank?
• There will be lots of changes in the banking world in the next several years.  One that we fully expect is that banks will reduce their use of wholesale borrowings and really go after core deposits. There’s nothing wrong with FHLB advances, brokered deposits, borrowing from the Fed window, and so on,  but they’ll just get used a whole lot less. At least that’s what we think.

• Remember that old joke:  Those that can, do.  Those who can’t, teach. Those who can’t teach, teach PE?  We heard a play on that recently, and it ended with …,and those can’t, become regulators.  We forget the first part, and you probably need to hear the whole thing to get the humor.  But it’s still funny.  (Please don’t forward this to your examiner-in-charge.)

• We worry about our clients whose business is largely refinance activity, and we’ve seen a number of places where refis make up over 90% of their volume.  You intuitively knew this, but the MBA Refinance Index is off 65% from its 2009 peak!

It came out last week that the Chinese have expressed their displeasure at the Fed’s easing.  This worries us.  For the very reason that they hold so many of our Treasury bonds, they’ll have to be listened to more and more.  And over time, our monetary policy makers will have to pay increased attention to what the Chinese want or don’t want us to do.  When you’re a debtor nation, your creditors get a say in how you do things.  This is very scary in its implications for our future.  But we balanced the budget year after year in the Clinton years, and we can do it again.  We will do it again.

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

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