The Garrrett, Watts Report (March 10, 2009)

March 11th, 2009 · No Comments


To Our Clients, Colleagues and Friends, 

  • Earlier today we met with officials from the Federal Reserve. We’ve been advising a mortgage banker client on buying a bank, and because the bank he’s buying is regulated by the Fed, they will have to approve his application.  In any case, the people we met with said it would take them only 30-60 days to approve the application.  We’re still in shock at how quickly they can move. 
  • And why is our client buying a bank?  The #1 reason is just plain access to funding.  It’s scary these days, wondering whether your lines will get renewed.
  • What do Ken Holtzman, Earl Hamilton, and Sam Jones have in common?  They were the only three pitchers to ever toss a no hitter without recording a single strike out!
  • Two good guys who died way too young:  Jackie Robinson at 53 and Yale President and Baseball Commissioner Bart Giamatti at 51.
  • The median price for homes sold in Detroit this past December was $7,500.  That’s not a typo.  Motor City had 1.6 million people fifty years ago.  Today it has 800,000.  There is not a single major grocery store chain in the city, and only two movie theaters. 
  • We got the website wrong last week for CalCap.  It should have been  This is the private lender on income property loans.  A good goal for 2009 is to develop an income property division.  By the way, we know the guys running it.  Good guys, and smart guys
  • Did you know that 9.6% of all advertising dollars are spent on the web?
  • Does anyone recall our writing about CityBank, which we considered the most profitable bank in America ?  This Seattle area bank consistently generated a Return on Assets in excess of 3%.  Now, they’ve disclosed that fully 51% of their loans are non-performing, mostly construction loans.  Live by the sword, die by the sword. 
  • Did you see that Citigroup’s preferred stocks are all yielding round 30%?  Not a good sign.  Wells Fargo’s are all in the mid-teens.  Not a good sign, but not as scary.
  • Last Friday we mentioned the name of the person to contact at the Prieston Group.  We had also said quite a bit about Friday being the anniversary of the fall of the Alamo .  We got about a dozen e-mails asking if the person at Prieston was the same guy who’d been the starting Quarterback at Cal a few years ago, and yes, it’s the same person. But not one letter about the Alamo .  Gotta love our sense of history.  By the way, who is buried in Grant’s tomb?
  • For those looking for work, here’s something from friend who’s working for a bank that’s been seized by the FDIC:  “The FDIC has big time hiring needs right now….  It’s a good place to work - the pay is relatively good (especially at the mid levels), they have terrific benefits, there’s obviously plenty of work right now, and it’s good resume building/networking for the future when the market stabilizes and grows.  I’ve also found them a be good group of people.”
  • In the Owners-Who-Care department:  In 1974, The San Diego Padres played a horrible game, and in the 8th inning, owner Ray Kroc grabbed the public address microphone and announced to the crowd ‘Ladies and gentlemen, I suffer with you. I’ve never seen such horrible baseball in my life.”  What a cool owner.
  • We always thought of LOS company PCLender as oriented slightly more toward Credit Unions, but we saw a list of the lenders they’ve been signing up lately. They seem to be doing business now with a whole lot of mortgage bankers.
  • Now that everyone is making money, perhaps you can spend a few minutes thinking about having a Disaster Recovery Plan.  Try to imagine that your main headquarters burns to the ground.  Start there.  It’s just not enough to simply back up your data every night.
  • Are you doing well, making money, growing – but you’re a subsidiary of a bank or bank holding company that appears to be going down the drain?  We’ve seen this.  We think it calls for some contingency planning, and probably for going to the parent first and asking if they approve your going out to find new ownership.  When things get ugly, companies will sell anything to stay afloat, and wouldn’t you rather shop your company than have it sold in an act of desperation by your current owner?
  • Weird names from the Office of Vital Records in Mexico , babies named: Burger King, Adolpho Hitler Flores de Valgas, Vick Vaporub, Alka Seltzer, Usmail (as in U.S. Mail), and in Connecticut , baby was recently named ESPN.  In New Zealand , a girl went to court to change her name from “Talua Does the Hula from Hawaii ”.

                                                                                          *     *

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

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

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Where are “High Balance” loans trading? GMAC clarifies TPO conditions; Above-average story on cave homes

March 11th, 2009 · No Comments


My son asked me the other day, “If you try to fail, and succeed, which one have you done?”

CitiMortgage joined other lenders in publishing their FHA loan limit increases, which are effective for 2009. “For FHA Loans that are credit approved pursuant to the American Recovery and Reinvestment Act of 2009 (ARRA) signed into law on February 17, 2009, the following high cost area loan limit increases are now in effect: 1-unit $271,050 $729,750 $1,094,625; 2-unit $347,000 $934,200 $1,401,300; 3-unit $419,400 $1,129,250 $1,451,925; 4-unit $521,250 $1,403,400 $2,105,100.” Citi reminded their sellers that any Loan that has a base loan amount exceeding $417,000, prior to the inclusion of any up-front insurance premium (UFMIP), must be registered with a different code.

As lenders everywhere await investors to let them know the pricing and adjustments for high balance conforming loans, it is of interest to note where pools of these loans are being bought and sold. (Remember that “normal” pools of conforming loans can contain up to 10% high balance loans, at the same market price as regular balance conforming loans. This can be a nice source of revenue for any company charging an extra point or two, and then selling the loans at the same price in the secondary markets.) Currently high balance pools are worse in price by roughly 1.5 points from non-high balance pools, which translates to .375-.50% higher rates. So agents and brokers can expect to see this price difference going forward initially.

Some investors are changing their jumbo pricing. GMAC, for example, announced to correspondents that they have “added a -.375 adjustment for all Jumbo Fixed and ARM Products.  In addition, we removed the -.125 adjustment for the 30 Year Jumbo in California .”

(GMAC also refined/changed their TPO policy for loans “for which the loan origination (taking the loan application) or processing functions are performed by an entity other than the entity closing and funding the loan.” GMAC TPO approval is restricted to its delegated clients who have received TPO approval authority from GMACB Credit Risk, and are not eligible for funding on table funding transactions. GMAC goes on to include the check list for TPO loans, which includes an in-file credit report covering undisclosed debt, deterioration in credit ratings, a verbal VOE, employer’s phone number, 4506T, AVM, etc.)

God Bless the Associated Press for this story:

Yesterday’s stock market rally, which also carried through overnight, does little to change the picture of our current economy, but sure made a lot of folks feel better. It was easily the largest gain of the year, and reasons include a) Citi having a profitable quarter, b) equity prices reaching a point where they were so under-valued one had to buy them, and c) the fact that this month contains the second-in-a-row Friday the 13th. The stock market did little to help our bond market, however, especially with the 3-yr auction. “The market” knows about these auctions well in advance, but then can either move up or down based on how well they are received. Today the Treasury will be auctioning off $18 billion of 10-yr notes, so stay tuned. 

Lock desks everywhere saw a little pick up last week, and this was echoed in the Mortgage Bankers Association’s index of applications. It rose 11% last week, with the refinancing gauge +13% and the purchase index +7.1%. Aside from this and folks watching the stock market, there is little other news out today. With the price pressure due to the auction, we find the 10-yr up to 3.02% and mortgage prices slightly worse.

My wife and I were sitting at a table at my high school reunion, and I kept staring at a drunken lady swigging her drink as she sat alone at a nearby table.
My wife asked, “Do you know her?”
“Yes,” I sighed, “she’s my old girlfriend. I understand she took to drinking right after we split up those many years ago, and I hear she hasn’t been sober since.”
“My God!” says my wife, “Who would think a person could go on celebrating that long?”

and then the fight started…..


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Ira Artman’s Sterling Slivers: Toxic Shock - Facts, Lies, and Insidious Hype

March 10th, 2009 · No Comments


                                                The Toxic Avenger
                                                © 1991 Marvel Comics

Toxic assets? What are they talking about?

It’s OK with me if bank regulators and accountants continue to obscure the passing of the investor-owned banking industry.

But could they at least keep their hands off the language? Assets are:

  • Any item of economic value owned by an individual or corporation, especially that which could be converted to cash.


That is, assets are “good” things that fall in the “nice to have” category.

The “Toxic assets” phrase refers to “misunderstood” mortgage and credit-related assets that now bloat bank balance sheets. It is said that they cannot be sold at a “fair” price. But there is no such thing.

“Toxic assets” is simply a polite 21st century euphemism for:

  • These are assets that we have improperly marked way too high, and they should really be valued at a much lower price.
  • We would like to do this, but can’t. If we did so, it would make our institution insolvent and would probably lead to the destruction of the free world, as we know it, as well as Our American Way of Life.
  • So would you please watch “Dancing With The Stars” and leave us alone, we know what we’re doing!

The term “toxic assets” is a term that financiers borrowed (they were in a borrowing mood) from the “toxic waste” produced by the (previously seen as nasty) materials or manufacturing sectors – chemical or material byproducts that pose a long-term health hazard.

But “toxic assets” can only BE toxic if their marked price is set too high – once the price has been set low enough, the damage has been done, we can roll up the insolvent institutions, and get on with the beginning of the recovery.

Who is fooled by this terminology? According to Google and Yahoo!, not many.

Figure 1: Google Hits for “Toxic Assets” & Company Name, March 10, 2009.

Above [See Figure 1] is a list of the names of 10 financial firms that I’ve haphazardly plucked from the holdings of the Financial SPDR ETF, XLF. I’ve included each company’s stock symbol as well as the number of “Google Hits” for that company’s name and the term “Toxic Assets.”

If you plot these “hits” against the percentage change in each company’s stock price, for Feb 2008 through Feb 2009, you get something like this:

Figure 2: Google Hits and Company Stock Price Decline, Feb ‘08 – Feb ‘09

It’s pretty clear that no one is fooled by the terminology, and this can also be seen in the following scatterplot, which charts the percentage decline in stock prices against the Google hits:

Figure 3: Google Hits (“Toxic Assets”) versus Company Stock Price Decline

Could we just get on with it, but leave the language alone. After what’s happened to our homes, the economy, our jobs, and any hopes for retirement, it’s all that we have left. Thank you!
- - - - - - - - - - -    
I used to work with numbers for a living. What will I find as I pass through the Meadowlands -  a new job, or at least my next idea? Till next time.

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MortgageNewsClips: Shrink, Mary the Hero, 4 Point Plan, TRACE Expands = Good, Krugman Sez, ICE CDS, Inflation Treatise, FVA GAAP On Its Head, Big Oil Pays Taxes, Wards of State, Buffet Pearl Harbor, Unintended Consequences, Multiplier, 4 more

March 10th, 2009 · No Comments

1.  World Bank Says Global Economy Will Shrink in ’09 -  EDMUND L. ANDREWS - New York Times 

2.  Obama Plan: Paul Krugman says we are falling behind  - Behind the Curve - By PAUL KRUGMAN - … Yet many economists, myself included, actually argued that the plan was too small and too cautious. The latest data confirm those worries — and suggest that the Obama administration’s economic policies are already falling behind the curve. … - NY Times Op_ed

3.  more unintended consequences - A Hiring Bind for Foreigners and Banks - By JONATHAN D. GLATER - What could be worse than graduating from an American business school this year with an interest in banking?  Being such a graduate who is not a United States citizen. A provision in the economic stimulus package limits the hiring of foreign workers by any company receiving government bailout money. In finance, that is nearly every big employer.  At least one financial institution, Bank of America, has rescinded job offers to foreign citizens, citing the new law, signed by President Obama last month. - NY Times 


Mary is the hero America needs now - Mary, my Hero of the Week from our Saturday Entrepreneur Show -  John Rutledge Blog


In this issue of The Institutional Risk Analyst, we talk to David Kotok of Cumberland Advisers and Bill Dunkelberg of Liberty Bell Bank of Cherry Hill, NJ, about the banking system, big banks vs. small business, and whether the systemic trumps the idiosyncratic in the halls of power in Washington.  Oh, and we propose a four-point plan to diffuse systemic risk, resolve zombie banks, liquidate toxic assets and help homeowners, and be home for dinner. 



this is very good - FINRA Seeks Major Expansion of TRACE Reporting  -  The Financial Industry Regulatory Authority (FINRA) is proposing a major expansion of its Trade Compliance and Reporting Engine (TRACE) to include debt issued by federal government agencies, government corporations and government sponsored enterprises (GSEs), as well as primary market transactions in new issues. Currently, TRACE reports real-time pricing and trade volume information only on corporate bonds trading in the secondary market.  - Business Wire -  Earth Times


ICE Starts Credit-Swap Clearing to Increase Revenue - By Matthew Leising - Intercontinental Exchange Inc., the second-largest U.S. futures market, begins clearing credit- default swaps today, providing a revenue boost as futures trading volumes fall.  - Bloomberg

good charts and excellent treatise on inflation - Decomposing the Inflation Argument - … There are consequences to perpetual inflation, however: the U.S. dollar has lost 97.8% of its value since the creation of the Federal Reserve:  … - by Rob Viglione - Freedom Factory

The cult of fair-value accounting has turned GAAP on its head. Investors-and the economy in general-are the losers. Gary Townsend explains at


Big Oil, Big Taxes - Mark Perry - … In other words, Big Oil paid almost as much in federal income taxes in 2006 as the entire bottom half of individual U.S. taxpayers. … - Carpe Diem


Fannie And Freddie As Permanent Wards Of The State? -  Phil Hall - …  reading a New York Times article that claimed Washington insiders have declared that Fannie Mae and Freddie Mac will “never fully return to private hands.” … However, the Times doesn’t appear to be kidding when it claims that “lawmakers and company executives are beginning to quietly acknowledge” that the government-sponsored enterprises (GSEs) will move into the future as federal agencies. I really wish they were kidding, because a future of Fannie and Freddie as permanent fixtures of the federal government will be a disaster. - MortgageOrb



BANZAI BUFFETT: FISCAL ‘PEARL HARBOR’ MEANS 5-YEAR WAR - By DAN MANGAN - Our economy is sunk!  Legendary billionaire investor Warren Buffett (right) yesterday called the fiscal crisis “an economic Pearl Harbor” -   and he doesn’t expect it to recover anytime soon. - NY Post 



Stimulus Plus Easy Money a Significant Economic Multiplier - A new staff position paper put together by International Monetary Fund economists presses the case for more aggressive fiscal stimulus actions worldwide.  The paper, which is not official  IMF policy, uses simulations with a multi-country structural model to show that “worldwide expansionary fiscal policy combined with accommodative monetary policy can have significant multiplier effects on the world economy.” - Research Recap


Detox for Troubled Assets - Plan Is Critical to Revive the Financial System, FDIC Chair Says - By Binyamin Appelbaum - The government’s plan to strip banks of troubled assets could force some firms to record large losses, but the painful purge would help restore confidence in the banking system, according to Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. - The Washington Post     

list of 5 - Nationalization for Beginners -  …. However, different people ascribe different meanings to this word; in particular, opponents like to define nationalization as the government taking over every bank permanently and turning banking into a government service.  As I see it, there are at least five different meanings of nationalization. - The Baseline Scenario


Speech:  Chairman Ben S. Bernanke - Financial Reform to Address Systemic Risk - FR Board


Who’s Obama Kidding? - Brian S. Wesbury and Robert Stein -  … Despite the rosiest economic projections we have possibly ever seen, as well as one of the largest tax hikes in history, President Obama’s budget fails to achieve balance at any time in the next decade. The smallest deficit (at least as far as the eye can see) will be $533 billion in 2013.  … - Forbes 


Banks and allies want ‘immediate’ fix on accounting rules - Los Angeles Times

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Goodbye Non-Agency Securitization, plus Thoughts on TALF, by Victor Hong

March 10th, 2009 · No Comments


Non-agency securitization, especially complex, will never return during our careers..

An underlying problem of the bailout programs is not just moral hazard, but publicly sponsored contract abrogation. Examples start as homeowner defaults, of course, but grow to include foreclosure moratoria and the statutory nullification of securitization pooling-and-servicing agreements (PSA), particularly their provisions for servicer loan-modification limits and bankruptcy loss carve-outs.

Because bankruptcy loss carve-outs have been eliminated, subordinate and mezzanine RMBS tranche investors must now bear a much greater proportion of default losses than they contractually had ever accepted. All this is eminent domain, essentially, where private individuals are unilaterally and publicly forced to suffer ex-post losses without adequate a-priori compensation.

The concepts of asset protection and contractually scheduled cashflows are gone.   Non-agency or highly structured securitizations are dead, and unmarketable.   The change is secular, not cyclical.    The rest of the story is advising investors how to extricate themselves from this deliberate train wreck, and never look back.

The unavoidable impact will be less and costlier credit for the entire economy, whether on the consumer or business side. What seems a free lunch becomes the most unaffordable meal which one can ever eat.


Thoughts on TALF:

As additional TALF implementation details appear, there seems little if any clarity about the core matter of valuations. How will the Fed and each investor agree upon the fair value for funding a specific ABS?  Indeed, suppose that two investors submit separate holdings of an identical bond, where one has valued it at 65:00 but the other at 95:00? Such likelihood is not remote, given the large outstanding principal size of many TALF-eligible ABS. Presumably, both investors must legally attest to supportable fair-market marks, when borrowing from the Fed on a term, non-recourse basis. Otherwise, if mark-to-market investors are broadly and knowingly authorized to assign materially divergent prices to identical (or even closely comparable) bonds, that would defeat the key TALF goal of promoting transparent market liquidity.

My suggestion is for the Fed to post publicly the lowest, median, and highest prices where it has TALF-funded each CUSIP, and require that any investor who funds an additional holding of that CUSIP must do so at the lowest price. This would protect the Fed and ultimately taxpayers, while also promoting the price discovery, financial-statement accuracy, and market re-liquidification which all parties claim to want.

Victor Hong may be contacted through Bill Coppedge.

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Industry players coming and going; Flagstar reminds wholesale clients of mandatory vs. best efforts

March 10th, 2009 · 1 Comment


Bernie Madoff and his wife are saying they have $69 million that is theirs and is not part of the money he swindled. They say it’s money he saved by switching to GEICO.

With all of the talk about loan modifications, many borrowers (and their loan officers) are wondering, “Who has my loan?” Assuming that one has a borrower with a conforming conventional loan, how do you determine who “owns” it? All one needs is web access:

Flagstar sent out a nice memo reminding their wholesale clients of the importance of minimizing fallout, and the difference between “best efforts” and “mandatory”:

“Unfortunately, over the last few months the wholesale channel has experienced an unacceptable level of lock fallout. To help our customers improve their overall performance, we’ve taken numerous steps to help them reduce lock fallout. Our efforts, which have included offering pricing incentives, supplying online tools to help customers monitor their own performance, and stressing the importance of customers honoring their pledge of “best efforts”, have helped reduce our overall lock fallout….In this market many customers have lost sight of what the term “best-efforts delivery” means when securing a rate lock. Our broker and correspondent agreements state that even for “best efforts” locks, the “delivery of Mortgage Loans closed by Seller that are locked-in with Flagstar is mandatory.” This means that if a loan closes that is locked best efforts, it must close with Flagstar. While a certain level of borrower-driven fallout is expected, heightened levels of fallout are not only unhealthy for Flagstar, but for our industry as a whole. As part of our broker and correspondent agreements, Flagstar reserves the right to charge a pair off fee on any loans locked best efforts that ultimately close with another investor. We have been closely monitoring all of our customers (brokers and correspondents) with unacceptable levels of lock fallout and will begin charging pair-off fees on any loan that we find closed with another lender after it was locked best efforts with Flagstar. Loans that were locked with Flagstar but for any number of reasons have become undeliverable to Flagstar (denied in underwriting, unexpected AUS results, UW condition that could not be met, etc.) will be exempt from a pair-off fee.”

Companies continue to come and go. Central States Mortgage shut down yesterday – they are/were headquartered in Wauwatosa , WI , and one of the largest mortgage banks in Wisconsin , shut down yesterday, suspending all operations. They hit their peak in 2004 with $1.4 billion of originations, and funded $523 million last year. On the flip side, Manhattan Bancorp out of Southern California announced that it is investing in a new capital markets business with Bodi Advisors. It “will be a capital markets and advisory firm, focused on the trading, for the accounts of customers, of residential mortgage-backed securities and mortgage loans. The business will also have the ability to expand into the origination, brokerage and sale of residential mortgage loans.” (The Bank of Manhattan, which has been operating for 18 months, is a full service bank focused on banking to entrepreneurs, family-owned and closely-held middle market businesses, real estate investors and professional service firms.)

Aside from that, the mortgage-news markets are pretty quiet this morning. Prices are lower, and rates higher (10-yr up to 2.94% and mortgage prices worse by about .125), this morning ahead of the $34 billion 3-yr Treasury note auction today. (Tomorrow we have $17 billion in 10-yr’s to sell, and on Thursday $11 billion of 30-yr’s.) So typically, with no scheduled economic news, bonds will trade off of supply news, like that, or stock market news, which today could be positive. Our stock market was pretty quiet yesterday, but overnight several markets overseas improved, and this morning we find some news out of CitiGroup that they are experiencing their best quarter since they last posted a profit in 2007. So bank stocks could do well.

An old cowboy named Dick, was overseeing his herd in a remote mountainous pasture in Colorado , when suddenly a brand-new BMW advanced out of a dust cloud towards him. The driver, a man in a Brioni suit, Gucci shoes, Ray Ban sunglasses and YSL tie, leans out the window and asks the old cowboy, “If I tell you exactly how many cows and calves you have in your herd, Will you give me a calf?”
Dick looks at the man, obviously from out of town, then looks at his peacefully grazing herd and calmly answers, “Sure, Why not?”
The fellow parks his car, whips out his Dell notebook computer, connects it to his Cingular RAZR V3 cell phone, and surfs to a NASA page on the Internet, where he calls up a GPS satellite to get an exact fix on his location which he then feeds to another NASA satellite that scans the area in an ultra-high-resolution photo. He then opens the digital photo in Adobe Photoshop and exports it to an image processing facility in Hamburg , Germany . Within seconds, he receives an email on his Palm Pilot that the image has been processed and the data stored. He then accesses an MS-SQL database through an ODBC connected Excel spreadsheet with email on his Blackberry and, after a few minutes, receives a response.
Finally, he prints out a full-color, 150-page report on his hi-tech, miniaturized HP LaserJet printer and finally turns to the cowboy and says, “You have exactly 1,586 cows and calves.”
“That’s right. Well, I guess you can take one of my calves,” says the old cowboy. He watches the man select one of the animals and looks on amused as he stuffs it into the trunk of his car.
Then Dick says to the guy, “Hey, if I can tell you exactly what your business is, will you give me back my calf?”
The man thinks about it for a second and then says, “Okay, why not?”
“You’re a Congressman for the U.S. Government”, says Dick.
“Wow! That’s correct,” says the guy, “but how did you guess that?”
“No guessing required.” answered the old cowboy. “You showed up here even though nobody called you; you want to get paid for an answer I already knew, to a question I never asked. You tried to show me how much smarter you are than I am, and yet, you don’t know a thing about cows…this is a herd of sheep. Now give me back my dog.”


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