We asked you last week what your losses averaged on repurchases, and we got quite a few responses.
Here is one:
“A performing repurchase due to underwriting errors that can be refinanced into a new loan will cost about $10,000. A Non-performing repurchase that was originated in the last 12 months costs about 30 points to sell to a scratch and dent desk. A Non-performing repurchase that was originated over 12 months ago will cost 50 points as the value has most likely dropped 20% since original purchase on top of the 30 point discount in the scratch and dent market.”
We’ll show you some more the next few weeks. Here are how some selected financial stocks fared last month.
Cathay General (CATY): +19.2%
Washington Fed (WFSL): -1.7%
City National (CYN): +11.9%
MasterCard (MA): -2.8%
U.S. Bancorp (USB): +10.2%
Bank of Hawaii (BOH): -3.4%
BB&T (BBT): +9.0%
Visa (V): -7.1%
Silicon Valley Bank (SIVB): +8.8%
Franklin Resources (BEN): -8.1%
Equifax (EFX): +1.9%
JPMorgan Chase (JPM): -8.6%
A couple of years ago the Mortgage Bankers Association paid $90 million for its Washington D.C. headquarters. This past Friday they sold it for $41 million. Oops.
The story about the Mortgage Bankers office building is almost as good as the credit union run by & for OTS employees. It failed in the early 90’s due to bad loans.
GMAC’s ResCap group reported a 4th quarter loss of $4 billion and has now lost $9.2 billion over the past eight quarters. Part of the 4th quarter loss was that the company set aside over $570 million in reserves to deal with loan repurchases. GMAC has some very smart people running the show now, and we’re confident they’ll get things turned around.
Let’s say you believe in the mortgage industry, and you also like stocks that pay big dividends. You could buy Annaly Mortgage (14.6% dividend yield), Anworth Mortgage (10.5%) Capstead Mortgage (16.4%) and Redwood Trust (13.1%). Buy a basket of these stocks and your average dividend yield is 12.8%.
You still believe in the mortgage industry, but instead of buying stocks for a high yield, maybe you like to buy beaten down stocks with low price-to-book ratios. If so, you could buy Flagstar Bank (48% of book value), PHH (68% of book), Genworth (54% of book), MGIC (59% of book) and PMI (18%).
If you worry about our federal deficit, check this out this site. Tons of details there, none reassuring. And remember those huge budget surpluses in the Clinton years? The Congressional Budget Office had projected that the entire national debt would be eliminated by 2009. Last year!!!! Instead, it’s up to $12 trillion, with the President’s budget showing close to another $2 trillion added to it this year alone.
When Mark McGwire hit 49 home runs his first year, he broke the record of 38 home runs by a rookie. Whose record did he break? It was the great Frank Robinson, then of the Cincinnati Reds.
A family that recently invested heavily in an Illinois bank that later failed is suing the regulators. They allege that the FDIC acted in a manner that was "arbitrary, capricious and an abuse of discretion.” Whether true or false, about 99% of all bankers will agree that regulators do act that way.
With your January loan volume off 40-50%, maybe that will finally make you want to do a serious Break-even Analysis. This will be one of those numbers you need to know, and you need to update it every month.
We recently did an analysis for a commercial bank client in the Southeast. We compared compensation plans at 17 other institutions that did a lot of mortgage banking. The study went into lots of areas, but what do you think was the biggest predictor of pay levels? It wasn’t loan volume, it wasn’t earnings, and it wasn’t returns on equity. The biggest predictor was whether your firm was an insured depository or an independent mortgage banking client. The depositories simply paid less than the independent mortgage banking companies.
Dismayingly, the above study showed that very few lenders have true clawbacks for bad loans. The most profitable ones charged losses for a variety of reasons back to the loan officer and branch manager. The best run companies rewarded profitability over volume and had big disincentives against doing bad loans.
We still see companies which allow loan officers to lock directly with investors. We’ve been saying for 5-6 years that this will guaranty underperformance. A centralized rate lock desk is a must if you want to be successful.
