The Garrett, McAuley Report
by Joe Garrett
Stocks of mortgage lenders and investors didn't have a good year, with Flagstar and HomeStreet being huge exceptions. Congratulations to Sandro DiNello and Mark Mason, respectively, the CEOs of these two great banks. As for the others, we randomly chose the change in stock prices for companies we thought were representative of this industry:
We tallied these numbers around December 15th, so they may be off a little by the time you see this. Still, not a pretty sight except for Flagstar and HomeStreet, which had great years.
Quote of the Year: "We spend an ocean of money on cyber-security, and it is the only expense where I ask if it's enough." -- John Stumpf, CEO of Wells Fargo.
Question: "You have scoffed at marketplace lenders, but isn't this just the natural evolution of lending?"
Answer: (1) Yes, I suppose it's a natural evolution in that it's really just Beneficial or Household Finance without the costly branches, but those branches were very much a part of how these finance companies really got to know their customers. A typical Beneficial customer got several loans there, and the branch people actually got to know their borrowers; and
(2) Knowing your customers goes a long way when the credit cycle turns.
Also, I question the marketplace lenders' knowledge of credit. A good bank credit officer has spent years or decades honing his craft, something that mathematical formulas can never fully replicate. My sense is that the marketplace lenders aren't staffed with people with hands-on credit experience. Instead, it seems like they employ "data analysts" who come up with "models" and "algorithms."
(3) Can we please stop calling them "marketplace lenders?" They are online finance companies. Finance companies serve a legitimate purpose, so these new-age lenders shouldn't be embarrassed to call themselves what they are. Finally, (4) let's never forget that the most troubled loans are always made in the best of times, and times are very good right now. So in answer to the question, I think many of these marketplace loans are going to fare poorly when the credit cycle turns. I could be wrong, but I don't think so.
Question: "Is it true that lenders can make 10 points selling SBA loans?"
Answer: Yes, and a very informal survey of our bank clients shows that they're making between 10 and 14 points this year and averaged 13-14 points in 2013-2014. And no, these aren't typos. If you make an SBA loan for, say, $1.3 million, you can sell the 75% that is guaranteed, or about $1.0 million. And yes, 10 points on that one loan sale will generate a gain of about $100,000.
The next big scandal?
A Silicon Valley company named Theranos has a $9.0 billion valuation based on its ability to run blood tests with just a drop or two of blood from a pin prick.
Unfortunately for their private equity investors, their technology doesn't work. The company has admitted that they have kinks to work out, but the fact is that something like 28 of 29 blood tests they perform are wildly inaccurate. People are thinking that their technology is a complete charade. When word started leaking out that it might be a fraud, the company hired a public relations crisis expert, always a bad sign.
The lab director was the CEO's personal dermatologist, with no experience running a lab, and the founder/CEO herself is a 31-year-old who dropped out of Stanford after her freshman year.
Here she is, Elizabeth Holmes:
This story might only be mildly interesting, until you see who's on the Board of Directors: Richard Kovacevitch (former CEO of Wells Fargo), Henry Kissinger (former Secretary of State), George Shultz (former Secretary of State and Secretary of the Treasury), Dr. William Frist (former U.S. Senator and heart and lung transplant surgeon), Sam Nunn (former U.S. Senator), Riley Bechtel (billionaire former Chairman of Bechtel Corp.), William Perry (former Secretary of Defense), along with a retired Marine General, a retired Navy Admiral, and the former head of the Center for Disease Control. A major investor is Larry Ellison. Keep your eyes peeled for the next Theranos shoe to drop.
On January 1, American Banker will be starting its 180th year. It was first published in 1836 when Andrew Jackson was President. Congratulations to Editor-in-Chief Marc Hochstein and his staff of 25 writers and editors who make it so addictive to its 365,000 readers.
Student loans not looking so hot: At September 30th, about 7 million people hadn't made a payment on their student loans for over a year. And if you exclude those student borrowers who are still in school, 25% of all student loans are at least 90 days delinquent.
Going to a Warriors game pre-game warm-up can be almost as exciting as watching the actual game. Steph Curry starts by dribbling one ball with his right hand and one with his left, crossing over and doing figure eights between his legs. When he switches to shooting, he ends up making a bunch of shots from half court. At home games, he does his famous tunnel shot, a 40-foot shot from the tunnel that leads to the Warriors locker room. You can sometimes see him dribbling a basketball with one hand while dribbling a tennis ball with the other. He does this because the different bounciness between the two balls increases his coordination.
His game has gotten so much better this year that serious analysts say that despite being MVP last year, he could also be Most Improved Player this year.
And locally, Saint Mary's College (10-1) guard Emmet Naar is shooting a ridiculous 70% (28 for 40) from three-point range. I taught at Saint Mary's a long time ago and have always followed their basketball team. In fact, the first college basketball game I ever saw was St. Mary's vs. Cal when I was about 10 years old. I graduated from Cal, but when I went to a game between the two schools a few weeks ago, I really didn't know who I'd root for. I found myself rooting for tiny Saint Mary's, maybe 1/15th the size of Cal and just over the hill from Berkeley. Saint Mary's had a two-point lead with 3.2 seconds left but lost on a buzzer-ending three pointer.
When I taught at Saint Mary's, the Brothers as well as the Novitiates all wore black robes, and they'd all show up for the home games wearing them. I loved seeing them cheering on their school. The college was part of the Christian Brothers order, and they also owned the Christian Brothers winery. Faculty lunches featured the same slop the students ate, but there were always four glasses at each setting, one for each of the three types of wine they made plus one for an after-meal brandy.
Warren Buffet famously said that, "A rising tide lifts all ships, but it's when the tide goes out that you see who was swimming naked," and boy, will that apply to the mortgage banking industry when rates go up some day and volume falls and margins shrink. We can think of only one client that has a formal, written plan to deal with that eventuality. But even there, Mike Tyson may have some insight when he said, "Everyone has a plan until they get hit on the jaw." Iron Mike could just as easily be referring to mortgage banking as well as to boxing.
That's a young and old Warren Buffet and a young and old Mike Tyson. In his prime, I think Tyson could have beaten just about everyone except for Muhammad Ali. Ali would have just danced away, flicking an occasional jab, until the late rounds when he'd really mix it up with a then-tired Tyson.
We wrote last week that it was the 100th anniversary of Frank Sinatra's birthday, but we just found out that it's also the 100th anniversary of the births of Edith Piaf (1915-1963) and Billy Holiday (1915-1959).
I never liked Billie Holiday's music all that much, but it does seem perfect for a smoky piano bar at 1:00 in the morning somewhere in Manhattan or San Francisco: Billie Holiday. Edith Piaf was France's most popular chanteuse, and 100,000 Parisians turned out for her funeral.
Although this video shows her singing her famous La Vie en rose in a big concert hall, Edith Piaf, she started her career singing in the brothels of Paris. Both Holiday and Piaf died young from their alcohol and drug addictions. Pretty interesting that these three saloon singers, Sinatra, Piaf, and Billie Holiday, were all born the same year. I wonder if they ever met.
The wheels of justice turn slowly:
Some people complain that no one has gone to jail for what was once quaintly referred to as the mortgage meltdown. Not entirely true. Gateway Bank's CEO Poppi Metaxas just got 18 months for bank fraud having to do with non-performing subprime loans.
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We hope everyone had a nice Christmas, enjoyed time with friends and family, and that each of you has a good 2016. Our belated Christmas present is six cartoons this week.
Helping lenders increase revenues, control costs, and better manage risk.
Joe is a friend and a teacher. He helped me establish my mortgage banking company increased revenues, controlled costs and managed the risks as he always does. He has 35 plus years of banking and mortgage banking experience and was the CEO of two successful commercial banks. He has been on the Board of Directors of four banks, two as Chairman. I am sharing his monthly report with his permission. I will share his future newsletters as long as I am permitted. You can find his contact information on his website.
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