GLG News by Mark Mariotti

Implications: More competition, not less is required within the automotive industry. Positive results will eventually be rewarded by a free market.

Analysis: For about a decade now, I have seen the consolidated automotive industry shed its assets. Generally the assets which have been shed were those that were not currently or soon to be not profitable, such as auto parts and financial arms.

The need to shed positive assets is now more important, whereby creating smaller more efficient companies (with separate boards and executive crews) and more importantly competition.

Seems to me that the free markets will reward the successful companies which can emerge from a continual shedding of assets by the automotive industry.

More new innovative automotive companies, using bleeding edge technologies and styles, which focus on direct management of a single line of automotive product, and perform by the competition of the industry should produce some very strong new automotive companies.

Since the beginning of the 1960's my family and friends have been involved in the automotive industry. Throughout those decades, there was good times and bad. Today, (granted, along with an overall valuation decline in the automotive industry), we observe a meltdown of the US automotive stock and bond valuation. I have personally watched our automotive stock & bond portfolio decline in valuation at an alarming rate.

A positive turnaround must come soon, and I can only imagine that somewhere out there the answer lies in the spirit of an up and coming execute ready to gather all of our positive assets and champion the US auto industry of the future.

Implications: Effective immediately after the Fannie/Freddie take over, the DITECH origination service of Cerberus' GMAC Financial Services launched a television campaign to offer 5.5% interest rate mortgage loans.

Analysis: Understandably, the underwriting has become much tighter as well as the appraisals... however the aggressive marketing of prudent lending should be commended by GMAC.

GMAC Financial Services has a distinct presents in Southern California with their commercial television advertising. Further, GMAC Financial Services owns several other non-origination operations in Southern California and is a progressive employer of mortgage professionals in Southern California.

Implications: Unlikely that a suitor firm will take over Lehman directly by itself without assistance, perks or partners. As you may recall Bear Stearns in a similar situation, and remember that the Feds had to lend and assist JP Morgan with the acquisition.

Analysis: This weekend behind closed doors, we assume the Fed will look at the top 5 suitors by strength, and propose a package for Lehman purchase.

Various suitors have been discussed, B of A has been mentioned, although they are still assimilating the Countrywide (CFC) purchase.

Makes sense, that if the Feds are providing consultation and package incentives to the suitor, that the suitor company would be better off NOT going it alone for acquisitions.

Implications: The prior several years have definitely been a severe downturn (stating the obvious) in the destruction of existing housing prices. Bloated inventories, overextended borrowers, lack of decent funding, macro economics, lack of faith in the valuations have all contributed to this mess. But it definately is a cycle, and cycles CHANGE.

Analysis: This cycle CHANGE will be on a case-by-case localized real estate market basis. As the local inventories are gobbled up... loan rates and accessability increase... macro economic trend positive, housing demand will return.

Watch each local market closely, we have begun to observe a trend of buyers in the market, and deals closing during unseasonable time periods.

Implications: Yes, it is a mess - I have seen about 3 or 4 cycles such as these over the last 30-years.  We have all seen this mess coming years ago. In 2004, a vast amount of mortgage originators were doing some very creative things to sell mortgages. HEOPA and high cost was in effect while these negative equity mortgages were written. But, if a measure of a trillion dollars markdown against the GDP is compared - it is not the end of the world - bad yes, stupid yes, and yes we will see this kind of thing again.

Analysis: Which ideal world are we aware of; where, McKillop would stand up today and announce his resignation. His position and those similar to his cannot be expected to be responsible for a cycle. If you are a wrongdoer, and that is confirmed... then you must take responsibility, but again... NOT FOR A CYCLE.

Apart from Northern Rock, a unique situation, not a single UK banker has willingly taken the drop. Oh yes, US congress and UK officials can say after the fact that there is someone to blame - and oh there he is!

Nope, they cannot be expected to be responsible for a cycle. However, they must stay in place (perhaps with remuneration penalties) to protect their shareholders interests so that this type of issue can be eliminated and we can garner the trust necessary to move forward.

Implications: a) markets self correct b) yes all sorts of pain occurs c) the cycle continues... lows become floors and investors flood in

Analysis: Today (Friday, 4/18/2008), Wall Street proves again; that the investment cycle continues.

Gravity took hold the trailing 52 weeks - plenty of write-downs - Today, investor sentiment has returned to the select financials including Citigroup.

If the floor has finally been hit... it's upwards from here.

Implications: For many decades, the world's refined petrolium gasoline consumer  have not had such a plentiful and affordable stream of energy. Finally, the US refined petrolium gasoline consumer has experienced a history of $.27 a gallon in the sixties to $4.50 a gallon today. Price, will eventually CHANGE the habits of the US refined petrolium gasoline consumer.

Analysis: From new vehicle design, to current and used production inventory of exotic sports cars, commercial trucks, and recreational motor homes vehicles; ALL EFFORFTS MUST NOW BE SERIOUSLY considered to include the environmental and actual cost of these vehicle's internal combustion engines using COST-EFFECTIVE AND ENVIRONMENTALLY SAFE fuel.

Come on... this is the best planet in the universe, we have all won the cosmic lottery, yet we are killing our own ability to progress and develop this planet to best of of custodianship.

We are all choking from the cost and fumes... and merely with some simple changes (look at the Brazil model) we can get back to worrying about more important issues.

Implications: HP is a long time solid provider of computer hardware, and EDS (founded the information technology out-sourcing industry more than 45 years ago) is a longtime provider of system services. The Plan of Merger, dated as of May 13, 2008, by and among EDS, Hewlett-Packard Company and Hawk Merger Corporation, under which EDS would be acquired by Hewlett-Packard Company appears to merge two very strong technology companies into one   diversified technology giant.

Analysis: This merger appears to be a very positive one for the company going forward.  Both company have solid earnings, and a franchise name within the technology industry.

The hardware/software industries are very different markets, with very different skill-sets. Utilizing the synergies of each company, and at the same time keeping the focus of where each respective company has emerged will be a challenge, and if balanced properly will provide a strong, diversified future for the merged company.

Implications: With 45 percent of contingent sales identified as "short sales," or sales in which the lender will be required to accept less than the principal balance owed, we can't expect investor demand to grow. Investors currently have other more liquid and stable securities to place their bets, and these instruments are yielding strong cash-flows.

Analysis: The gravity of the investors desire to finance housing must be taken into consideration as a component of borrowers closing new loans on the existing inventory.

Most investors will rely on their lender/originators to mitigate loss. The shrinking inventory of homes and elimination of short-sale needs is a very good start, and will become the zero gravity point at which the investor will start to take a better look at the opportunities in real estate lending.

Inventory reduction will secure price/demand ratios, and stabilize those borrowers walking out on their obligations.

Employment stability and lower interest rates, with moderate entry prices will get the potential home-buyer back in the market.

Implications: MGA's can seek out better lines and Company deals. MGA's can seek out training to meet the changing demands. One very specific area an MGA can capitalize on is TECHNOLOGY.

Analysis:

We must assume that most MGA's do not have the 'big buck' budgets to run a full scale technology department, however, this issue MUST NOT scare the firm away for embracing technology.

As far back as twenty-years ago, our MGA operation (using then state-of-the art Data General Mini Computers) completely automated the front-end quoting process. Today that quoting system using some sort of citrix plug-ins would accommodated online internet quoting.

The automatization reduced errors and workforce.

We also created online underwriting processes. NOT perfect, and NOT complete - however this kind of system can rate/underwrite standard variable risks.

Claims processing also enjoyed the fruits of technology.

In summary... I believe the cost of technology has decreased over the last few decades, and an MGA utilizing technology, with the assistance of an consulting firm will yield bottom line profits in a short period of time.


FULL DISCLOSURE: During the 1980's Mr. Mariotti operated a California MGA, with average loss ratios of 65% or less.

Implications: But the future can be managed. We can look at the past cycles and then extrapolate forward potential probabilities. When markets contract, they can keep contracting to oblivion. But the probabilities of markets which are infrastructure tested, tried and true, tend to rebound. Demand growth and upgrades within this market alos indicate stgrong probabilities of recovery. Automobile, real estate, semiconductors, consumer electronics, transportation, financial markets all have probabilities of recovery from their respective lows. Bottom fishing is a tricking business, I suggest that small tax-lot scouts be positioned to exploit dollar-cost-averaging if the market does rebound, and mitigate allocation in case the market stalls.

Analysis: Using time value of investment principal techniques and proper allocation as prudent investment factors; market declines can become probabilities of rebound and principal appreciation.

Implications: Many factors, such as; convenience,  better fraud protection, acceptance,  user interface improvements, peer reviews, dysfunctional brick and mortar stores, high transportation costs all contribute to the growth of Internet commerce. The list is very short which tracks products and services which do not have an Internet presence. More products and more services are added to the business-to-consumer Internet transaction. Small ticket items ranging $20 or less, to $100,000 exotic sports cars are becoming much more acceptable for Internet commerce.

Analysis: The leaders of the Internet space are reporting strong profits as well as new firms coming online each and every day with very innovative business models all directed at taking the brick-and-morter business.

Further, social networking growth continues, which never had much competition from "Pen-Pals."

Implications: Whether markets are up or down - if a trading company such as TD Ameritrade (merged from many different trading companies and platforms), Scottrade, Schwab, Knight, etc runs their business efficiently, trade volume effect growth.Seems that towards the end (long trade exits - short trade entrance) of a bull market, and beginning (long trade entrance - short trade cover) of a bull market the equity trades intensify.

Analysis:  Along with the transaction revenue - entering the beginning of bull markets  without mortgage credit exposures, the asset management business will attract more principal (growing fees) and present better investment opportunities.  Ameritrade's acquisition of Fiserv's investment support services business helped with asset management growth.

Implications: Freddie Mac (GSE - Government-Sponsored Enterprises) wastes no time and begins to finance $10 billion to $15 billion in jumbo mortgages from big lenders. This follows the actions of other GSE's to add liquidity into the real estate market. I sincerely believe that this effort will help to flatten out the sagging real estate market and brace the industry with a solid floor to grow from. Please, congress... keep up the good work and continue to CHANGE the mortgage lending industry. Times and technology have CHANGED in such ways to help prevent another mortgage lending liquidity crisis in the future. Surely, many current homeowners which owe mortgages on their homes, are currently feeling the bite of rate cap creep and overall monthly mortgage payment increases. And many unhappy borrowers which cannot continue making the payments, will look to congress to CHANGE the lending industry rules to help them 'work out' solutions with their lenders, WITHOUT BURNING THE INVESTOR.

Analysis: More must be done. Since housing is in the sites of congress, and the people of the United States (borrowers, lenders and investors alike) are looking for leadership and rescue from miserable real estate conditions,  NO MATTER WHO OR WHAT IS TO BLAME, congress has a great opportunity to join forces with the experts and CHANGE the industry to thrive for all parties going forward.

Implications: Current 'so called' mortgage metrics are not necessarially useful now or in the future. Ratios and numbers can always leave room for interpretaion and misdiagnosis.   Definately positive refi action is taking place for the strapped borrowers and principal committed investors; the GSE's should keep this effort going. However... If foreclosure mitigation and borrower forbearance refinancing are counts which are included in overall refinancing - well that can blurr the condition of the lending industry and the real estate market's overall recovery.

Analysis: Mortgage applications up, and similar metrics used for the trailing 50 years must be updated to present a clear and concise view of the current lending industry.

I believe the borrower must have more options available for refinance - perhaps forbearance eliminates their possible real estate appreciation for a few years, but allows them to stay in their homes. 

Allowing the borrower to break their existing mortgage contract, move the balance owed to another investor does help the borrower stay in their home, however this represents a higher risk for the new investor and I firmly believe that the investor (which may loose interest income) should no be required to suffer principal loss.

Borrower forbearance if properly administered should yield a positive result for all parties.

Implications: a) Ease investor anxiety NOW   b) Secondary Mortgage Market Investors have been worried that recent data indicate a slowing economy, which would continue to cut into potential profit growth and actual principal at some of the nation's biggest mortgage companies, and portfolios.

Analysis: The actual PRINCIPAL INVESTORS (excluding demand deposits) behind all of these pools of mortgages are deep in anxiety. Many are working out loss mitigation for bad news securitzed mortgage loans.

These investors... prop-up the ENTIRE mortgage industry... so, it's due time (and some process improvement has occurred) to provide more mortgage liquidity to the consumer by easing investor anxiety.

Risk management flags are BRIGHT RED when it comes to analysis of most pools... we MUST improve the quality of the mortgage, thereby easing anxiety and all boats will start floating up again.

Implications: a) it does appear that the independent mortgage broker is going the way of the independent insurance agent and the independent fee based financial planner b) technlogy will be key in providing the independent mortgage broker, the acutal end-user (borrower) and actual owner-buyer-investor of the mortgage more  fair (APR - common comparrison tool)  choices

Analysis: I personally don't have any blame game to play. In reality, there has been another failing system tumbling down and causing severe harm to all those grabbing the falling knife.

Further, (and full disclosure) I have implemented the federal/state/municipal mandated compliance requirements at the Washington Mutuals, GMAC's and Countrywide's mortgage origination units.

MANY MORTGAGE BROKERS, BORROWERS AND INVESTORS WERE KEPT OUT OF A LOAN IF IT LOOKED PREDATORY. Everyone moaned, tho - since they all wanted the loan to fund - but the systems were in place and worked many times over. JUST NOT IN ALL CASES.

Some of the funded loans which passed current compliance (many loans as we have now uncovered), were bundled, securitized and sold in the secondary market. The secondary market CREATED EXTREME LIQUIDITY thereby keeping the independent mortgage broker funding large volumes of high loan-to-value (LTV) loans. The cycle turned negative and the LTV became worse and borrowers walked.

Everyone is suffering... so my suggestion is to prepare better fair lending underwriting and compliance guidelines. These best practices can be developed from the existing metrics in place created from the poor performing loans.

Better compliance procedures and systems will create better online tools which will allow the independent mortgage broker , and those borrowers that rather go it alone much more prudent decision making.

The investors; let's NOT forget, they put up the principal... will begin to feel more comfortable as  the transparency and compliance of the loan (bundled loans) they are buying look more promising.

Implications: a) existing federal, state amd municpal compliance check and balances exist b) move Rating Agency solutions to subprime mortgage losses in the large secondary market traunces into the origination systems & procedures

Analysis:

I have spent a good portion of my 30-year career in Mortgage Lending Technology designing and implementing technology solutions in the mortgage origination phase.

Currently in-place; Federal (HOEPA), State & Municipal (High Cost) prohibitions to STOP FROM FUNDING any out-of-balance and possible predatory loans.

This process has been in-place for over a decade, and the viability is definitely up for debate.

However, the same technology used by the largest global originators of mortgages, to STOP FROM FUNDING these predatory loans could also use a dose of compliance metrics from the rating agencies.

Basically, the current predatory compliance protects the potential borrower of the note - my suggestion is to ALSO protect the mass investor/buyer of the note.

Move the rating agencies metrics to the beginning of the mortgage origination cycle and STOP FROM FUNDING if the metrics so indicate.

Implications: 1) Full Disclosure - Mark Mariotti ran a nonstandard auto operation (California admitted MGA with Ohio company underwriting)  in Southern California during the 1970's &  '80s with a direct-marketing model and a non-internet online (yes back then) reservation style quoting system. Our loss ratios were VERY LOW. 2) Basically it is risk versus reward. Many cannot obtain auto insurance whatsoever with a messy MVR - thereby opening the doors for a very aggressive and systemized firm to take on the risk. 3) Technology will make this very specific segment profitable as long as the operator watches the loss-ratio and g&a expenses like scrooge.

Analysis: Unfortunately no matter what level of training has been provided, some auto drivers simply cannot grasp a safe driving routine. Some are accident prone and others have a lead foot.

The 'poor driver' as a 'poor risk' is identified to protect a standard portfolio from poor loss-ratio numbers.

A pool of these drivers (hedged by reinsurance, SUPER HIGH PHYSICAL DAMAGE DEDUCTIBLES, and internal subrogation teams) can yield a very nice loss-ratio. Keeping an eye on expenses to generate the premium-lead is critical, technology provides a more cost effective model than booking business via agents.

Implications: 1) Amerprise has been aggressive ever since its Personal Advisor and Banking separation from Amercan Express 2) MasterCard appears to be the predominate card network

Analysis: As my good ole generation of 'Baby Boomers' reach for the pina colladas instead of the hand-held devices - they will need a more creative way to pay. A Debit MasterCard earning rewards and never any chance of finance charges since the funds are posted from debit balances seems like the way to go for affluent spenders.

The up and comers (generation x and the like) are more likely to use the credit feature, since their bankrolls are not yet liquid.

Similar to Schwab Bank issuing debit cards connected to an investors brokerage/banking account, this new suite of payment cards will be a powerful tool for spenders and with investment accounts with Ameriprise. It will help them manage both sides of their balance sheet – assets and liabilities.