2008 December 29 Monday
NYTimes Describes WaMu Boiler Room Lending Culture

Reminds me of descriptions of penny stock brokerage firms selling misrepresented stocks in boiler room atmosphere. But this was a huge FDIC-insured bank.

On another occasion, Ms. Zaback asked a loan officer for verification of an applicant’s assets. The officer sent a letter from a bank showing a balance of about $150,000 in the borrower’s account, she recalled. But when Ms. Zaback called the bank to confirm, she was told the balance was only $5,000.

The loan officer yelled at her, Ms. Zaback recalled. “She said, ‘We don’t call the bank to verify.’ ” Ms. Zaback said she told Mr. Parsons that she no longer wanted to work with that loan officer, but he replied: “Too bad.”

Shortly thereafter, Mr. Parsons disappeared from the office. Ms. Zaback later learned of his arrest for burglary and drug possession.

The sheer workload at WaMu ensured that loan reviews were limited. Ms. Zaback’s office had 108 people, and several hundred new files a day. She was required to process at least 10 files daily.

“I’d typically spend a maximum of 35 minutes per file,” she said. “It was just disheartening. Just spit it out and get it done. That’s what they wanted us to do. Garbage in, and garbage out.”

Massive numbers of taxpayer-insured dollars got shoveled out the door. Many of the loans were packaged up and sold off. Washington Mutual just didn't package up enough of them to avoid holding the bag when the music stopped.

As housing prices went above the levels that buyers could afford WaMu responded by lowering standards and selling mortgages that the buyers wouldn't be able to afford once they reset.

WaMu’s boiler room culture flourished in Southern California, where housing prices rose so rapidly during the bubble that creative financing was needed to attract buyers.

To that end, WaMu embraced so-called option ARMs, adjustable rate mortgages that enticed borrowers with a selection of low initial rates and allowed them to decide how much to pay each month. But people who opted for minimum payments were underpaying the interest due and adding to their principal, eventually causing loan payments to balloon.

Customers were often left with the impression that low payments would continue long term, according to former WaMu sales agents.

For WaMu, variable-rate loans — option ARMs, in particular — were especially attractive because they carried higher fees than other loans, and allowed WaMu to book profits on interest payments that borrowers deferred. Because WaMu was selling many of its loans to investors, it did not worry about defaults: by the time loans went bad, they were often in other hands.

WaMu’s adjustable-rate mortgages expanded from about one-fourth of new home loans in 2003 to 70 percent by 2006. In 2005 and 2006 — when WaMu pushed option ARMs most aggressively — Mr. Killinger received pay of $19 million and $24 million respectively.

The FDIC ought to sue to recover some of that executive compensation. The financial executives of America should come to know some fear.

Share |      By Randall Parker at 2008 December 29 02:29 PM  Economics Lending


Comments
Carl Shulman said at December 29, 2008 3:18 PM:

I'd like to see more on the end-buyers who bought the default risk from these boiler rooms.

Anonymous said at December 29, 2008 4:48 PM:

It's clear that the corruption has spread throughout the managerial class, down to a fairly low level. The USA used to have a reputation internationally as a honest country. What effect will this have on how foreigners view us ? These bad loans were packaged up and sold as legitimate financial instruments to them. They now know that the USA can't be trusted. Why do business with us anymore ? They must be making this calculation.

miles said at December 30, 2008 8:40 AM:

Randall wrote:
"The FDIC ought to sue to recover some of that executive compensation. The financial executives of America should come to know some fear."


Yup, that pretty much says it all. If people "get a pass" on something, and only a "stern talking-to" from a judge, why should we expect behaviors to change? If you want to make sure this doesn't happen again, the ring-leaders should have most all of their earnings taken away from them civilly with the United States as the plantiff to make amends for the current recession they helped cause. Then about a five year stint at Club Fed with a ruined reputation should follow. When he starts out again, newly single and divorced, broke as a lowly loan processor in a stip-mall Countrywide store in suburban hell with no possibility for advancement, then OTHERS will see what might happen to them if they follow his path. As it is, the some execs are out but still rich---laughing all the way to the bank. Yes I know, I'm mean, cruel, cold-hearted, etc, etc, etc..

Toadal said at December 30, 2008 10:37 PM:

miles wrote: ... If you want to make sure this doesn't happen again, the ring-leaders should have most all of their earnings taken away from them civilly with the United States as the plantiff to make amends for the current recession they helped cause.

Nothing will happen to WaMu's ring-leaders and 'business' will go on as usual. If WaMu is punished, Citigroup must also be punished, and Citigroup is simply too big and powerful. Citigroup executives, like Robert Ritter in Tom Clancy's 'A Clear and Present Danger', have been given a get-out-of-jail-free card in the form of $250 billion dollars in guarantees by the federal government.

I'm afraid the only entity successfully able to punish Citigroup were the Japanese for their dirty dealings in Japan.


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