Washington Mutual Ignored Subprime Mortgage Risks, Former Insiders Tell Senate Panel

Washington Mutual, with more than $300 billion in assets, was the nation’s largest thrift before it was seized by the government and sold to JPMorgan Chase & Co. in 2008.

Palm Coast, FL – April 14, 2010

Posted April 13, 2010 on bailoutsleuth.com by RYAN HOLEYWELL
Former risk officers at Washington Mutual Inc. testified today that they told bank executives that its home loan business was risky and unsustainable, but their warnings went unheeded.
The inside look at the largest bank failure in U.S. history occurred at the Senate Permanent Subcommittee on Investigations hearings today, which focused on Washington Mutual’s lending practices.
Washington Mutual, with more than $300 billion in assets, was the nation’s largest thrift before it was seized by the government and sold to JPMorgan Chase & Co. in 2008.
The subcommittee has blamed Washington Mutual for contributing to the financial crisis by originating a huge volume of risky loans that were sold as mortgage-backed securities and ultimately became toxic. Senators criticized former bank leaders for both originating those loans and for not entirely disclosing their risky – and sometimes fraudulent — nature when they were securitized.
In his opening remarks, subcommittee chair Sen. Carl Levin (D-Mich.) presented a list of 18 Washington Mutual practices "that created a mortgage time bomb," including its acceptance of stated-income "liar" loans in which borrowers didn’t have to prove their earnings; its targeting of high-risk borrowers; and its securitizing of loans that were likely to fail.
"It was a man-made economic assault," Levin said. "People did it. Extreme greed was the driving force."
The subcommittee announced that since November 2008, it has interviewed more than 100 people, consulted with dozens of experts and accumulated more than 1 million pages of documents, as preparation for a series of hearings that will investigate the causes and effects of the financial crisis.
Washington Mutual’s former risk officers testified that they were marginalized and isolated as the company placed a growing importance on making dangerous but profitable loans. They also blamed regulators for not having more overisght of the origination of loans that ultimately became securitized and polluted the market.
On Friday, the subcommittee will conduct a hearing on the role that regulators played in the crisis. It will feature testimony from current and former leaders from the Office of Thrift Supervision and the Federal Deposit Insurance Corp. Future subjects to be explored by the subcommittee include credit rating agencies, investment banks and the use of complex financial instruments.
James Vanasek, who served as Washington Mutual’s risk officer in 2004 and 2005, testified that he urged the company’s leaders to "take a stand" and "say enough is enough."
"It was clear to me the practices were fundamentally unsound," he said.
According to the subcommittee, the bank shifted its focus to high-risk loans in the mid-2000s because they had a potential for greater profits than safer fixed-rate, 30-year home loans. It went on to increase its securitization of subprime loans six times over through the acquisition of Long Beach Mortgage Corp. in 1999.
Stephen Rotella, Washington Mutual’s former chief operating officer, testified that the company began its emphasis on risky loans prior to his 2005 arrival, adding that he worked to reduce them.
Former Chief Executive Kerry Killinger also said that the bank reduced its home originations vastly from 2003 until 2007, when it shut down its subprime lending business. But Levin accused Killinger of not being entirely truthful, noting that much of that reduction came from a drop in the number of fixed-rate, 30-year mortages. In that same time period, Levin correctly noted, Washington Mutual actually increased its percentage of high-risk loans.
Meanwhile, Washington Mutual and Long Beach Mortgage increased their securitizations of subprime loans from $4.5 billion in 2003 to $29 billion in 2006. Between 2000 and 2007, they securitized at least $77 billion in subprime loans, according to the subcommittee.
The subcommittee also has been investigating a high-risk loan called the Option ARM that was Washington Mutual’s flagship product. Under the terms of that loan, borrowers could actually make monthly payments that failed to cover the full amount of principal and interest, resulting in a loan in which the total amount owed increased each month. Washingotn Mutual sold $115 billion in Option ARMs, which had a higher-than-usual default rate.
Throughout the hearing, Levin referenced more than 600 pages of documents the subcommittee had assembled, including internal memos and e-mails. Levin was highly critical of Washington Mutual executives for originating fraudulent loans and sometimes including them in secutized packages sold to investors.
Under questioning from Sen. Ted Kaufman (D-Del.), David Schneider,  former president of home loans for Washington Mutual, admitted that there was no limit to the size of a mortgage one could get with a stated income loan, which did not require borrowers to prove their earnings. The practice stopped in 2006, he said.
According to the committee, an FDIC review of 4,000 Long Beach loans in 2003 revealed that less than 25 percent could be properly sold to investors. Levin continually questioned bank executives about a 2005 review of a pair of loan officers who had high rates of fraud in their loans – 58 percent for one and 83 percent for another. They were offered prizes and trips for their success.
A review in 2008 found that staff in another top loan producer’s office manufactured details on loan applications by duplicating asset information and changing the name of the borrower.
1 reply
  1. John Boy
    John Boy says:

    Washington Mutual

    All these hearing are useless unless someone ends up going to jail. There is nothing being done to prevent new equally destructive paratices from being created by the new breed of MBA’s flowing out of business schools each year. The only effective way to stem these practices is long prision sentences and clawbacks of all illegal gains.

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