Seattle Times Reviews WaMu, Hometown Predator

An excellent postmortem details a corrupted culture

Hats off to The Seattle Times for an excellent two-part series investigating the demise of Washington Mutual, onetime hometown hero turned zero (literally).

The paper calls a spade a spade here, writing (emphasis mine) “In short, WaMu became one of the nation’s biggest predatory lenders.”

Hey, better late than never.

As The Audit, particularly Audit Chief Risk Officer Dean Starkman, has long maintained, this kind of tough digging into the corporate roots of the crisis has been in short supply, and as our Elinore Longobardi explores in detail in the current issue of Columbia Journalism Review the language the press uses matters. It’s a question of whether you blame the borrowers (they’re “sub-prime”) or the lenders and brokers who fed off of them (they’re “predatory”).

With this piece, there’s no question which it is. The Seattle Times has the goods on ol’ predatory WaMu, which it shows “used huge sales commissions and misleading marketing to hawk risky and overpriced loans to borrowers,” quadrupling its option-ARM lending in two years.

For instance:

WaMu lured borrowers with a very low interest rate of about 1 percent. But this “teaser” rate was good only for one month. After that, the option ARM could have far higher interest rates than conventional 30-year fixed-rate loans.

With each minimum payment, unpaid interest piled up. Once the debt grew too large, WaMu canceled the minimum-payment option. You could suddenly get a new bill for two or three times what you had been paying….

It would give you an option ARM even if you couldn’t afford to repay it. You only needed enough income to cover the minimum payments.

This is good corporate history by reporters Drew DeSilver and David Heath. The Times scores on-the-record interviews with top executives and lower-level employees alike to tell the story of how the company went so wrong, even pinpointing the date it began (publicly anyway), with a late 2003 speech by the chief financial officer pointing to lucrative products like subprime mortgages and option ARMs as the company’s salvation.

And it has some excellent anecdotes of borrowers who got taken screwed by the WaMu or WaMu-connected boiler rooms. For instance, a guy who had to take over his family finances when his wife got sick and turned a 4.6 percent interest fixed-rate loan into a 1 percent teaser-rate option ARM with the help of WaMu’s marketers and a third-party broker who fed the bank’s voracious appetite for such junk:

The 1 percent interest rate Houk thought he was getting was only good for the first month. It had reset to 7.4 percent, nearly 3 percentage points above his previous WaMu loan. This was buried in the fine print in a sheaf of legal documents he had signed.

And this was not a one-off thing or simply a matter of unsophisticated borrowers, as the Times shows with an anecdote of an advertising-business owner who got blatantly screwed by WaMu. It was part of a corrupted culture at the bank, which was far from alone (hello, Countrywide!) in this sort of thing:

WaMu did not reward brokers for getting its customers the best deal. Just the opposite. The worse the terms were for borrowers, the more WaMu paid the brokers.

A WaMu daily rate sheet obtained by The Seattle Times shows how lavish the rewards could be. On an option ARM, WaMu would reward brokers as much as 3 percent of the loan amount — more than triple the standard commission at the time.

Brokers would get an additional point — 1 percent of the loan — for roughly every half-point in higher interest the borrower paid. So the broker would get 3 percent of the loan if he could get the borrower to pay 1.5 percent above the market rate.

The Times does a great job explaining why this was so. In part one of the series, it explains how the company intentionally told its risk officers to back off, and how the money machine overpowered those who dissented about the recklessness. And it fingers a bad guy, Craig Davis, who became head of lending and origination after an acquisition.

Overall, 34.1 percent of WaMu subprime loans went into foreclosure in those 10 markets — more than three times the 10.2 percent rate of archrival Countrywide.

In Cleveland, an astonishing 54 percent of its subprime unit’s loans have gone into foreclosure because of those deteriorated standards, which also produced this priceless anecdote:

“Someone in Florida had made a second-mortgage loan to O.J. Simpson, and I just about blew my top, because there was this huge judgment against him from his wife’s parents,” she recalled. Simpson had been acquitted of killing his wife Nicole and her friend but was later found liable for their deaths in a civil lawsuit; that judgment took precedence over other debts, such as if Simpson defaulted on his WaMu loan.

“When I asked how we could possibly foreclose on it, they said there was a letter in the file from O.J. Simpson saying ‘the judgment is no good, because I didn’t do it.’ “

It’s all here: the predatory lenders, the perversely incentivized brokers, the ineffective regulators, the greedy executives, the Fed’s easy-money policy, securitization, etc. And a super kicker:

Meanwhile, the FBI is investigating whether Washington Mutual executives broke criminal laws by deceiving shareholders about the bank’s health. As for now, there is no known federal investigation under way for deceiving borrowers.

Salute The Seattle Times for this one, which is as good as anything the big boys on the beat have produced. And it shows there’s still critically important stuff coming out of our wounded metro newspapers.

(hat-tip: my father-in-law)

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.