“If you were dead, they would still give you a loan”

“It was the Wild West. If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.”

-Steven M. Knobel, a founder of appraisal firm Mitchell, Maxwell & Jackson

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Interesting article in the Sunday NYTimes about WaMu, the company that could not say no. The Times missed a golden opportunity to proclaim a major bank a “slut” — any opportunity one gets to do so should be taken without hesitation.

And just how slutty were WaMu’s loans? By the first half of this year, the value of its bad lending had reached $11.5 billion. Here’s why:

WaMu pressed sales agents to pump out loans while disregarding borrowers’ incomes and assets, according to former employees. The bank set up what insiders described as a system of dubious legality that enabled real estate agents to collect fees of more than $10,000 for bringing in borrowers, sometimes making the agents more beholden to WaMu than they were to their clients.

WaMu gave mortgage brokers handsome commissions for selling the riskiest loans, which carried higher fees, bolstering profits and ultimately the compensation of the bank’s executives. WaMu pressured appraisers to provide inflated property values that made loans appear less risky, enabling Wall Street to bundle them more easily for sale to investors.

Why the disregard for traditional lending standards, the risky mortgages, the lending to unqualified people? Was it the CRA or Fannie/Freddie? To the contrary, it was a relentless drive for sales volume and market share. Loan officers were givens 100s of new loans per day, ensuring  review and oversight were minimal. Investigating into loan apps was actively discouraged.

I know from personal experience that WaMu was amongst a group of predatory lenders and mortgage felons who actively misrepresented loans. I have disagreed with those who called the no doc loans predatory borrowing. It was the banks that actively misrepresented the loan products to borrowers; It was the banks that had the fiduciary obligation to their depositors and investors not to engage in reckless lending.

My wife has a WaMu account, and we got a sales pitch on mortgages from them in 2004, and again when we sold one house and bought another in 2006. I am pretty savvy about mortgages, and I was aghast about their Option ARM and their Neg Am sales pitch. I spoke with several WaMu salespeople — in person in a NYC branch, and over the phone — and they tried to make the teaser rate sound like this was a non-resetting, permanent payment. If you pressed them about the reset, they would eventually fess up. If you asked them about Neg Am, they never explained the total amount owed went up every month you underpaid principle. But if you were naive about finance or didn’t understand how these loans worked, they steamrolled right over you.

Here’s the ugliness:

The ARM Loan Niche:  WaMu’s retail mortgage office in Downey, Calif., specialized in selling option ARMs to Latino customers who spoke little [or no] English and depended on advice from real estate brokers, according to a former sales agent who requested anonymity because he was still in the mortgage business.

According to that agent, WaMu turned real estate agents into a pipeline for loan applications by enabling them to collect “referral fees” for clients who became WaMu borrowers.

Buyers were typically oblivious to agents’ fees, the agent said, and agents rarely explained the loan terms. “Their Realtor was their trusted friend,” the agent said. “The Realtors would sell them on a minimum payment, and that was an outright lie.”

This is predatory lending. The FBI, which has already arrested over 1000 people, should be hunting for all of these dirtbags, clawback any and all commissions from them — then toss them in jail.

And again, what some have termed “predatory borrowing” was in the real world, simply fraud perpetrated by bank employees and mortgage brokers: “[Managers] in the Irvine, Calif, office coached brokers to leave parts of applications blank to avoid prompting verification if the borrower’s job or income was sketchy.”

I’ve mentioned this many times before: Many of the people who have 2/28 ARMs had no idea they had a mortgage that was going to reset. I’ve spoken to many people who had no idea, and remain convinced its a paper work error. From what I personally saw from the sales staff at WaMu, this was not an accident.

Excerpt after the jump . . .

At WaMu, getting the job done meant lending money to nearly anyone who asked for it — the force behind the bank’s meteoric rise and its precipitous collapse this year in the biggest bank failure in American history.

On a financial landscape littered with wreckage, WaMu, a Seattle-based bank that opened branches at a clip worthy of a fast-food chain, stands out as a singularly brazen case of lax lending. By the first half of this year, the value of its bad loans had reached $11.5 billion, nearly tripling from $4.2 billion a year earlier.

Between 2001 and 2007, Mr. Killinger received compensation of $88 million, according to the Corporate Library, a research firm. He declined to respond to a list of questions, and his spokesman said he was unavailable for an interview.

During Mr. Killinger’s tenure, WaMu pressed sales agents to pump out loans while disregarding borrowers’ incomes and assets, according to former employees. The bank set up what insiders described as a system of dubious legality that enabled real estate agents to collect fees of more than $10,000 for bringing in borrowers, sometimes making the agents more beholden to WaMu than they were to their clients.

WaMu gave mortgage brokers handsome commissions for selling the riskiest loans, which carried higher fees, bolstering profits and ultimately the compensation of the bank’s executives. WaMu pressured appraisers to provide inflated property values that made loans appear less risky, enabling Wall Street to bundle them more easily for sale to investors.

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Previously:
Tyler Cowen: “Predatory Borrowing The Bigger Problem” (January 2008)
http://www.ritholtz.com/blog/2008/01/tyler-cowen-predatory-borrowing-the-bigger-problem/

Getting Mortgage Fraud Down to an Art (December 2008)
http://www.ritholtz.com/blog/2008/12/getting-mortgage-fraud-down-to-an-art/

Source:
By Saying Yes, WaMu Built Empire on Shaky Loans
PETER S. GOODMAN and GRETCHEN MORGENSON
NYT, December 27, 2008
http://www.nytimes.com/2008/12/28/business/28wamu.html

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