US Senate panel: high-risk loans brought down WaMu

April 13, 2010

   By Dan Margolies
   WASHINGTON, April 12 (Reuters) -  Despite fraud rates of over 58 percent and 83 percent at two of Washington Mutual Bank’s top-producing loan production offices in 2005, the bank did nothing to address the problem, according to findings released Monday by a congressional panel.
   The loans were made after the the bank, a subsidiary of now bankrupt Washington Mutual Inc <WAMUQ.PK>, decided in 2003 to focus on high-risk mortgages because they were more profitable, the subcommittee found.
   The strategy, endorsed by Washington Mutual Chief Executive Kerry Killinger, led the bank and an affiliate, Long Beach Mortgage Corp, to securitize more than $77 billion in subprime home loans and billions more in other high-risk mortgages.
   The focus on high-risk loans eventually contributed to WaMu’s failure in September 2008.
   Killinger will be among the former Washington Mutual executives testifying before the Senate Permanent Subcommittee on Investigations on Tuesday. Washington Mutual is the biggest bank failure in U.S. history.
   “Washington Mutual built a conveyor belt that dumped toxic mortgage assets into the financial system like a polluter dumping poison into a river,” Senator Carl Levin, chairman of the subcommittee, said at a briefing for reporters on Monday.
   “Using a toxic mix of high risk lending, lax controls, and destructive compensation policies, Washington Mutual flooded the market with shoddy loans and securities that went bad,” the Michigan Democrat said.
   Seattle-based Washington Mutual was the nation’s biggest thrift with more than $300 billion in assets and $188 billion in deposits before regulators seized it and sold the banking operations to JPMorgan Chase & Co <JPM.N>.
   Washington Mutual’s parent company is in bankruptcy proceedings and may have a second life thanks to billions of dollars of tax refunds owed to it. [ID:nN29104131]
   The failure occurred a couple of weeks after investment bank Lehman Brothers declared bankruptcy, triggering a global financial panic that led to the freezing of credit markets and the biggest financial crisis in the United States since the Great Depression.
   Levin’s subcommittee said it reviewed millions of pages of documents and conducted more than 100 interviews and depositions as part of its investigation, which started in November 2008.
   The subcommittee plans to hold four hearings to address the roles played in the crisis by high-risk mortgages, regulators, credit rating agencies and Wall Street investment banks.
   The hearing on Tuesday will focus on Washington Mutual itself, a once traditional lending institution that had been around for more than a century and focused on fixed-rate and government-backed loans before shifting to higher-risk home loans in 2003.
   Among those scheduled to testify are Killinger, whom the subcommittee said was paid $103.2 million between 2003 and 2008; Stephen Rotella, the bank’s former president and chief operating officer; David Schneider, the former president of Washington Mutual’s home loan division; and two of the thrift’s former chief risk officers.
   The subcommittee found that Washington Mutual’s pay policies rewarded loan officers and processors for originating high volumes of high interest-rate loans, paid extra to loan officers who overcharged or imposed stiff prepayment penalties on borrowers, and granted top executives millions of dollars in compensation even when Washington Mutual’s lending strategy put the bank at financial risk.
   “Volume was king,” Levin said.
  
   “IT IS UGLY”
   Washington Mutual and the Long Beach unit originated billions of dollars in subprime and other high-risk loans through their own loan offices and third-party mortgage brokers. Washington Mutual also made bulk purchases from other lenders.
   The thrift retained some loans on its books and sold the rest to Wall Street, usually after bundling them into securities, or to the government-sponsored home finance companies Fannie Mae <FNM.N> and Freddie Mac <FRE.N>.
   The high fraud rates at two of Washington Mutual’s top producing loan offices, both in southern California, were uncovered during a 2005 internal review by Washington Mutual, according to the subcommittee’s findings. The review found that the fraud, which involved falsified documents, was caused mainly by employees circumventing bank policies.
   Yet the two loan officers responsible for the loans continued working for the bank until 2008 and received prizes for their loan production, the subcommittee found.
   Washington Mutual’s own executives issued warnings as early as 2003 about lending and securitization deficiencies at the thrift and at Long Beach, according to documents obtained by the subcommittee.
   “Delinquencies are up 140 percent and foreclosures close to 70 percent,” Rotella wrote in an April 2006 e-mail cited by the subcommittee. “… It is ugly.”
   Washington Mutual shut down Long Beach in mid-2007 and took over its subprime operations. A Long Beach employee was subsequently indicted for taking kickbacks to process fraudulent and substandard loans.
   The Puget Sound Business Journal reported on Monday that Killinger plans to tell the subcommittee that the bank could have survived and that regulators seized it precipitously. (Reporting by Dan Margolies; Editing by Tim Dobbyn) ((dan.margolies@thomsonreuters.com, +1 202 898 8324)) Keywords: WAMU/SENATE
   
Monday, 12 April 2010 22:15:47RTRS [nN12207084] {C}ENDS

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