Report: WaMu rewarded employees who pushed dangerous mortgages

Article Courtesy of The Palm Beach Post

By Kimberly Miller

Published April 26, 2011

In the fall of 2006, Washington Mutual was so determined to push its riskiest mortgages on customers that it created a football-themed employee bonus "blitz," offering "touchdown" incentives for every sale of a pick-a-payment loan.

A non-prime loan was a "field goal" in the game to win a $1,000 gift card at the expense of home buyers who were purposefully steered away from fixed-rate, 30-year mortgages.

The campaign to sell high-risk loans, which contributed to the 2008 demise of the nation's sixth-largest bank, is outlined in a 650-page report released last week by the U.S. Senate's Permanent Subcommittee on Investigations.

Florida is mentioned repeatedly in the report. Washington Mutual's loan sales were concentrated in the state, which ultimately suffered above-average home value depreciation.

Rapid-fire construction of new homes and condominiums made Florida a prime target for toxic loans, said Michael Sichenzia, president of Dynamic Consulting in Coral Springs and a former fraudster who now investigates suspect housing deals.

And Washington Mutual was eager to issue loans, announcing in 2006 it planned to add 25 Florida branches to more than 200 already in the state.

"If you were a bank trying to build a market share, you went to the areas where development was rampant," Sichenzia said. "Every new home builder, every condo developer treated buyers or prospective buyers as some kind of mark in one big con game."

Two years after the blitz, Washington Mutual was seized by its regulator, the Office of Thrift Supervision.

It was ultimately sold to JPMorgan Chase for $1.9 billion. Without the purchase, Washington Mutual's failure might have "exhausted the entire $45 billion Deposit Insurance Fund," the federal report says.

"This case study focuses on how one bank's search for increased growth and profit led to the origination and securitization of hundreds of billions in high-risk, poor-quality mortgages that ultimately plummeted in value, hurting investors, the bank and the U.S. financial system," the report says.

Investigators methodically lay out Washington Mutual's profit plan, offering a behind-the-scenes glimpse at how the bank set out to market products it was warned were dangerous.

Its flagship loan was the Option Adjustable Rate Mortgage, or Option ARM.

The Option ARM typically offered borrowers an initial teaser interest rate and gave them a choice each month of paying a higher or lower amount, including making a minimum payment that covered only a portion of the interest owed and none of the principal.

The loans were nicknamed "pick-a-payment."

Between 2003 and 2007, high-risk Option ARMs represented as much as half of the bank's loan originations. In 2006 alone, Washington Mutual originated more than $42.6 billion in Option ARM loans and sold or securitized at least $115 billion to investors.

The bank even assembled focus groups to devise better tactics to sell its Option ARMS. One result of the focus groups was the "Option ARM Blitz" sales incentive program.

Foreclosure defense attorney Trent Steele represented a Lake Worth woman, now deceased, who took out a Washington Mutual Option ARM in 2003.

The woman, a Realtor, said she should have known better but got "duped" into taking the loan and was in foreclosure by 2008.

"The people that marketed these loans led the public to believe the payments were realistic, but within a short time period they became obscenely out of reach," said Steele, who has an office in Palm Beach Gardens. "It was something homeowners quickly became buried in."

One loan officer told a congressional committee last year that he expected the majority of homeowners with Option ARMs to sell or refinance before their payments increased. That became impossible as the real estate market imploded.

Another favorite Washington Mutual loan was one that required no proof of a borrower's earnings. The so-called "stated-income" loans were ripe for fraud and perpetuated by rewards given to loan personnel, the report surmises.

"Because of the compensation systems rewarding volume versus quality and the independent structure of the originators, I am confident at times borrowers were coached to fill out applications with overstated incomes or net worth to meet the minimum requirements," said Jim Vanasek, Washington Mutual's chief risk manager during a congressional hearing last year.

Vanasek, who retired in 2005, said the move toward riskier loans occurred despite his repeated attempts to stem the practice.