Part one | Reckless strategies doomed WaMu

Great story on the rise and fall of Washington Mutual in the Seattle Times.
http://seattletimes.nwsource.com/html/businesstechnology/2010131911_wamu25.html#
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But interviews with former WaMu executives and employees, along with government and internal company documents, reveal a far different picture, one of executives charting a reckless course that doomed the bank:

• In its headlong pursuit of growth, WaMu systematically dismantled or weakened the internal controls meant to prevent the bank from taking on too much risk — the very standards and practices that had helped it grow in the first place.

• WaMu's riskiest loans raked in money from high fees, but because the bank skimped on making sure borrowers could repay them, they eventually failed at disastrously high rates. As loans went bad, they sucked massive amounts of cash that WaMu needed to stay in business.

• WaMu's subprime home loans failed at the highest rates in nation. Foreclosure rates for subprime loans made from 2005 to 2007 — the peak of the boom — were calamitous. In the 10 hardest-hit cities, more than a third of WaMu subprime loans went into foreclosure.

By the summer of 2004, nearly 60 percent of the loans WaMu was making were the riskiest sort — option ARMs, subprime mortgages and home-equity loans.
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After a string of small and midsize deals gave WaMu a commanding position in the Northwest, in July 1996 it announced its biggest deal to date: the purchase of California-based American Savings for $2 billion in stock.

The deal was a turning point for WaMu. Not only did it double the thrift's size, but it introduced two practices that turbocharged WaMu's growth: pay-option adjustable-rate mortgages, commonly called option ARMs, and the "originate-to-sell" model of mortgage banking.
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From a California-only product, option ARMs became widespread during the housing bubble, despite warnings from consumer advocates. The nonprofit Center for Responsible Lending called them "toxic mortgages" because of the threat of steep-payment shock and because the low teaser rates and minimum payments made them "ideally suited for misrepresentation."

Killinger hired Craig Davis, American's director of mortgage origination, to run WaMu's lending and financial services. Davis, several former WaMu executives said, began pushing WaMu to write more adjustable-rate mortgages, especially the lucrative option ARMs.

"He only wanted production," said Lee Lannoye, WaMu's former executive vice president of corporate administration. "It was someone else's problem to worry about credit quality, all the details."

Up to that point, WaMu held on to most of the mortgages it made. Now it began bundling ARMs and certain other mortgages into securities and selling them off — pocketing hundreds of millions of dollars in fees immediately, while offloading any potential repayment problems.
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Killinger backed the push to generate more and more mortgages to be packaged and sold, allowing that to dominate the entire home-loan operation. WaMu turned again to California for its entree to the murky world of subprime lending, buying Long Beach Mortgage in 1999.

Though Long Beach was lucrative, some executives argued against the deal.

"It didn't fit our culture," Lannoye said. "It's hard to say you're a 'friend of the family' when you have an entity like Long Beach that's making loans to people at higher rates than they had to pay because they didn't know any better. I didn't want to have to sit in front of a regulator and explain why an African-American borrower (from Long Beach Mortgage) was paying two percentage points higher than a borrower from WaMu."
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As the great refinancing boom of 2002-03 tapered off, competition intensified among mortgage lenders to write, close and package as many loans as possible. Countrywide Financial in particular, which had led the industry by cutting the teaser rate on its option ARMs to 1 percent, was seen as a threat.

Countrywide "was held up as the competitor, because they would do anything — low-doc, no-doc, subprime, no money down," said Tom Golon, a former senior home-loan consultant for WaMu in Seattle. The WaMu staff was subjected to "total blanketing — e-mails, memos, meetings set up so people understood that this was what the company wanted them to do."

If Countrywide's unofficial motto was "Price any loan!", WaMu's response was "The power of yes." In ways large and small, the company made it clear that it wanted its loan consultants to make a lot more loans — especially the riskier but potentially more lucrative ones.
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