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Where WaMu went wrong

CougarCougar
edited April 2008 in Seattle Real Estate
Saturday night I was seated next to a person who had just got back from vacation. While away they got news of being laid off at the end of April. They work(ed) for WaMu as a loan processor. I said "didn't you see this coming?" No response. It is estimated 800 in the Seattle area to lose their jobs, Bellevue loan center to close at the end of August. Not only did WaMu not take care of their own but also many of those who were granted a loan that should not have. Why would a mainstay like WaMu get so greedy?

To keep growing rapidly, the Seattle company loosened its lending
standards, took on shaky real-estate loans and lent money to risky
mortgage
brokers.

http://seattletimes.nwsource.com/html/b ... amu14.html
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Comments

  • deejayohdeejayoh
    I read this article this morning and just thought, yup - that all seems about right. I thought the writer seemed to have done their homework. Lots of good info that isn't generally available (e.g. WAMU is holding $44B in low/no-doc option ARMs on their books!!!)

    where is "Finance" to 'splain to all of this why this is a good thing?
    Deejayoh - I used to work for WAMU in the Operational Risk Dept so I think I know more about them than you do! Yes, WAMU does sell off mortgages, but it was their correspondant loans (ones they were the underwriters for other mortgage producers). Their policy is to keep mortgages from people that bank at WAMU...there are a few relatively minor exceptions but not common, its a quirky detail.
    Currently I have a good friend that works with in credit dept and they told me that they are making more money on holding the current loans than selling them in the market, thus it means the market value is underpriced. Its simply SUPPLY & DEMAND, more people are forced to sell loans for solvency issues, thus those that just WANT to sell them would receive a lower price. That is the reason WAMU hasnt sold any in months.

    For people that get into the program, they will have several years to work out a stratgy to refinance if prices moderate, get raises and promotions at work, and other variety of ways to stabilize yourself over time. Most loans that get the extra time will be fine.

    It has been estimated that approx 15% of Suprime loans will go bad, but what about the other 85% of people that pay on time? (or use whatever percentage, its larger than 50%, thus more people are ok than suffer). Of PRIME loans, it is estimated that less than 5% will go bad. So that means the other 95% of people that have a loan are doing just fine, or scraping by and wont go into forclosure.

    It is true that we have not hit bottom, yet most likely by the end of 2008. It will be ugly and more crap to hit the markets.

    DJO - Im quite sure that I know more about the Banking Industry than you do, so no need to lecture me. I work with insuring banks all day (worked on a small bank's account today).

    :lol:
  • rose-colored-coolaidrose-colored-coolaid
    Isn't it weird in retrospect all the reprimands like Finance's that we kept hearing. "I originate loans, so I know more than you", "I show homes, so I know more than you", "I do landscaping, so I understand the industry better than you."

    As things teetered on the precipice, everyone seemed to switch on 'fortune teller' mode, with accuracy approaching the level of fortune telling. What concerns me though, is that they should have been right. People like Finance should have been a lot smarter than people like me. But somehow the greed blinded them.
  • UbersaladUbersalad
    By the way, WAMU stepped way up in 2006 and begin offering very competitive construction and alt-a program. I remember beating any other lender at 80% LTV and no-doc by almost 1%. Their construction lending was also practically giving away money...

    IMO, WAMU is where they're at by industry pressure...
  • EconEEconE
    In 2006, every WAMU branch I drove by in Los Angeles had their windows painted with "100k HELOCS, no income or SSN verification required"...or something along that line.

    Good thing Washington is doing so well. Somebody is gonna have to pay the taxes to bail out So. Cal. :lol:

    And yeah...what happened to Finance?
  • deejayohdeejayoh
    rose-colored-coolaid wrote:
    People like Finance should have been a lot smarter than people like me.

    Well, he used to "work for WAMU in the Operational Risk Dept". Given where they are today, I guess that department was in charge of taking on lots of operational risk.

    I think he's off with Meshugy having a pity party. Watching their HD-DVD players, and trying their best to continue acting prescient.
  • AlanAlan
    Finance used to be Finance Guru. He changed his name when people pointed out that he didn't know what he was talking about. If he was responsible for helping Wamu manage risk then I'm not surprised they ended up where they are.
  • UbersaladUbersalad
    Wasn't he a graduate of WSU business school? How much can he possibly know?
  • fasterfaster
    deejayoh wrote:
    I think he's off with Meshugy having a pity party. Watching their HD-DVD players, and trying their best to continue acting prescient.

    C'mon man, let's not drag HD-DVD players into this.
    :evil:
  • Lake Hills RenterLake Hills Renter
    HD-DVD, the BetaMax of the new century.
  • snigletsniglet
    I have a fairly forgiving attitude towards the management of WaMu, and other financial institutions that are seeing trouble from mortgage finance. These managers didn't have much of a choice during the boom: either you play along and go for the profits and volume that were available or you get fired.

    WaMu shareholders would have crucified any CEO who led the firm to underform industry competitors (e.g. CFC) with growth and profits. Back in 2005 any bank manager who had decided to sit out the Alt-A or sub-prime markets due to fiscal prudence would have been out of a job in a matter of days. What choice does that leave? Play the game or switch careers.
  • AlanAlan
    A banker's goal is to take risks that make him go broke only when every other banker goes broke too.
  • snigletsniglet
    Alan wrote:
    A banker's goal is to take risks that make him go broke only when every other banker goes broke too.

    Well, it looks like WaMu's management was right on track according to Alan's dictum. All the banks are going down the hole at the same time...

    Wachovia, Citigroup, CFC, BofA, and almost everyone else are being clobbered big-time.
  • AlanAlan
    And everyone is fairly forgiving of them all. After all, if no one else could see this coming how could they be expected to?
  • deejayohdeejayoh
    Ubersalad wrote:
    Wasn't he a graduate of WSU business school? How much can he possibly know?

    More than me!
  • SeattleMooseSeattleMoose
    They dug their own grave. Too bad for the many who are gonna feel the fallout from the actions of the few. Common theme these days.
  • UbersaladUbersalad
    sniglet wrote:
    I have a fairly forgiving attitude towards the management of WaMu, and other financial institutions that are seeing trouble from mortgage finance. These managers didn't have much of a choice during the boom: either you play along and go for the profits and volume that were available or you get fired.

    WaMu shareholders would have crucified any CEO who led the firm to underform industry competitors (e.g. CFC) with growth and profits. Back in 2005 any bank manager who had decided to sit out the Alt-A or sub-prime markets due to fiscal prudence would have been out of a job in a matter of days. What choice does that leave? Play the game or switch careers.

    That's exactly where I am getting at. WAMU was known to have pretty tight guidelines. I remember I was quite surprised to see their Alt-A's aggressive pricing, which they didn't even have Alt-A until 2006 (or I just never noticed in the last page of rate sheet).
  • deejayohdeejayoh
    Ubersalad wrote:
    That's exactly where I am getting at. WAMU was known to have pretty tight guidelines. I remember I was quite surprised to see their Alt-A's aggressive pricing, which they didn't even have Alt-A until 2006 (or I just never noticed in the last page of rate sheet).
    Tight guidelines? Hmmmmm. From what do you draw that conclusion? I have been reading Mish's blog postingsabout the 2007 WAMU Alt-A mortgage pool. They are pretty stunning. The highlights from the last post:
    January Pool Stats
      19.3% 60 day delinquent or worse 13.15% Foreclosure 1.83% REO
    February Pool Stats
      22.69% 60 day delinquent or worse 11.62% Foreclosure 3.56% REO
    March Pool Stats
      25.3% 60 day delinquent or worse 13.35% Foreclosure 4.44% REO
    Note the above progression. This cesspool from May of 2007, was 92.6% originally rated AAA, even though loans had full doc only 11% of the time. In less than one year, the pool was 25.3% 60-day delinquent or worse. Of that 25.3%, 13.35% is in foreclosure and 4.44% is bank owned real estate.
    It would seem - based on this example, that WaMu had very few standards for their lending whatsoever. And remember, they have another $44B of these on their own books that they could not find a sucker to buy. I'd guess the later ones probably look worse than this one. If they do, there is no way they survive this.

    And I don't agree that they just went with the herd. Things started going down the drain in 2005. That was when WaMu appeared to have stomped on the accelerator - as other banks were selling their lending assets (e.g. National City selling First Franklin to ML)

    Plus they hired finance.
  • UbersaladUbersalad
    I was referring to pre-2006.
  • CougarCougar
    WaMu annual meeting: director Pugh resigns, executive bonus plan to be
    revised - I'm not surprised, easy out, whose next? Does that mean she's off the hook and won't be held accountable? I hear Starbucks needs a good "director". :roll:

    http://seattletimes.nwsource.com/html/b ... amu15.html
  • gobubblegogobubblego
    Given that Wamu was one of the biggest originators of high-risk loans - subprime, option ARMs, liar/no-doc/NINJA loans, etc. and that it was based here, I'm having trouble reconciling why Seattle has one of the lowest percentages of subprime loans in the country, according to the below link:

    http://graphics8.nytimes.com/images/200 ... xlarge.jpg

    Anyone know why? I can't imagine Seattlites having much better average credit scores than the rest of the nation. It seems somewhat puzzling to me.
  • UbersaladUbersalad
    All of this took place after 2005-2006, which could also be one of the reasons why Seattle is behind by few years.

    Of course I don't have solid data to support this.

    Another thing to add, WAMU had a list of disapproved appraisers, which none of other lenders have. Although I think this sort of backfired in recent months...
  • deejayohdeejayoh
    Ubersalad wrote:
    All of this took place after 2005-2006, which could also be one of the reasons why Seattle is behind by few years.

    Of course I don't have solid data to support this.

    Another thing to add, WAMU had a list of disapproved appraisers, which none of other lenders have. Although I think this sort of backfired in recent months...

    Actually, according to this article, it looks like WaMu started going downhill as early as 2001
    Appraisers say WaMu cut corners to increase its mortgage business

    "Up until 2001, it was a pretty good system. Every appraisal was looked at by a human being," said Albertini, who now works for American Home Appraisals on Mercer Island.

    But as loan volume increased, so did the pressures — and the incentives — for WaMu appraisers to work faster and bypass safeguards that could have protected the bank against the high-risk mortgages now dragging it down, Albertini and other appraisers say.
  • UbersaladUbersalad
    Looks like sensationalism to me. There was no incentive to inflate value in 2001 and no pressure. Data also supports that WAMU only start to slip in late '05 to '06.

    I know for fact that they were still adding people to that list in 2006 from quality appraisals, which they question the value.

    Just read the article, actually it's all pretty much bullshit.
    When Albertini began working for WaMu in 1999, most mortgages were supported by a complete appraisal, which included an on-site property inspection, detailed measurements of the house and a physical drive-by of comparable homes by bank appraisers to determine if the house was worth what the buyer was willing to pay for it.

    Up until 2001, it was a pretty good system. Every appraisal was looked at by a human being," said Albertini, who now works for American Home Appraisals on Mercer Island.

    Appraisals are still being done this way... It's talking about two different things and taking out of context. Sounds like they're connecting "appraisal waiver" with actual appraisal. Appraisal waiver is run through the system that determines if the value is acceptable, and therefore you won't have to order an appraisal, or in cases where only a drive-by appraisal is needed. I am not sure how common the system is actually turning out the waiver or the percentage of it, but I can tell you from my own experience, it was rare.

    Anyhow, the article is pretty garbage in attempt to give readers some sort of insight.
  • CougarCougar
    ``I understand it hurts,'' Killinger said yesterday. ``No constituency is happy. I'm not happy. I want people to calm down, have a little faith. I know it's tough.''

    For those who have lost their job at WaMu - can they come to your house for a warm dinner every night?

    For those who have lost their homes - can they take a shower too?

    I would love to have Killinger relocate his office to the street corner on Second Ave to "feel" how much it hurts, to calm people down and give them faith. I certainly would stop by and give him a piece of my mind! :evil:
  • deejayohdeejayoh
    Ubersalad - do you work at WaMu? You seem really adamant. Just wondering what your source is that you are so vociferously calling BS on that story.

    I don't really care one way or the other when they started screwing up. Same difference, they are toast anyway. I just thought it interesting that the story showed up on the same day you said things starting going downhill in 2005.
  • UbersaladUbersalad
    No I don't work for WAMU, and I am just trying to get the facts straight.

    I am not necessary attacking the interviewee, but more so on the editor for lumping everything together to create sensationalism. I don't have time to gather data as proof, but explain to me the incentive of capturing overpriced houses in 2001.

    Also, look at the article, have they offered any "actual" explanation of how WAMU begin to overlook their appraisals?
    Albertini and Hagar said key safeguards were compromised when the bank began a sweeping effort to capture a larger share of the mortgage market starting in 2001.

    First came automation, which allowed the bank to replace the first set of eyeballs evaluating the appraiser's work — the cursory review by administrative staff — with a type of computer review that was becoming increasingly common in the industry.

    Michael Evans, international treasurer with the American Society of Appraisers, said some lenders eventually began using computers alone to establish home values. Others used them conservatively, as an additional tool for their appraisal staff, recognizing that "speed can kill," he said.

    What part of automation is the culprit? Using computer to capture important details to be reviewed by underwriter, why not? And using Michael Evans' quote out of context to strengthen their case?
    At WaMu, field appraisers quickly learned that by stating that a house was being sold "as is" and listing its market value as greater than the requested loan amount, they could bypass a more in-depth review of their work and get paid more quickly, Albertini said.

    The computer system also had glitches that obliterated appraiser comments about conditions that might affect the value of the property, things such as proximity to railroad tracks or unfinished remodeling. The glitches happened often enough, he said, that Albertini stopped working off the computer reports and instead asked appraisers to just send him copies of their original paperwork.

    If I remember correctly, appraisals only have two options: As-Is or Incomplete. If it is complete, then they're always As-Is. Also this is Underwriter's job to review the appraisal, and this is where that "cursory review" would take place. Again, sensationalism and taken out of context.
    In 2003, the bank instituted a new commission system that paid field appraisers according to the volume of their work.

    I am not sure how they were being paid pre-2003...but all the appraisers I know is paid on volume of their work. Why would they pay any other way? Pay by salary regardless of how many appraisals they do each month? Another bullshit.

    Like I said, post 2005-2006 is when the pressure got to WAMU. Before that, WAMU in the wholesale channel was actually harder than other lenders.
  • ira sira s
    In most cases, appraisers get paid a percentage of the price paid for the appraisal, often 50%.
    I suspect that the reporter got stuff screwed up, but maybe WAMU was offering a larger percentage for each one if more appraisals were done.
    I took classes from Richard Hagar, who is mentioned in the article. He goes all over the country teaching attorneys general about real estate fraud, and he is an absolute riot. His real estate fraud class was exceptionally entertaining, as well as being highly instructive.
  • lamontlamont
    Ubersalad wrote:
    Like I said, post 2005-2006 is when the pressure got to WAMU. Before that, WAMU in the wholesale channel was actually harder than other lenders.

    Nov 17, 2005 was when WaMu started charging ATM fees for non-customers, too...
  • deejayohdeejayoh
    well, you got me curious. "wamu appraisal process" fed into google reveals that WaMu did at least intro a new system in 2001 that "Streamlined" the appraisal process.

    http://newsroom.wamu.com/phoenix.zhtml? ... highlight=

    and a quick search on "optisvalue" (the name of the new system) reveals that the system was a dog - appraisers hated it, it appears - and costs were unacceptably high (and they were losing share) so they dumped it in 2004, laid off a bunch of appraisers, and started looking for other ways to cut cost.

    which probably led them to do as you suggest and throw caution out the window in 2005-ish.

    http://news.alamode.com/04/0727.htm

    interesting. gotta love the internet.
  • CougarCougar
    Exactly one year ago - WaMu won't escape subprime turmoil

    During the housing boom of the past several years, Washington Mutual
    was among the nation's top lenders in the high-risk sector of subprime...
    http://seattletimes.nwsource.com/html/b ... ime17.html
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