Replies to post #120307 on Mr Cooper Group Inc (COOP)

[VivaLasVegas]

Who is TED?

Cheers

[JohnnyWinter]

Part one | Reckless strategies doomed WaMu

Execs say WaMu fell victim to the economy &emp; but WaMu caused its demise by embracing risky loans and dismantling safeguards.


"On Sept. 10, 2007, Washington Mutual CEO Kerry Killinger stood before an audience of analysts and money managers and assured them the Seattle-based thrift would come out of the housing slump stronger than ever.

WaMu, Killinger told the Lehman Brothers conference, had tightened its lending standards, could access plenty of cash, and was "picking and choosing carefully" when it came to making new loans.

"This frankly may be one of the best times I have ever seen for taking on new loans into our portfolio," he said.

But even as he spoke, WaMu was a dead bank walking. The company had plunged headlong into the business of making exotic, high-risk home loans, selling many of them to investors but holding onto others; now defaults on those loans were rising, and big investors had lost their taste for them.

Almost a year to the day after the Lehman conference, Killinger was fired. Two and a half weeks after that, federal regulators seized WaMu's banking units, effectively euthanizing a 119-year-old institution that had survived the Great Depression and the S&L crisis.

After its collapse, Killinger and other leading WaMu executives repeatedly deflected responsibility, saying the company fell victim to a housing slump turned global credit crisis that they foresaw but couldn't outrun.

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.


WaMu's overall business strategy fueled its implosion. Since riskier loans had more profit potential than safer loans, the bank paid its loan consultants and independent mortgage brokers more for making them. It pressured appraisers to inflate home values. It told its underwriters to find ways to make loans "work," regardless of WaMu's own standards.

The strategy's momentum was so powerful and pervasive, one former top executive said, that the few dissenting voices inside upper management "were blown off." Rather than avoiding the housing bubble, he said, "Washington Mutual chose its destiny, to be right smack dab in the middle to the hilt."

"A cockeyed optimist"

Talk to people who worked with Killinger, and the same phrases and adjectives keep coming up. Ambitious. Quick study. Smartest guy in the room. And always, always optimistic.

"He's a cockeyed optimist to the nth degree," one former associate said. "He always thought he could get out of whatever trouble he was in."

But Killinger also is repeatedly described as avoiding confrontation and uninterested in the nuts-and-bolts details of WaMu's business. He declined to respond to specific questions posed by The Seattle Times.

"He could look at a financial statement and get to the heart of what was going on in a nanosecond," said Fay Chapman, WaMu's chief legal officer from 1997 to 2007. "But he could not have run a coffee stand. I just don't think his mind works that way."

And even more than most chief executives, insiders say, Killinger was focused on WaMu's stock price as the company's — and his — primary gauge of success. "Kerry's view of himself was tied to a constant increase in the stock price," Chapman said. "He was fixated on it."

Those traits all would play roles in WaMu's demise.

Killinger joined WaMu in 1982 after it bought Spokane's Murphey Favre stock brokerage, of which he was part owner. He rose rapidly, becoming president of the bank in 1988 and chief executive officer in 1990.

Killinger saw growth as the key to WaMu's future. Without growth, WaMu sooner or later would be picked off by some larger bank, as Seafirst and Rainier National Bank, among others, had been.

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.

Option ARMs have become notorious as one of the main drivers of the mortgage bubble. With an option ARM, payments were based on a low "teaser rate" for the first few months (later just one month); then the rate adjusted and the "option" feature kicked in.

Each month, the borrower could make a payment that would fully pay off the principal and interest; one that covered just the interest; or a "minimum" payment based on the teaser rate, which wouldn't even cover all the interest owed. The unpaid interest was added to the loan's principal balance, shrinking the borrower's home equity. Option ARM customers frequently ended up owing more than they'd originally borrowed.

Option ARMs posed two big risks to borrowers: The interest rate adjusted monthly, rather than annually as with most standard ARMs, and once the unpaid interest hit a predetermined cap, the loan would effectively convert to a fixed-rate loan — typically with much higher monthly payments.

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.

Chapman, the former chief legal officer, said she and some other WaMu executives "argued vociferously" against the shift, saying it didn't fit WaMu's traditional emphasis on lending mainly to its own banking customers.

But Davis and other executives from American Savings "didn't want to give it up. It was what they knew how to do, and they made a huge amount of money on it."

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."

The frenzy peaks

WaMu's acquisition spree, along with its plan to open branches in metro areas from coast to coast, was meant to transform the stodgy Northwest thrift into a national consumer-banking powerhouse. And it worked, for a while. By 2002, WaMu was the sixth-largest financial institution in the country. The stock hit its all-time high of $46.55 on Nov. 23, 2003.

But for the next 3 ½ years the shares languished, seldom rising much above $45 or falling below $40. This only confirmed Forbes magazine's description of Killinger's cherished company as "the world's tallest midget."

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.

The most direct way was by paying them more to do so. A compensation grid from 2007 — the same year Killinger told investors that WaMu was reining in its home-loans operation — shows the company paid the highest commissions on option ARMs, subprime loans and home-equity loans: A $300,000 option ARM, for example, would earn a $1,200 commission, versus $960 for a fixed-rate loan of the same amount. The rates increased as a consultant made more loans; some regularly pulled down six-figure incomes.

WaMu also began allowing more "low-documentation" loans — those in which a borrower didn't need to submit bank statements, pay stubs or other proof of earning enough money to repay the loan. Instead, the company leaned more and more heavily on credit scores, which could be ascertained while the borrower was still on the phone.

"The big saying was 'A skinny file is a good file,' " said Nancy Erken, a WaMu loan consultant in Seattle. She recalled helping credit-challenged borrowers collect canceled checks, explanatory letters and other documentation that they could afford their loans.

"I'd take the files over to the processing center in Bellevue and they'd tell me 'Nancy, why do you have all this stuff in here? We're just going to take this stuff and throw it out,' " she said.

In time, WaMu even began allowing low- or no-documentation option ARMs, piling risk on risk. The loose standards spread through the company like a flu virus.

"I don't think Killinger intentionally set out to cut corners," said one senior executive who spoke on condition of anonymity. "But he certainly created an atmosphere in which doing the easy thing rather than the hard thing was OK."

Even the most notorious murder case of the 1990s made a cameo appearance, as Chapman learned in early 2007.

"Someone in Florida had made a second-mortgage loan to O.J. Simpson, and I just about blew my top, because there was this huge judgment against him from his wife's parents," she recalled. Simpson had been acquitted of killing his wife Nicole and her friend but was later found liable for their deaths in a civil lawsuit; that judgment took precedence over other debts, such as if Simpson defaulted on his WaMu loan.

"When I asked how we could possibly foreclose on it, they said there was a letter in the file from O.J. Simpson saying 'the judgment is no good, because I didn't do it.' "

As standards eroded, WaMu's option-ARM volume exploded — from less than $5 billion in the first quarter of 2003 to $19.6 billion in the second quarter of 2005. WaMu bundled many of its option ARMs into securities as fast as they could be written and sold them to investors, who thought the higher yields justified the added risk.

"(Chief operating officer Stephen) Rotella told me they could sell (option ARMs) off for four times what they could get for fixed-rate loans," said Golon, the former loan consultant. "There was a class of willing buyers for these out there who wanted more risk."

Over at Long Beach Mortgage, the subprime unit was making a lot of 2/28 and 3/27 ARMs, in which the interest rate was fixed for two or three years but floated afterward.

"They were just nasty products — just awful for the consumers — and even at that relatively early date they were performing badly," Chapman said.

In fact, in the 10 cities with the worst foreclosure rates on less-than-prime loans from 2005 to 2007, Long Beach Mortgage had the highest failure rate in eight of them, according to an analysis last year by the federal Office of the Comptroller of the Currency. Its dismal performance included 22 percent in Miami, 41 percent in Sacramento and 54 percent in Cleveland.

Overall, 34.1 percent of WaMu subprime loans went into foreclosure in those 10 markets — more than three times the 10.2 percent rate of archrival Countrywide.

What controls?

As WaMu was weakening its lending standards, it was making sure its underwriters and credit-risk managers wouldn't get in the way.

In an internal newsletter dated Oct. 31, 2005, and obtained by The Seattle Times, risk managers were told they needed to "shift (their) ways of thinking" away from acting as a "regulatory burden" on the company's lending operations and toward being a "customer service" that supported WaMu's five-year growth plan.

Risk managers were to rely less on examining borrowers' documentation individually and more on automated processes, Melissa Martinez, WaMu's chief compliance and risk oversight officer, wrote in the memo.

Soon after, WaMu's risk managers were called to an "all-hands" meeting at the company's posh new conference center near Seattle-Tacoma International Airport. Dale George, a former senior credit-risk officer in Irvine, Calif., recalled that Martinez emphasized "the softer side of risk management" at the meeting.

"The whole tone it set was that 'Maybe the next file I review I should pull back, hold off on downgrading (a loan), not take a sharp pencil to what production was doing,' " he said.

"They weren't going to have risk management get in the way of what they wanted to do, which was basically lend the customers more money."

And as WaMu was loading up on option ARMs and other exotic loans, the computer model it used to determine how risky its portfolio was had not been updated to fully take such loans into account.

An internal "Corporate Risk Oversight Report," dated September 2005, noted that the model's ability to predict losses "is untested on products with the potential to negatively amortize" — that is, products like the option ARM.

"Given recent production and interest rate trends," the report continued, "negative amortization is a major and growing risk factor in our portfolio." It recommended that the model be tested to make sure it predicted higher losses from negative-amortization loans, especially in times of economic stress.

In response, WaMu managers said the model had been tested on historical loan data, including option ARMs, from 1999 through 2004, and that the only action needed was to clarify the model's documentation.

However, for most of that period option ARMs were a relatively small part of WaMu's loan mix, and they weren't marketed to the broad range of customers that they ultimately were. In fact, once the housing bubble popped the failure rate on option ARMs rose rapidly, and WaMu had to set aside billions more than originally planned to offset those losses.

WaMu also has been accused, by individuals as well as New York Attorney General Andrew Cuomo, of pressuring appraisers — its own and outside contractors — to inflate the value of real estate.

Inflated appraisals meant WaMu could write bigger loans against a given property — sticking borrowers with bigger payments in the process. They also meant a given loan amount would be a smaller percentage of the home's appraised value, making the loan appear less risky.

The unraveling

Even when Wall Street's appetite for mortgages knew no bounds, WaMu kept many of the riskiest loans on its own books — boosting short-term profits but giving it far greater direct exposure to the eventual meltdown than competitors such as Chase and Wells Fargo.

Beginning in 2007, those high-risk loans went sour so quickly and in such volume that WaMu couldn't keep up.

Banks have to set aside money to offset loans they expect to go bad. When more loans do so than anticipated, the bank has to add more money to its loss reserve — cutting into profits.

At the end of 2007, $6.1 billion of WaMu's loans were in "nonaccrual" — bank-speak meaning that WaMu no longer expected to get all the money due it. Over the course of that year, WaMu set aside $3.1 billion for loan losses and posted a $67 million loss, its first in decades.

By mid-2008, WaMu's problem loans had ballooned to $9.7 billion. The bank had to set aside nearly that much to cover losses, and it lost a staggering $7.9 billion in the first half of the year alone.

In effect, WaMu had run through the billions of dollars it raised that spring from outside investors — not in building the business, but in shoveling cash into the hole it had dug for itself. And no one could tell how much deeper the hole would get.

WaMu's shaky condition spooked depositors, who began withdrawing large sums in July and August 2008. The run eased in late August but reignited the next month, after Killinger was fired and rumors were rife that WaMu would be sold or shut down.

More than $17 billion flew out the door between Sept. 5 and 25, when federal regulators finally pulled the plug on Killinger's dream of a banking Wal-Mart.

In the end, said Bill Longbrake, WaMu's longtime chief financial officer, the bank failed because its leaders abandoned its historical balance between growth and prudence.

"You have to be willing, when the external world is haywire, to lose market share and profits," he said. "They could have stepped back." "

http://seattletimes.nwsource.com/html/businesstechnology/20101
31911_wamu25.html

Bill Longbrake = mole or no mole

(I don't think he has been accused of being a mole.)

[JohnnyWinter]

Part two | WaMu: Hometown bank turned predatory

"Through high-risk and overpriced loans, WaMu became one of the nation's biggest predatory lenders. The strategy eventually failed, bringing down the bank and costing thousands of borrowers their homes.


Second of two parts

For decades, Washington Mutual lived up to its image as a staid, straight-laced Seattle institution. Its motto: "The Friend of the Family."

By the time WaMu made history last year as the nation's biggest bank failure, it bore no resemblance to this homey image.

What few people knew was that bank executives crafted a radical new business strategy in 2003 that was intended to boost profits. The new WaMu used huge sales commissions and misleading marketing to hawk risky and overpriced loans to borrowers.

In short, WaMu became one of the nation's biggest predatory lenders.

The strategy eventually failed, not only bringing down Washington Mutual but deceiving borrowers, costing thousands their homes.

In particular, the bank promoted as its "signature loan" a complex product known as the option ARM. This adjustable-rate mortgage, much like a credit card, gave borrowers the choice of making low minimum payments. But that option didn't cover the interest and only dug them deeper into debt.

WaMu and its brokers promoted this feature as a benefit for borrowers. Pay less on your mortgage and take that vacation you've always dreamed of.

WaMu lured borrowers with a very low interest rate of about 1 percent. But this "teaser" rate was good only for one month. After that, the option ARM could have far higher interest rates than conventional 30-year fixed-rate loans.

With each minimum payment, unpaid interest piled up. Once the debt grew too large, WaMu canceled the minimum-payment option. You could suddenly get a new bill for two or three times what you had been paying.

Another aspect of the option ARM made it even riskier. Washington Mutual broke the most basic rule of lending, a rule as fundamental as "all lifeguards must be able to swim":

It would give you an option ARM even if you couldn't afford to repay it. You only needed enough income to cover the minimum payments.

Regulators did nothing about it until years later.

Several other top lenders pushed the option ARM, as well, contributing to the mortgage crisis. The White House is pushing for a new consumer regulatory agency to end these sorts of abuses, but the banking lobby and even federal banking regulators are opposed. Banks say more regulation would kill innovation.

"I hated that loan," said Mary Kay Morse, a 20-year veteran at WaMu whose job was to persuade independent brokers to make option ARM loans. "It's just not a good loan. It wasn't good for the borrower."

That loan affected her opinion of WaMu.

"I always felt like I worked for a really honest industry that cared for the borrowers they dealt with," she said. The corporate culture changed to: "We just want to do the most we can to make money for the bank."

WaMu's new strategy

The strategy that eventually would destroy Washington Mutual and devastate so many of its borrowers was first presented publicly in a 487-seat auditorium in Manhattan's theater district on Dec. 9, 2003.

Chief Executive Officer Kerry Killinger stood before an audience of Wall Street professionals on "Investors Day" and spoke of the need for bold change.

"The environment that we are in today is more challenging than I have seen in several quarters," Killinger said, "and that's been particularly paramount in the mortgage space."

Common wisdom holds that the mortgage meltdown began in 2007. But in fact, serious trouble was brewing in 2003.

The Federal Reserve, led by Alan Greenspan, had aggressively cut interest rates starting in 2001 to calm the economic tremors of the dot-com bust and the Sept. 11 terrorist attacks.

Rates on 30-year loans, which had hovered around 7.5 percent, tumbled to 5.25 percent by June 2003. Americans pounced on the falling rates to buy new homes or refinance costlier loans. The massive surge in lending stoked Washington Mutual's profits.

July was a turning point. Rates began creeping up, sending borrowers scurrying to lock in before rates went higher. The mortgage market was peaking.

As demand waned, lenders tried to entice business by slashing profit margins on conventional mortgages, such as the 30-year fixed. WaMu's chief business was making home loans, yet it lost money on that segment in the third quarter of 2003.

By November, WaMu had eliminated 4,500 full-time jobs in home lending and ousted the division head. By year's end, its mortgage business had shrunk with alarming speed, down by about half from the summer.

After Killinger finished speaking, Chief Financial Officer Tom Casey got up and presented WaMu's solution.

WaMu had other types of loans, such as subprime and home-equity lines of credit, that remained highly profitable. He noted there was even a specialty loan for borrowers with good credit that remained lucrative, the option ARM.

As Casey explained it, the bank recently had beefed up its commissions and retrained its sales force to push option ARMs. In just the past few months, they had climbed from 15 to 35 percent of its mortgage business.

The loan — mind-numbingly complex and highly risky for both the bank and its customers — originally was created for the savviest and most risk-tolerant of borrowers.

When Casey took questions, none of these highly paid professionals asked an important question: Why would the average customer want a loan so risky, costly and hard to understand?

"I felt totally duped"

Usually, Bob Houk's wife handled the family's money matters. But after being diagnosed with a brain tumor, she was in and out of the hospital, so he took over. In late 2006, he received a postcard with WaMu's logo on it.

Houk already had a 30-year WaMu mortgage at a fixed rate of 4.6 percent. But the postcard promised to lower the monthly payments on their Bainbridge Island home with an adjustable-rate mortgage starting at only 1 percent interest.

He liked the idea of cutting expenses. A son was in college, his wife was on disability from her job as a nurse, and Houk, a physician assistant at Group Health, worked only part time to be at her side.

Houk called the number on the card, reached an independent mortgage broker in California, and made all the arrangements over the phone. Soon someone came to his house with papers to sign. Houk was impressed at how easy the process was.

But a couple of months later, Houk noticed something on his monthly statement that gave him a sick feeling. Instead of one low monthly payment, there were now options. His minimum monthly payment of only $1,018 was there. But there were also higher-priced options for paying interest only or for paying interest and principal. Just covering the interest that month would cost him about $1,000 more.

The 1 percent interest rate Houk thought he was getting was only good for the first month. It had reset to 7.4 percent, nearly 3 percentage points above his previous WaMu loan. This was buried in the fine print in a sheaf of legal documents he had signed.

"Who in their right mind would give up a 4.6 percent loan?" Houk said. "I felt totally duped."

Houk said he called Washington Mutual, but the woman he talked to said nothing could be done. WaMu just gets the loan from the broker, he recalled her saying, so the bank's not responsible.

To drum up customers for these overpriced loans, WaMu offered hefty commissions to its sales force.

Loan officers working inside WaMu were rewarded with higher commissions for signing up a borrower for an option ARM rather than a conventional loan.

But WaMu made the vast majority of its option ARMs through its network of independent mortgage brokers. They worked in a loosely regulated industry. In many states, the job required no education, no background check and no oversight. While there are reputable brokers, the industry suddenly attracted a motley crew, who could make six figures in a year in commissions.

WaMu did not reward brokers for getting its customers the best deal. Just the opposite. The worse the terms were for borrowers, the more WaMu paid the brokers.

A WaMu daily rate sheet obtained by The Seattle Times shows how lavish the rewards could be. On an option ARM, WaMu would reward brokers as much as 3 percent of the loan amount — more than triple the standard commission at the time.

Brokers would get an additional point — 1 percent of the loan — for roughly every half-point in higher interest the borrower paid. So the broker would get 3 percent of the loan if he could get the borrower to pay 1.5 percent above the market rate.

WaMu could afford to pay such high commissions, called "yield spread premiums," because the money actually came from the borrower in the form of higher interest rates and prepayment penalties.

Houk's broker, for example, got paid a commission of $9,498 on a $316,000 loan, according to loan documents. Houk didn't know he was paying a huge commission. The broker also charged him a $795 origination fee.

Houk was in the dark because federal disclosure requirements for these loans are lax. In fact, of the nearly two dozen WaMu customers with option ARMs interviewed by The Times, none knew about the yield spread premium or that brokers were rewarded for locking them into loans that were costlier than they needed to be.

Fooled by the loan

Even business-savvy borrowers could get fooled by the option ARM. As an owner of an advertising business in North Miami Beach, Fla., John Terboss wanted to keep his costs down. So he took out a WaMu option ARM and paid $2,000 a month.

Terboss grew tired of his principal going up, but he couldn't afford the loan's interest-only payment of $4,100. Responding to a flier in the mail, Terboss called a broker who promised a new $720,000 option ARM from WaMu with an interest-only payment of $3,200 a month. Terboss kept the letter from the broker making this promise.

But what was promised was impossible. Terboss already had a WaMu option ARM loan. Paying the loan off and getting a new one put Terboss right back where he started. The only ones to benefit from a refinance were the broker and the bank.

Only later, when told by The Seattle Times, did Terboss learn the broker was paid an $18,000 commission on the loan.

When the monthly bill came, Terboss was stunned to discover it was $4,700 — $1,500 more than promised.

Terboss called the broker and was told there must have been a misunderstanding about how WaMu calculated its payments. Terboss called WaMu but said the bank refused to talk to him.

"Who in their right mind would refinance with the same bank to pay [$1,500] a month more?" Terboss asked.

Finally, the broker offered to refinance Terboss' loan again into a loan from a different lender. But there was a problem. WaMu charged stiff prepayment penalties for up to three years on its option ARMs. The penalties helped cover the yield spread premiums and discouraged shellshocked borrowers from finding better deals.

Terboss decided he had no choice. Within five months, he paid the $21,000 prepayment penalty and refinanced to a Citibank loan.

"We're not naive to business," Terboss said. "This is heartbreaking that we got caught like this."

Borrowers didn't know when they were getting cheated because the loan was so difficult to understand, said Renee Larsen, a former WaMu loan officer in Florida. She blames WaMu for putting trusting borrowers in such a bind.

Disturbed by getting so many complaints from option ARM customers, she contacted the Florida Attorney General's Office and turned in her own bank.

"I feel like they perpetuated fraud with my help," Larsen said. "It makes me very angry."

"Reckless and immoral"

In late 2005, federal banking regulators tried to rein in option ARM abuses. They proposed better disclosure to borrowers and later asked WaMu and others to stop lending to people who couldn't afford to repay. Industry lobbyists resisted the proposals. The regulators issued an "industry guidance" that asked banks to make better efforts to treat borrowers fairly.

Fay Chapman, WaMu's general counsel, recalled dissension about the option ARM at the executive level, but "the majority thought they were a great product and the majority won."

Chapman thinks the option ARM was a good product for the right borrower. But as the loan became so profitable, she said, "Mortgage brokers put people into the product who shouldn't have been."

Seattle mortgage broker Kathryn Keller said it was WaMu's decision to try to put everybody into a specialty loan designed for savvy speculators. "I think that was reckless and immoral," Keller said.

The option ARM was such a bad deal for borrowers, says Chuck Cross, a former Washington state regulator who led investigations of predatory lending by Household Finance and Ameriquest, that the obvious question is: Why would anyone who understood it want one?

"The only way they [option ARMs] could be sold was not to give the borrowers all the information," Cross said.

Washington Mutual was not alone in mass marketing the option ARM and paying huge premiums to brokers for costlier loans. Lending giant Countrywide, Golden West Financial and others aggressively pushed them.

Last year, Countrywide agreed to pay $8.7 billion to resolve charges brought by several states' attorneys general, including Washington's, in part for engaging in predatory lending with its option ARM. The lawsuit accused Countrywide of giving option ARMs to borrowers who couldn't understand them or repay them.

Bad loans on the books

The industry's defense for the option ARM, even today, is that since home prices were rising so quickly then, borrowers could go deeper into debt and still come out ahead.

Of course, if housing prices actually fell, the results would be disastrous. You couldn't refinance your loan. You'd lose money selling your house. And if all you could afford was the option ARM's minimum monthly payment, you faced certain foreclosure when the loan reset.

It was for these reasons that Wells Fargo said it refused to make option ARMs.

Several former WaMu executives interviewed by The Times said no one could have foreseen the housing bubble at the time. But someone at WaMu did: Killinger, the CEO.

In June 2005, he told Wall Street professionals of a new challenge facing WaMu's mortgage business: "We have a significantly above-average risk in housing today. ... Overall, the price appreciation has been at a very high level and, I believe, an unsustainable level."

Translation: Home prices can't keep going up.

The prospect of a housing recession made the option ARM too risky for WaMu to keep on its own books because borrowers might default in large numbers. But, as Killinger explained, there was a solution: WaMu would continue to make the loans, but would bundle them into mortgage-backed securities and sell them to big investors. Soon, Washington Mutual was selling nearly all of its new option ARMs.

But by July 2007, across the industry, big investors became alarmed by how many borrowers were not paying off their loans, and stopped buying packages of option ARMs. Seemingly overnight, Washington Mutual got stuck with billions in risky loans it had intended to sell.

The number of bad loans on WaMu's books soared, scaring big depositors whose accounts weren't fully insured.

When WaMu went under, the bad option ARM loans in its portfolio had nearly quintupled in the last 12 months to $3.2 billion.

When a run on the bank ignited in September last year, regulators shut down WaMu and sold its assets to JP Morgan Chase.

Killinger declined to respond to specific questions from The Seattle Times, but he said that his strategy in 2003 was meant to protect the bank from a looming housing bubble.

A struggle for reform

Today, the biggest option ARM players — Washington Mutual, Countrywide, IndyMac and Wachovia — are out of business or have been sold. The loan isn't used, but is still not against the rules.

Banks paying mortgage brokers more for putting borrowers into higher-rate loans continues to be the standard practice today. The Federal Reserve Board has proposed rules that could curb this practice. The Fed has also proposed rules for improving disclosure to borrowers on option ARM loans.

Meanwhile, the FBI is investigating whether Washington Mutual executives broke criminal laws by deceiving shareholders about the bank's health. As for now, there is no known federal investigation under way for deceiving borrowers."

http://seattletimes.nwsource.com/html/businesstechnology/2010136506_wamu26.html?prmid=obinsite

[JohnnyWinter]

"JPMorgan Chase to hire 1,200"

"The bank says it plans to aggressively expand its mortgage lending business as signs of stability in the housing market emerge.

NEW YORK (CNNMoney.com) -- JPMorgan & Chase announced plans Tuesday to hire 1,200 mortgage loan officers as the bank moves to expand its home loan business.

"We have invested in new systems, aggressively grown our capacity and now are looking to increase our sales force," Dave Lowman, head of home lending at Chase, said in a statement.

The New York-based bank said the hiring spree, which will be complete at the end of 2010, will grow its home loan sales force by 60%.

New loan officers will be hired in 23 states -- including California, Florida and Texas and key cities such as New York and Chicago.

The new loan officers will work with personal bankers and referral sources, such as real estate agents and builders, as well as with their own network of homeowners.

Lowman said the goal is to ensure that Chase branches are adequately staffed and that the bank is "well positioned when the housing market fully recovers."

While the housing market remains weak, home sales have begun to pick up in many parts of the country as buyers take advantage of rock-bottom prices and attractive mortgage rates.

"It's not surprising to see JPMorgan doing what it's doing," said Mike Larson, a housing market analyst at Weiss Research.

Chase weathered the downturn in the housing market better than rival mortgage lenders Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500), and has emerged as one of the dominant player in the home loan business.

"With so many competitors falling by the wayside, I think JPMorgan sees the opportunity to grab market share as the housing market appears to be stabilizing," Larson said.

Chase (JPM, Fortune 500) originated $37.1 billion in mortgages in the last quarter through more than 5,100 branches nationwide. The company also services $1.1 trillion of home loans.

First Published: November 10, 2009: 2:11 PM ET"

http://money.cnn.com/2009/11/10/news/economy/JPMorgan_mortgage_loan_officers/index.htm


Heroes adding jobs in a bad economy while at the same time training mortgage brokers how to do their job ethically and morally unlike the training given to prior WaMu loan officers.

[JohnnyWinter]

JP Morgan CEO Jamie Dimon eats banks for breakfast

Wall Street's new Master of the Universe is a grandson of Greek immigrants straight out of Queens.

Jamie Dimon, 53, is CEO of JPMorgan Chase, a man of big bold strokes who is betting that he can turn bank and brokerage junk into solid gold for his firm and his reputation.

Just hours after lender Washington Mutual went bellyup Thursday in the biggest bank failure in history, Chase gobbled it up. There were others interested in WaMu - Citigroup and Bank of America among them - but Dimon won out with a $1.9 billion bid.


The WaMu deal includes major debt - but monster assets as well, including WaMu's 2,200 retail branches around the country and cash deposits.

It was Dimon's second big swing at the fastball of busted financial services companies in the last six months.

In March, Chase swallowed investment bank Bear Stearns and its dazzling midtown skyscraper at what analysts consider a bargain basement price, $10 a share.

Dimon's play is that with shrewd management, big cuts, sales of assets, and some help from the government, the Bear Stearns and WaMu investments will be worth more than 10 times what Chase paid for them in a few years.

Dimon has done just that - with mergers and acquisitions - more than a dozen times over the last 25 years.

In fact, he's been at it since boyhood.



His grandfather, who emigrated from Smyrna, Greece, to Queens, was a stockbroker who took Dimon's father Theodore in as a partner.

While he was in school, Jamie Dimon worked during the summertime at their New York office.

After graduating from Harvard Business School in 1982, Dimon hooked up with a family friend, Sanford Weill.

Starting with a small lender - Commercial Credit Corp. - they built an empire, acquiring Primerica, Salomon Smith Barney, Traveler Insurance and Shearson, eventually buying Citicorp.

The risk now is that Dimon miscalculated in a foundering economy, that he paid too much for WaMu's portfolio of mortgages, loans and debt and that all will fall in value in a nose-diving housing market.

However, with those acquisitions, Chase is already in a virtual tie with Bank of America as the biggest bank in the United States with an eye-popping $1 trillion in cash deposits.


And Dimon, who likes fine wine in addition to the hurly-burly of high stakes mergers, is probably the No. 1 man in U.S. finance.

"He is a great deal maker, just brilliant, a guy who pays tremendous attention to detail, to the numbers, and he is terrific at valuing assets," said a manager at rival bank Citigroup, who asked to have his name withheld.

Not everyone on Wall Street loves him.

"He's taking advantage of other people's pain and he's ruthless," said a principal at Morgan Stanley, referring to the fact that countless shareholders of Bear Stearns lost almost all of their investments while WaMu shareholders were totally wiped out, not to mention the job losses.

Still, investors and mutual fund managers quickly applauded Dimon and the WaMu deal, sending JP Morgan's shares up 11% yesterday.

Dimon wasn't available for comment yesterday, according to a JPMorgan spokesman, who added, "This is a very busy time."

Busy, in fact, is Dimon's style - along with secrecy and fastidious attention to numbers and balance sheets.

Dimon and his top aides have been quietly going over WaMu's books and talking with the bank's top executives since March, the analysts said.

"That's the way Jamie works," said the Citigroup manager. "It looks like he makes a big move in a day, but in fact, he's been studying it and planning for months." "


http://www.nydailynews.com/money/2008/09/27/2008-09-27_untitled__dimon27m-1.html



That's pretty much Dimon in a nutshell, and imo, he's hungry for WMB NOLs, and he will get them.

crunch crunch CRUNCH