The Seattle Times is running a terrific two-part series (Part I, Part II) on the disastrous misfortunes of Washington Mutual that is must reading for anyone still inclined to pick at the carcass of the great housing bust. (Found via the Big Picture.)
Longtime HTWW readers will recall that back when the financial crisis was just getting rolling, I took some pride in the fact that I personally was a customer of two of the most catastrophically imploding financial institutions in the U.S. My bank was Washington Mutual and my mortgage payments went to Countrywide. But as the years go by and even more details emerge as to the level of greed and incompetence that afflicted these two private-sector icons, my pride is veering perilously close to overweening overload.
The Seattle Times' Drew DeSilver tells us, for example, that "WaMu's subprime home loans failed at the highest rates in nation," and that "In the 10 hardest-hit cities, more than a third of WaMu subprime loans went into foreclosure."
How bad a bank was WaMu? Listen to Fay Chapman, WaMu's chief legal officer from 1997 to 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.'"
The bank made a loan to O.J. The words "epic fail" hardly do justice to the tale of WaMu.
The story of WaMu is in large part the story of the Option-ARM -- adjustable rate mortgages that entice consumers with very low initial payments -- a loan that in retrospect seems almost purposely designed to get borrowers into deep trouble. In the short run, Option-ARMs were highly profitable for WaMu, so the bank paid mortgage brokers huge commissions on every sale, and instructed staff to go easy on the due diligence on that key question: Could the borrower feasibly pay back the loan? When the housing market blew up, WaMu found it could no longer sell off securitized packages of Option-ARM loans to Wall Street, and its business model collapsed.
A Consumer Financial Protection Agency, in theory, would be given the task of protecting borrowers from toxic mortgage products such as the Option-ARM. But the (still surviving) banks are opposed to such an idea. David Heath notes:
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.
But the lesson to be drawn from WaMu is that a Consumer Financial Protection Agency wouldn't just protect consumers -- it would also protect banks ... from killing themselves with their own innovations.