Tuesday, April 13, 2010; A14
The mortgage lending operations of Washington Mutual, the biggest U.S. bank ever to fail, were threaded through with fraud and the bank's own inquiries were unable to stop the deceptive practices, according to a report by Senate investigators.
The investigators said the bank's pay system rewarded loan officers for the volume and speed of the subprime mortgage loans on which they closed. Bonuses even went to loan officers who overcharged borrowers or levied stiff penalties for prepayment, according to the report being released Tuesday by the investigative panel of the Senate Homeland Security and Governmental Affairs Committee.
Chairman Carl M. Levin (D-Mich.) said Monday that the panel will decide after hearings this week whether to make a formal referral to the Justice Department for possible criminal prosecution. Justice, the FBI and the Securities and Exchange Commission opened investigations of Seattle-based Washington Mutual soon after its collapse in September 2008.
The report said that the company's 's top producers -- loan officers and sales executives who made high-risk loans or packaged them into securities for sale to Wall Street -- were eligible for the bank's President's Club, with trips to swank resorts.
Fueled by the housing boom, Washington Mutual's sales to investors of packaged subprime mortgage securities increased from $2.5 billion in 2000 to $29 billion in 2006. The 119-year-old thrift, with $307 billion in assets, was seized by regulators in September 2008 and was sold to J.P. Morgan Chase for $1.9 billion in a deal brokered by the Federal Deposit Insurance Corp.
Jennifer Zuccarelli, a spokeswoman for J.P. Morgan Chase, declined to comment on the subcommittee report.
WaMu was one of the biggest issuers of so-called option-ARM mortgages, which allowed borrowers to make payments so low that loan debt actually increased every month.
The Senate subcommittee investigated the Washington Mutual failure for a year and a half, focusing on the thrift as a case study for the financial crisis that brought the recession and the loss of jobs or homes for millions of Americans. The panel is scheduled to hold hearings Tuesday and Friday to take testimony from former senior Washington Mutual executives, including former chief executive Kerry Killinger, and former and current federal regulators.
Washington Mutual "was one of the worst," Levin told reporters Monday. "This was a Main Street bank that got taken in by these Wall Street profits that were offered to it."
Investors who bought mortgage securities from Washington Mutual were not informed of the fraudulent practices, the Senate investigators found. The company "dumped the polluted water" of toxic mortgage securities into the stream of the U.S. financial system, Levin said.
In some cases, sales associates in Washington Mutual offices in California fabricated loan documents, cutting and pasting false names on borrowers' bank statements. The company's own investigation in 2005, three years before the bank collapsed, found that two top-producing offices -- in Downey and Montebello, Calif. -- had levels of fraud exceeding 58 percent and 83 percent of the loans. Employees violated the bank's policies on verifying borrowers' qualifications and reviewing loans.
Washington Mutual was repeatedly criticized over the years by its internal auditors and federal regulators for sloppy lending that resulted in high default rates by borrowers, according to the report. Violations were so serious that in 2007, Washington Mutual closed its big affiliate Long Beach Mortgage as a separate entity and took over its subprime lending operations.
Senior executives of the bank were aware of the prevalence of fraud, the Senate investigators found.
In late 2006, Washington Mutual's primary regulator, the U.S. Office of Thrift Supervision, allowed the bank an additional year to comply with stricter guidelines for issuing subprime loans.
According to an internal bank e-mail cited in the report, Washington Mutual would have lost about a third of the volume of its subprime loans if it applied the new requirements.