Tuesday, April 13, 2010

WaMu-CRA Link Pushed Down the Memory Hole

Washington Mutual, which at one time was the sixth-largest depository institution in the U.S., became the biggest bank failure in U.S. history when it was seized in September 2008 and sold to J.P. Morgan Chase & Co. Our legislators are now trying to figure out what happened, but still mystified: 'Details Scarce on WaMu Failure' reads today's WSJ headline. In another WSJ piece, Senator Carl Levin notes:
WaMu had poor policies, poor controls, inadequate oversight of its loans, it turned out toxic mortgages that sunk the bank, devastated homeowners and polluted the financial system like a poison

But back when the seeds of the recession were being sown WaMu was 'best practices'. The CRA gave activists veto power over bank mergers, so in 2003, when they took over Dime Bank, they bragged about pledging $375 billion towards funding low income borrowers at a time when their total assets were only $250B. They won the 2003 CRA Community Impact Award for such profligacy. The only way to shove that much crap thru is to lower underwriting standards. Thus, WaMu accepted a picture of a mariachi singer in his mariachi outfit as the sole documentation of his purported $100k income.

James Lockhart, an executive at the Fannie Mae regulator notes in his written testimony that Fannie and Freddie were very concernded with meeting 'affordable housing goals' (newspeak for giving loans to people who can't afford them), and made sure they met them. Further, they were actively appeasing Countrywide, who was a major customer of Fannie and Freddie.

It is important to remember that government legislators and regulators were encouraging reckless subprime lending the whole way down. Maybe they didn't cause the crisis, or they were not even one of the larger of several causes, but they were not arguing for stricter underwriting standards during the height of subprime lunacy. Even today, the only place you can get a home loan with only 3.5% down payment is from the government's FHA program.

So, when Armando Falcon, former chief regulator of Fannie and Freddie, who was on Capitol Hill Monday, suggests his problem was a lack of resources, remember, they had over 300 people looking at only two institutions, and were not saying anything about the novel, lower underwriting standards (eg, income verification, credit history, down payments, etc.). If they had 3000 people, they would not have done anything about the weakest link in Fannie's subprime initiatives.

Yet, the head of the Fannie and Freddie regulator continues to insist that "affordable housing goals" had absolutely nothing to do with their failure, because "The firms would not engage in any activity, goal fulfilling or otherwise, unless there was a profit to be made. Fannie and Freddie invested in subprime and Alt A mortgages in order to increase profits and regain market share." Further, "OFHEO made it very clear to both enterprises that safety and soundness was always a higher priority than the affordable housing goals." Yet there is no evidence they ever mentioned underwriting standards prior to 2007 as a concern. He seems to be saying that because these activities made money prior to 2007, and everyone was doing it, it was not risky. That's like saying you are against hangovers, but saw no evidence of such effects while you were on your seventh beer--you were just keeping up--so your strategy was unrelated to the ensuing hangover.


Don said...

I'm trying to understand the logic of this. You have a Govt Program meant to incentivize loans to people who aren't able to get them. The incentive comes in the form of a subsidy or guarantee. That is an explicit govt program with explicit risks. People might not agree with it, but that's the program.

How, then, does it make sense for a lender to act as if it has a subsidy or guarantee, when it doesn't? And if the program is intended to get loans to people that the private sector isn't lending to, who are these private sector lenders lending to?

What am I missing?

Don the libertarian Democrat

Patrick R. Sullivan said...

Don, banks were lending to people who met traditional criteria for being able to repay those loans. The govt. got the bright idea that that was secret racial discrimination, so they mandated that lenders loosen their standards.

It wasn't subsidies, it was threats; do it our way, or else.

discount mortgage leads said...

I actually loved WAMU they were the only bank that seemed to respect their customers/investors imo

I remember they had a personal banker that gave me a nice deal on some discount mortgage leads he later helped me with optimizing my business

asian floor lamps said...

I miss wamu chase just doesn't cut it for me i've changed over to a credit union myself

Anonymous said...

Pat: It was greed and a desire for rapid growth, not fear of government that made WAMU take these risks. Before the collapse sup-prime mortgages were the most profitable segment of the market. If you wanted to aggresively grow your business, it was a lot easier targeting the "growth market" in sub-prime rather than take market share from competitors.
To say it was the government shoving it down their throat is disingenuous, as the vast majority of banks were able to satisfy CRA without imperiling their balance sheet.