Yesterday I tuned in to CSPAN to watch Washington Mutual execs answer to the Senate Homeland Security and Governmental Affairs subcommittee about the failure of Washington Mutual. There are several things I found interesting…former CEO Killinger’s whining about WaMU’s unfair treatment of the banks dissolve and lack of taking any accountability as the leader of the bank for the past 18 years is not one of them. The testimony is very timely as our Congress is looking at financial reform, I hope they pay attention to what is being revealed.
Here are some points I find interesting:
From the Associated Press:
WaMu’s pay system rewarded loan officers for the volume of loans they closed on. Extra bonuses even went to loan officers who overcharged borrowers on their loans or levied stiff penalties for prepayment, according to the report of the Senate panel’s investigation.
“Washington Mutual engaged in lending practices that created a mortgage time bomb,” Levin said. “Because volume and speed were king, loan quality fell by the wayside.” …
In some cases, sales associates in WaMu offices in California fabricated loan documents, cutting and pasting false names on borrowers’ bank statements, the panel found. The company’s own probe 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…”
Currently the Federal Reserve is looking at changing how mortgage originators are compensated. They do not want compensation to be based in any part of the terms of the loan (such as the loan amount). This has caused some banks to change to a reward system based on volume (as Washington Mutual did) instead of the merits of each individual loan.
From Senator Levin’s opening statement:
“Washington Mutual and Long Beach compensated their loan officers and processors for loan volume and speed over loan quality. Loan officers were also paid more for overcharging borrowers – obtaining higher interest rates or more points than called for in the loan pricing set out in the bank’s rate sheets – and were paid more for including stiff prepayment penalties…”
The difference between mortgage bankers and mortgage brokers compensation is that mortgage brokers are the only one’s who are required to disclose how they’re compensated on the “back end” (yield spread premium).
James Vanasek, former Chief Credit Officer and Chief Risk Officer seemed relieved to have a chance to tell the subcommittee how his attempts to right Washington Mutual were ignored from management. From his submitted testimony, he feels that Washington Mutuals tagline sent the wrong message to their mortgage originators: the “Power of Yes” absolutely needed to be balanced with “The Wisdom of No.”
“Because of the compensation systems rewarding volume vs quality and the independent structure of the loan originators, I am confident that at times borrowers were coached to fill out applications with overstated incomes or net worth adjusted to meet the minimum underwriting policy requirements. Catching this kind of fraud was difficult at best and required the support of line management. Not surprisingly, Loan originators constantly threatened to quit and go to Countrywide or elsewhere if their loan applications were not approved.”
Washington Mutual was one of the pioneers of the option ARM, offering this product as far back as the 80s (per Killinger’s submitted testimony) I remember back in the 90’s participating with a Washington Mutual loan originator who was presenting the product to a group of investors. This use of this product made more sense than how they (and many others) wound up pushing it.
Our company actually banned this product and I know we lost business by not providing option ARMs if we could not convince the borrower to use a more fixed loan. Account executives from every bank who had an option ARM would be sure to let us mortgage originators know just how much income we were losing. I was (and am) okay with that.
From Senator Levin’s opening statement:
“WaMu was eager to steer borrowers to Option ARMs. Because of the gain from their sale, the loans were profitable for the bank, and because of the compensation incentives, they were profitable for mortgage brokers and loan officers. In 2003, WaMu held focus groups with borrowers, loan officers, and mortgage brokers to determine how to push the product. A 2003 report summarizing the focus group research stated: “Few participants fully understood the Option ARM. … Participants generally chose an Option ARM because it was recommended to them by their Loan Consultant….
To increase Option ARM sales, WaMu increased the compensation paid to employees and outside mortgage brokers for the loans, and allowed borrowers to qualify for the loan [based on a minimum payment]…”
From the LA Times:
Adding to the problems, WaMu and Long Beach Mortgage frequently steered borrowers who qualified for prime loans into subprime loans, the subcommittee found.
This post is all ready too long to discuss Long Beach Mortgage…but I can’t help but share this point I’ve tried making several times about what happened time and time again with Account Executives from banks (not just WaMu) who called on mortgage brokers to push the bank product (from Huffington Post):
“Within Long Beach Mortgage, former employees described how some sales people taught brokers how to break the rules, including using fake and forged documents.”
I’m glad to say I never sent a loan to Long Beach Mortgage and somehow I managed to only send one loan to Washington Mutual (which was an interesting story in its own).
And I would like to say that consumers can feel better about selecting a mortgage originator today, thanks to the SAFE Act, however mortgage originators who work for a depository bank (such as Washington Mutual) are not required to be licensed, they’re only required to be registered (you can thank Congress for that).
Rhonda, great post. I wish I could have seen or at least listened to the testimony. I imagine there was a little bit of squirming when asked about the fraud. Especially troublesome when asked about knowing about the fraud on loans, and continuing to sell them on the secondary as well as no discipline of top LO’s that they knew committed fraud – heard some recap on radio.
thanks, Jeremiah. I was troubled by how much Killinger came across as feeling like the victim when he ran WaMU for pretty much their last 18 years… it seems to me they traded fraud for greed.
It’s also very interesting to me because of how mortgage originators compensation is in the process of being changed… I understand that Washington State’s DFI and the Fed is trying to do away with the commission structure which will change things to be more like WaMU’s flawed plan and what Bank of America is touting.
In my opinion, paying mortgage originators based on how much they can close in one month does not encourage quality… Washington Mutual has proven that.
Rhonda- Good post! I hope you will consider this on-thread. It’s my yesterday’s KING5 TV interview about my much earlier dealings with the Old WaMu- a far different place than Kerry Killinger’s go-go place. Jerry
http://www.king5.com/news/business/Watch-Former-WaMu-employees-customers-react-90796984.html
Rhonda- Below is a link to my 3/20/09 RCG Post on the subject with our dialog on Washington Mutual. When it became “WaMu” with “the Power of YES!” ads and customers were addressed as “you guys”, we all should have known what was going on- nicht wahr? (isn’t that so?- a very useful German phrase). Jerry
http://raincityguide.com/2009/03/20/when-it-was-a-mid-century-modern-bank-washington-mutual-served-my-clients-well/
Issues with Washington Mutual began years ago. Killinger was their CEO for the last 18 years… I’m not a fan…I called on a few WaMu loan centers back in the early 90s as a title rep. Not my cup of tea.
Now with Chase, when I go into the branch located in my grocery store, I can barely make a deposit without them trying to steer me to the next level up teller–the mortgage-bank-teller. They try to review all my financials and want to go over my mortgage with me. It’s a joke.
Chase has adopted WaMU’s style in many ways (maybe they were alway this way but I’m just not as familiar w/their banking since they’re new on the west coast): promoting 1% back on your mortgage but if you read the fine print, it’s limited to $500 AND the rate has been higher than the going rate when I price it out… plus their commercials promote wreckless consumer behavior (a lady spending an windfall of cash on an expensive dress and the one with a mother and her daughters deciding the spend more because they get a text showing that they more in their checking/savings account than expected).
Nope, Jerry…I’m not a huge fan of the big banks. They are so deep in our Congressman’s pockets and without campaign reform, we will not see change…they will continue to have too much control our country.
And I don’t care to remember how they once were in the good ol’ days.
Rhonda- As to your:
“Nope, Jerry…I’m not a huge fan of the big banks. They are so deep in our Congressman’s pockets and without campaign reform, we will not see change…they will continue to have too much control of our country.
And I don’t care to remember how they once were in the good ol’ days.”
I’m not a backward looker either. We have to deal with today- (and tomorrow-) while remembering yesterday with the idea of retaining and/or getting back to its good things. And personal service is the only thing a residential architect has to offer his custom home clients
I’m amused when LOs who work for banks say they don’t need to be licensed because they’re all ready regulated… on Friday the regulators for WaMU will be grilled on the hill.
The dirty secret in my market is that the least experienced LOs generally work for large retail banks. None of the top producers with significant books of referral based business ($15-$100+ million year producers) would be caught dead at a retail bank in Chicago. By in large, retail banks have two types of LOs in my market. Newbies and brokers who are on their last stop before eventually leaving the business.
In fact, when the state of Illinois instituted tougher licensing requirements for loan originators, the big banks got them to make a provision for “loan solicitors” instead of loan originators. The solicitor is a watered down license for the call center monkeys and phone officers.
Are bank LOs really called “Loan Solicitors” in Illinois? I think every LO who is Licensed should promote and be proud of their license.
Regular retail bank LOs don’t have to be licensed by the state due to the Fed Charter. However, a lot of the retail like call center based places (quicken, e-loan, etc) use the loan solicitor license so their call center employees don’t have to take the real state licensing test.
Banks don’t like all the licensing provisions because it makes it hard for them to stuff their call centers with $8/hr telemarketing LOs.
Rhonda,
Yesterday I made a deposit at Chase. Told teller it was my first deposit in probably 15 mos. Teller said, good to hear and maybe you should make a plaque out of my deposit slip! It was all good and then she asked if I was interested in any mortgage products and they have a zero down product. I said, well how are those 100% loans doing these days……I have a lot of experience in seeing them real close!
About two weeks ago, my lovely spouse tried to cash a check and they refused because our balance was so low and the check was from “a third party.” Wife says, the “third party” is from “me” and written to me (pay check from operating biz account) and signed by ME. Wife wants to talk to a manager. Manager comes and says you can deposit it, but they won’t cash it. Wife says, then “you are calling me a Liar and a fraud” because the check is signed by me, written by me and produced by me. Why don’t you look at my history and see the types of checks we’ve deposited and cashed here”…..manager comes back and cashes the check.
On a personal and professional level in dealing with Chase in escrow, I can’t see how people do any banking with them. Pathetic.
Tim, do you think any other big bank would be any different? I think they’re all trying to eliminate their mortgage centers (if they haven’t all ready) to be replaced with “mortgage tellers” located in the bank branch. The goals of the tellers are for us to do dumb-ass mortgages or to be advised by inexperienced ‘mortgage-tellers’…we, the consumer, are suppose to trust the big banks because they are looking out for us…they would never take advantage of the consumer.
The banks have such a huge opportunity right now and I think they’re taking it every chance they get.
In the 1990s most loan products were available online to loan originators. One Broker who I was working with showed me the choices on his computer. There were 37 choices for products that I was looking for.
Today there must be thousands of loan products available, and every one would want to make loans, as investments. Giving money away, secured by property, must be highly desirable.
My point has been that banks want the properties they lend on. They make the Notes, sell the Notes, service the loans, foreclose on the property, and continue to manage the asset until it’s liquidated, or rented. There is no down side to the banks.
Banks, today, control the Real Estate market place. They must be holding the largest amount of inventory in history. If they were to rent the properties out they would be making a return on investment. That would of course dilute the market place.
We are in the same FICO world of finance, probably more so, than ever. We, the consumers, need to make that break. Stop borrowing, and figure out how to get banks out of your life.
I agree that in general, many consumers are far too leveraged. My son’s great grandparents could not understand why his dad and I had to get a mortgage to buy our first house in the late 80s… “if you can’t pay cash you can’t afford it” they would say…typically followed with “Rome wasn’t built in a day”.
It will be interesting to see how the spending habits of Americans are changed after going through the Great Recession.
Rhonda- Most of my custom clients over the years have had reasonable size mortgages. They reached the point where they could afford to have me design their dream home by starting small with matching mortgages and trading up over time. Single-digit interest rates allowed them to build equity so they could put their feet on the next rung on the ladder. My point? Not all debt is bad. JG
I totally agree that not all debt is bad… in fact you need to have a balance and I have a few clients where I’ve been advising not to pay additional towards their principal balance of their mortgage right now–it’s more important that for their particular circumstance, they build up their cash reserves. A mistake that I see some people make is put everything they have towards down payment instead of leaving some out–it’s more difficult to get cash out these days.
Rhonda,
I am not a mortgage professional at all but I am hooked on the unfolding mess that is happening before our eyes. Something to try and teach our children and grandchildren for sure. I do have a question about one of the comments outlined in your post:
“Adding to the problems, WaMu and Long Beach Mortgage frequently steered borrowers who qualified for prime loans into subprime loans, the subcommittee found.”
How can someone qualify for a prime loan but end up in a sub-prime loan? I thought by definition someone with bad or no credit was a sub-prime and anyone with good credit was prime? Is there a better explanation of what defines the two?
Thanks!!
Hi John,
I’ve never worked for WaMU… this is referring to how a bank LO (or any unethical LO) would make extra income by convincing a borrower they are “subprime” instead of doing a prime loan for them. The LO would make an incredible amount of money and because they work for a bank–that income on “the back end” would not be disclosed to the borrower (unlike YSP with a mortgage broker).
I actually took a transaction from a bank LO who was working for WaMU who had convinced the borrower they were subprime with a 720 credit score. They did have a small hiccup on their credit report but I was able to get them a prime mortgage with no price hits (we didn’t have the LLPA–risk based pricing at that time). The borrowers were in shock at the difference and couldn’t believe their friend of the family would do this to them.
WaMU’s not the only bank who had a subprime division they would farm loans off too–Countrywide had Full Spectrum. I don’t know if they had the same ugly practice as referenced by the testimony above.
Dealing with an independent Mortgage Originator makes a lot of sense these days. Rhonda- You make a good case for this as the way to go in these WaMu hearings times. How do you get paid and by whom? JG
Jerry, I’m not saying the working with a broker is better than a banker necessarily–I will say that just because the non-mortgage-broker is not disclosing what they’re on paid on the back, doesn’t mean it’s not there.
In fact, perhaps a mortgage banker is not being paid on the back, and the bank is keeping the “back end” and the bank is keeping it for themselves instead of passing it on to the mortgage originator. Apparently this is Bank of America’s new compensation plan–they have their LOs boasting they’re not paid “an overage” yet their rate/fees were slightly higher. It’s my understanding that Bank of America has adopted a compensation plan similar to WaMUs were LO’s are rewarded on a volume basis–a real head scratcher for me since this means LOs need to cram as many transactions as possible to close in a month in order to get an extra “spiff”.
In my opinion, consumers should focus more on what they’re paying by comparing rates and fees instead of the total compensation of what a mortgage originator is receiving.
Jerry, I’ve brokered a loan once in the last 3 years… can’t remember if I priced it with points or without…(whether or not there was YSP to be paid).
I am either paid by the consumer or by the lender/bank. We are a correspondent lender so a majority of our loans are closed in our credit line so we operate more like a bank in that regard–and more like a broker as far as having options for consumers with various lenders.
I would have sent you my incipient West Seattle client but he had already a Wells Fargo Mortgage in place before I met him. JG
Jerry, that’s kind of you. Thanks 🙂
Here’s a a link to a picture of the aforementioned West Seattle home. I took this last week when I was surveying it for the purchaser as to condition, updating and addition possibilities. I’ve done a lot of this- at reasonable cost. JG
http://knol.google.com/k/-/-/246qxuxd260sm/o90moq/p4150038.jpg
Rhonda- As to your “I am either paid by the consumer or by the lender/bank. We are a correspondent lender so a majority of our loans are closed in our credit line so we operate more like a bank in that regard–and more like a broker as far as having options for consumers with various lenders“.
Having financing options for my clients is very important to me and my clients (who are the only ones who pay me- by the hour plus a retainer for my professional architectural services including consultation). JG
Jerry, I WISH I was paid by the hour. What I meant was–how I am (and many mortgage originators are are) paid is impacted by how the consumer wants their mortgage priced. At this moment consumers can opt to pay an origination fee as a closing cost or the loan can be priced with zero points (origination fee/discount points) in which case the loan is priced with “rebate” and the bank/lender pays the origintor.
With the financial reform going on, how LOs are compensated is under great scrutiny. The new Good Faith Estimate designed by HUD will not easily allow a LO to be paid hourly since once we quote an “origination fee” on the GFE it is not suppose to change.
When a mortgage originator is paid based on volume, like WaMU was (and from what I understand) Bank of America LOs are, the volume bonus would be paid on a monthly basis and theoritically not part of a loan cost–in reality, the consumer is paying for that volume bonus too–it’s not coming out of thin air. It’s factored into ALL of the loans.
Hi Rhonda,
Great summary of the hearing. Do you know of any other documented cases of loan origination compensation based on volume?
Thanks,
Heather
It’s my understanding that WA DFI is jumping the Fed on how LOs are being compensated and that they would rather see our compensation by volume instead of the individual loan we are serving.
I have only worked at one mortgage company in my 10+ years… I’ll ask on Twitter and see if I get a response from LOs… I wish RCG’s connection with Facebook was working because then we could easily post your question there. (hint hint, Dustin)
I do happen to have a poll on my blog about how LOs are compensated…the poll will end this month.