Washington Mutualâ€™s 2008 demise provided lawmakers with a case study that pinpointed not only a rise of high-risk lending, but also how those mortgages led to the bankâ€™s failure â€” eventually contributing to the financial crisis.
The percentage of Washington Mutual high-risk originations rose dramatically from 19% in 2003 to 55% in 2006, according to a report released on Wednesday that dissected the 2008 crisis.
The report, authored by Senators Carl Levin (D-Mich.) and Tom Coburn (R-Okla.), was titled "Wall Street and the Financial Crisis: Anatomy of a Financial Collapse" and cited WaMu as "the largest bank failure in U.S. history."
By 2006, WaMu embarked on a strategy of high-risk lending and it began incurring record rates of delinquency and default. Its securitizations saw ratings downgrades and losses.
A year later, the bank itself began incurring losses, which prompted loss of confidence and depositors began withdrawing funds, eventually causing a liquidity crisis, the report said.
Its regulator, Office of Thrift Supervision (OTS) seized WaMu and sold to JP Morgan Chase (JPM: 46.25 0.00%) for $1.9 billion.
"From 2000 to 2007, WaMu and Long Beach together securitized at least $77 billion in subprime loans," the report said.
WaMu and its Long Beach originator steered high-risk borrowers into larger loans and higher-risk products, while also accepting loans without verifying borrower income.
"WaMu and Long Beach engaged in a host of shoddy lending practices that contributed to a mortgage time bomb," the report said.
WaMuâ€™s combination of high-risk loans, substandard lending practices and weak oversight produced hundreds of billions of dollars of poor quality loans that incurred early payment defaults, high rates of delinquency and fraud, according to the report.
The WaMu information in the report released Wednesday aligned with the data from Financial Crisis Inquiry Report, which is released by the Financial Crisis Inquiry Commission in January.
The inquiry report discussed WaMuâ€™s involvement with adjustable rate mortgages and the challenges it faced.
In 2002, Washington Mutual was the second-largest mortgage originator, just ahead of Countrywide. It had offered the option ARM since 1986, and in 2003, as cited by the Senate Permanent Subcommittee on Investigations, the originator conducted a study "to explore what Washington Mutual could do to increase sales of Option ARMs, our most profitable mortgage loan."
The study revealed that many WaMu brokers "felt these loans were 'bad' for customers."
"A lot of (Loan) Consultants donâ€™t believe in it . . . and donâ€™t think [itâ€™s] good for the customer," one member of the subcommitteeâ€™s focus group said. "Youâ€™re going to have to change the mindset."
Despite these challenges, option ARM originations soared at Washington Mutual from 30 billion in 2003 to 68 billion in 2004, when they were more than half of WaMuâ€™s originations and had become the thriftâ€™s signature adjustable-rate home loan product.
The Office of Thrift Supervision (OTS) later determined that the thrift likely could not "pay its obligations and meet its operating liquidity needs." The government seized the bank on Thursday, September 25, 2008 â€” appointing the Federal Deposit Insurance Corporation as receiver. In doing so, many unsecured creditors suffered losses. WaMuâ€™s assets were $307 billion as of June 30, 2008.