Senate Report: WaMu rewarded employees who pushed high risk mortgages

Written by Biloxi

According to the Senate report released last week, Washington Mutual (WaMu) had a campaign to sell high-risk loans and dangled that carrot called incentives to the employees and created  a football like-themed employee bonus to steer borrowers away from a 30 year fixed rate mortgages:

In September 2006, WaMu introduced pricing incentives for Option ARMs in the
consumer direct channel which waived all closing costs for Option ARMs except for an appraisal
deposit. In the fourth quarter of 2006, the consumer direct channel also held a contest called
the “Fall Kickoff Contest.” For each of the 13 weeks in the quarter, the loan consultant who
scored the most points would receive a $100 gift card. An Option ARM sale was a “touchdown”
and worth seven points; jumbo-fixed, equity, and nonprime mortgages were only “field goals”
worth three points. At the end of the quarter the top five point winners were awarded with a
$1,000 gift card.

In addition, from November 2006 through January 2007, e-Flashes sent to consumer direct originators promoted Option ARM sales specials offering $1,000 off closing
costs for loans under $300,000 and a waiver of all fees for loans greater than $300,000.


In addition, WaMu’s Chief Risk Officer admitted to the Senate committee that the volume of loans to the company were more important than the quality of the loans that they produced. He discussed the pressure that the company put on the loan originators. On pg. 112:

At the Subcommittee hearing, when asked about these matters, Mr.
Vanasek, WaMu’s Chief Risk Officer from 2004 to 2005, attributed the loan fraud to
compensation incentives that rewarded loan personnel and mortgage brokers according to the
volume of loans they processed rather than the quality of the loans they produced:
“Because of the compensation systems rewarding volume versus quality and the
independent structure of the originators, I am confident at times borrowers were coached
to fill out applications with overstated incomes or net worth to meet the minimum
underwriting 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 to go to Countrywide or elsewhere if the loan applications were not
approved.


Moreover, WaMu's loan sales concentrated in states such as Florida and California, which ultimately suffered home value depreciation. WaMu's CEO was warned by WaMu’s Chief Risk Officer to scale back on high risk lending practices. But, the CEO didn't respond. On pg. 104:

On top of those risks, WaMu concentrated its loans in a small number of states, especially California and Florida, increasing the risk that a downturn in those states would have a disproportionate impact upon the
delinquency rates of its already high risk loans.

At one point in 2004, Mr. Vanasek made a direct appeal to WaMu CEO Killinger, urging
him to scale back the high risk lending practices that were beginning to dominate not only
WaMu, but the U.S. mortgage market as a whole. Despite his efforts, he received no response:

“As the market deteriorated, in 2004, I went to the Chairman and CEO with a proposal
and a very strong personal appeal to publish a full-page ad in the Wall Street Journal
disavowing many of the then-current industry underwriting practices, such as 100 percent
loan-to-value subprime loans, and thereby adopt what I termed responsible lending
practices. I acknowledged that in so doing the company would give up a degree of
market share and lose some of the originators to the competition, but I believed that
Washington Mutual needed to take an industry-leading position against deteriorating
underwriting standards and products that were not in the best interests of the industry, the
bank, or the consumers. There was, unfortunately, never any further discussion or
response to the recommendation.”

Also, like Washington Mutual, Deutsche Bank gave special incentives and pressure sales force to push through an investment product. On p. 378:

In late February, as the market continued to deteriorate, Deutsche Bank attempted to
motivate its employees to sell Gemstone 7 by providing special incentives to its sales force for
selling the deal. On February 21, 2007, Mr. Kamat wrote to Ms. Bogza: “[W]e need help on
selling the As and BBBs in the Gemstone CDO 7 transaction – we have nearly 50% unsold on
both tranches in the transaction.”1459 In another email the same day, he wrote: “[S]hould we
offer more PCs for Gemstone 7 CDO given the market?”1460 “PCs” refers to Production Credits,
which were used to boost a salesperson’s compensation including through an end-of-year bonus.
Later the same night, Mr. Kamat sent an email to the co-head of the CDO Group seeking to
increase the Production Credits that could be awarded for selling Gemstone 7: “[D]ouble digit
PCs? I guess my original offer of 300 on single-As and 600 on triple-Bs is too low … what can
we offer?”

There was a time not so long ago when most people in this country blamed the borrowers for the financial crisis this country is in such as borrowers taking out larger loans than they could afford. Most people focused on that side of the table and not the other side where banks were pushing, forcing, coercing, and lying to these borrowers to accept loans that were doomed from the beginning all in the name of profit.