Sunday, September 4, 2011


containing high risk, poor quality mortgages were not safe investments and were going to incur
losses, the credit rating agencies admitted the emperor had no clothes. Investors stopped buying,
the value of the RMBS and CDO securities fell, and financial institutions around the world were
suddenly left with unmarketable securities whose value was plummeting. The financial crisis
was on.
Because of the complex nature of the financial crisis, this chapter concludes with a brief
timeline of some key events from 2006 through 2008. The succeeding chapters provide more
detailed examinations of the roles of high risk lending, federal regulators, credit ratings agencies,
and investment banks in causing the financial crisis.
Financial Crisis Timeline104
104 Many of these events are based upon a timeline prepared by the Federal Reserve Bank of St. Louis, “The Financial
Crisis: A Timeline of Events and Policy Actions,”
December 2006:
Ownit Mortgage Solutions bankruptcy
February 27, 2007:
Freddie Mac announces it will no longer buy the
most risky subprime mortgages
March 7, 2007:
FDIC issues cease & desist order against Fremont
for unsafe and unsound banking
April 2, 2007:
New Century bankruptcy
June 17, 2007:
Two Bear Stearns subprime hedge funds collapse
July 10 and 12, 2007:
Credit rating agencies issue first mass downgrades
of hundreds of RMBS and CDO securities
August 6, 2007:
American Home Mortgage bankruptcy
August 17, 2007:
Federal Reserve: “[M]arket conditions have
deteriorated…. downside risks to growth have
increased appreciably.”
August 31, 2007:
Ameriquest Mortgage ceases operations
December 12, 2007:
Federal Reserve establishes Term Auction Facility
to provide bank funding secured by collateral
January 2008:
ABX Index stops issuing new subprime indices
January 11, 2008:
Countrywide announces sale to Bank of America
January 30, 2008:
S&P downgrades or places on credit watch over
8,000 RMBS/CDO securities
March 24, 2008:
Federal Reserve Bank of New York forms Maiden
Lane I to help JPMorgan Chase acquire Bear Stearns
May 29, 2008:
Bear Stearns shareholders approve sale
July 11, 2008:
IndyMac Bank fails and is seized by FDIC
July 15, 2008:
SEC restricts naked short selling of some financial
September 7, 2008:
U.S. takes control of Fannie Mae & Freddie Mac
September 15, 2008:
Lehman Brothers bankruptcy
September 15, 2008
Merrill Lynch announces sale to Bank of America
September 16, 2008:
Federal Reserve offers $85 billion credit line to AIG;
Reserve Primary Money Fund NAV falls below $1
September 21, 2008:
Goldman Sachs and Morgan Stanley convert to bank
holding companies
September 25, 2008:
WaMu fails, seized by FDIC, sold to JPMorgan Chase
October 3, 2008:
Congress and President Bush establish TARP
October 12, 2008:
Wachovia sold to Wells Fargo
October 28, 2008:
U.S. uses TARP to buy $125 billion in preferred
stock at 9 banks
November 25, 2008:
Federal Reserve buys Fannie and Freddie assets
Washington Mutual Bank, known also as WaMu, rose out the ashes of the great Seattle
fire to make its first home loan in 1890. By 2004, WaMu had become one of the nation’s largest
financial institutions and a leading mortgage lender. Its demise just four years later provides a
case history that traces not only the rise of high risk lending in the mortgage field, but also how
those high risk mortgages led to the failure of a leading bank and contributed to the financial
crisis of 2008.
For many years, WaMu was a mid-sized thrift, specializing in home mortgages. In the
1990s, WaMu initiated a period of growth and acquisition, expanding until it became the nation’s
largest thrift and sixth largest bank, with $300 billion in assets, $188 billion in deposits, 2,300
branches in 15 states, and over 43,000 employees. In 2003, its longtime CEO, Kerry Killinger,
said he wanted to do for the lending industry what Wal-Mart and others did for their industries,
by catering to middle and lower income Americans and helping the less well off buy homes.105
Soon after, WaMu embarked on a strategy of high risk lending. By 2006, its high risk loans
began incurring record rates of delinquency and default, and its securitizations saw ratings
downgrades and losses. In 2007, the bank itself began incurring losses. Its shareholders lost
confidence, and depositors began withdrawing funds, eventually causing a liquidity crisis. On
September 25, 2008, 119 years to the day of its founding, WaMu was seized by its regulator, the
Office of Thrift Supervision (OTS), and sold to JPMorgan Chase for $1.9 billion. Had the sale
not gone through, WaMu’s failure might have exhausted the $45 billion Deposit Insurance Fund.
Washington Mutual is the largest bank failure in U.S. history.
This case study examines how one bank’s strategy for growth and profit led to the
origination and securitization of hundreds of billions of dollars in poor quality mortgages that
undermined the U.S. financial system. WaMu had held itself out as a prudent lender, but in
reality, the bank turned increasingly to higher risk loans. Its fixed rate mortgage originations fell
from 64% of its loan originations in 2003, to 25% in 2006, while subprime, Option ARM, and
home equity originations jumped from 19% of the originations to 55%. Using primarily loans
from its subprime lender, Long Beach Mortgage Corporation, WaMu’s subprime securitizations
grew sixfold, increasing from about $4.5 billion in 2003, to $29 billion in securitizations in 2006.
From 2000 to 2007, WaMu and Long Beach together securitized at least $77 billion in subprime
loans. WaMu also increased its origination of Option ARMs, its flagship product, which from
2003 to 2007, represented as much as half of all of WaMu’s loan originations. In 2006 alone,
Washington Mutual originated more than $42.6 billion in Option ARM loans and sold or
securitized at least $115 billion, including sales to the Federal National Mortgage Association
(Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). In addition, WaMu
dramatically increased its origination and securitization of home equity loan products. By 2007,
105 “Saying Yes, WaMu Built Empire on Shaky Loans,” New York Times (12/27/2008) (quoting Mr. Killinger: “We hope to do to this
industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home Depot did to
their industry. And I think if we’ve done our job, five years from now you’re not going to call us a bank.”).
home equity loans made up $63.5 billion or 27% of its home loan portfolio, a 130% increase
from 2003.
At the same time that WaMu was implementing its High Risk Lending Strategy, WaMu
and Long Beach engaged in a host of shoddy lending practices that contributed to a mortgage
time bomb. Those practices included qualifying high risk borrowers for larger loans than they
could afford; steering borrowers to higher risk loans; accepting loan applications without
verifying the borrower’s income; using loans with teaser rates that could lead to payment shock
when higher interest rates took effect later on; promoting negatively amortizing loans in which
many borrowers increased rather than paid down their debt; and authorizing loans with multiple
layers of risk. In addition, WaMu and Long Beach failed to enforce compliance with their
lending standards; allowed excessive loan error and exception rates; exercised weak oversight
over the third party mortgage brokers who supplied half or more of their loans; and tolerated the
issuance of loans with fraudulent or erroneous borrower information. They also designed
compensation incentives that rewarded loan personnel for issuing a large volume of higher risk
loans, valuing speed and volume over loan quality.
WaMu’s combination of high risk loans, shoddy 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. Long Beach mortgages experienced some of the
highest rates of foreclosure in the industry and their securitizations were among the worst
performing. Senior WaMu executives described Long Beach as “terrible” and “a mess,” with
default rates that were “ugly.” WaMu’s high risk lending operation was also problem-plagued.
WaMu management knew of evidence of deficient lending practices, as seen in internal emails,
audit reports, and reviews. Internal reviews of WaMu’s loan centers, for example, described
“extensive fraud” from employees “willfully” circumventing bank policy. An internal review
found controls to stop fraudulent loans from being sold to investors were “ineffective.” On at
least one occasion, senior managers knowingly sold delinquency-prone loans to investors. Aside
from Long Beach, WaMu’s President Steve Rotella described WaMu’s prime home loan
business as the “worst managed business” he had seen in his career.
Documents obtained by the Subcommittee reveal that WaMu launched its High Risk
Lending Strategy primarily because higher risk loans and mortgage backed securities could be
sold for higher prices on Wall Street. They garnered higher prices, because higher risk meant
they paid a higher coupon rate than other comparably rated securities, and investors paid a higher
price to buy them. Selling or securitizing the loans also removed them from WaMu’s books and
appeared to insulate the bank from risk.
From 2004 to 2008, WaMu originated a huge number of poor quality mortgages, most of
which were then resold to investment banks and other investors hungry for mortgage backed
securities. For a period of time, demand for these securities was so great that WaMu formed its
own securitization arm on Wall Street. Over a period of five years, WaMu and Long Beach
churned out a steady stream of high risk, poor quality loans and mortgage backed securities that
later defaulted at record rates. Once a prudent regional mortgage lender, Washington Mutual
tried—and ultimately failed—to use the profits from poor quality loans as a stepping stone to
becoming a major Wall Street player.
Washington Mutual was far from the only lender that sold poor quality mortgages and
mortgage backed securities that undermined U.S. financial markets. The Subcommittee
investigation indicates that Washington Mutual was emblematic of a host of financial institutions
that knowingly originated, sold, and securitized billions of dollars in high risk, poor quality home
loans. These lenders were not the victims of the financial crisis; the high risk loans they issued
became the fuel that ignited the financial crisis.
A. Subcommittee Investigation and Findings of Fact
As part of its investigation into high risk lending and the Washington Mutual case study,
the Subcommittee collected millions of pages of documents from Washington Mutual, JPMorgan
Chase, OTS, the FDIC, eAppraiseIT, Lenders Service Inc., Moody’s, Standard & Poor’s, various
investment banks, Fannie Mae, Freddie Mac, and others. The documents included email,
correspondence, internal memoranda, reports, legal pleadings, financial analysis, prospectuses,
and more. The Subcommittee also conducted more than 30 interviews with former WaMu
employees and regulatory officials. The Subcommittee also spoke with personnel from the
Offices of the Inspector General at the Department of Treasury and the FDIC, who were engaged
in a joint review of WaMu’s regulatory oversight and the events leading to its demise. In
addition, the Subcommittee spoke with nearly a dozen experts on a variety of banking,
accounting, regulatory, and legal issues. On April 13, 2010, the Subcommittee held a hearing
which took testimony from former WaMu officials and released 86 exhibits.106
In connection with the hearing, the Subcommittee released a joint memorandum from
Chairman Carl Levin and Ranking Member Tom Coburn summarizing the investigation to date
into Washington Mutual and the role of high risk home loans in the financial crisis. The
memorandum contained the following findings of fact, which this Report reaffirms.
1. High Risk Lending Strategy. Washington Mutual (“WaMu”) executives embarked
upon a High Risk Lending Strategy and increased sales of high risk home loans to
Wall Street, because they projected that high risk home loans, which generally
charged higher rates of interest, would be more profitable for the bank than low risk
home loans.
2. Shoddy Lending Practices. WaMu and its affiliate, Long Beach Mortgage
Company (“Long Beach”), used shoddy lending practices riddled with credit,
compliance, and operational deficiencies to make tens of thousands of high risk home
loans that too often contained excessive risk, fraudulent information, or errors.
106 “Wall Street and the Financial Crisis: The Role of High Risk Loans,” before the U.S. Senate Permanent
Subcommittee on Investigations, S.Hrg. 111-67 (April 13, 2010) (hereinafter “April 13, 2010 Subcommittee
3. Steering Borrowers to High Risk Loans. WaMu and Long Beach too often steered
borrowers into home loans they could not afford, allowing and encouraging them to
make low initial payments that would be followed by much higher payments, and
presumed that rising home prices would enable those borrowers to refinance their
loans or sell their homes before the payments shot up.
4. Polluting the Financial System. WaMu and Long Beach securitized over $77
billion in subprime home loans and billions more in other high risk home loans, used
Wall Street firms to sell the securities to investors worldwide, and polluted the
financial system with mortgage backed securities which later incurred high rates of
delinquency and loss.
5. Securitizing Delinquency-Prone and Fraudulent Loans. At times, WaMu selected
and securitized loans that it had identified as likely to go delinquent, without
disclosing its analysis to investors who bought the securities, and also securitized
loans tainted by fraudulent information, without notifying purchasers of the fraud that
was discovered.
6. Destructive Compensation. WaMu’s compensation system rewarded loan officers
and loan processors for originating large volumes of high risk loans, paid extra to
loan officers who overcharged borrowers or added stiff prepayment penalties, and
gave executives millions of dollars even when its High Risk Lending Strategy placed
the bank in financial jeopardy.
B. Background
Washington Mutual Bank was a federally chartered thrift whose primary federal regulator
was the Office of Thrift Supervision (OTS). As an insured depository institution, it was also
overseen by the Federal Deposit Insurance Corporation (FDIC). Washington Mutual was a full
service consumer and business bank. This Report focuses only on WaMu’s home lending and
securitization business. As part of that business, WaMu originated home loans, acquired home
loans for investment and securitization, sold pools of loans, and also securitized pools of home
loans that it had originated or acquired. It was also a leading servicer of residential mortgages.
(1) Major Business Lines and Key Personnel
From 2004 to 2008, WaMu had four major business lines.107
107 9/25/2008 “OTS Fact Sheet on Washington Mutual Bank,” Dochow_Darrel-00076154_001.
The Home Loans Group
handled WaMu’s home mortgage originations, securitizations, and servicing operations. The
Commercial Group handled apartment buildings and other commercial properties. The Retail
Banking Group provided retail banking services to consumers and businesses across the country.
The Card Services Group handled a credit card business purchased from Providian Financial
For most of the five-year period reviewed by the Subcommittee, WaMu was led by its
longtime Chairman of the Board and Chief Executive Officer (CEO) Kerry Killinger who joined
the bank in 1982, became bank president in 1988, and was appointed CEO in 1990. Mr.
Killinger was the moving force behind WaMu’s acquisitions and growth strategy during the
1990s, and made the fateful decision to embark upon its High Risk Lending Strategy in 2005.
Mr. Killinger stepped down as Chairman of the Board in June 2008, after shareholders opposed
having the same person occupy the bank’s two top positions. He was dismissed from the bank
on September 8, 2008, the same day WaMu was required by its regulator, OTS, to sign a public
Memorandum of Understanding to address its lending and securitization deficiencies. Two
weeks later the bank failed.
Other key members of the bank’s senior management included President Steve Rotella
who joined the bank in January 2005; Chief Financial Officer Tom Casey; President of the Home
Loans Division David Schneider who joined the bank in July 2005; and General Counsel Faye
Chapman. David Beck served as Executive Vice President in charge of the bank’s Capital
Markets Division, oversaw its securitization efforts, and reported to the head of Home Loans.
Anthony Meola headed up the Home Loans Sales effort. Jim Vanasek was WaMu’s Chief Credit
Officer from 1999 until 2004, and was then appointed its Chief Risk Officer, a new position,
from 2004-2005. After Mr. Vanasek’s retirement, Ronald Cathcart took his place as Chief Risk
Officer, and headed the bank’s newly organized Enterprise Risk Management Division, serving
in that post from 2005 to 2007.
(2) Loan Origination Channels
WaMu was one of the largest mortgage originators in the United States.108 It originated
and acquired residential mortgages through several methods, which it referred to as loan
origination channels. WaMu referred to them as its retail, wholesale, subprime, correspondent,
and conduit channels.
Retail Channel. In WaMu’s parlance, “retail channel” loans were loans originated by
WaMu employees, typically loan officers or sales associates operating out of WaMu branded
loan centers. The prospective borrower typically communicated directly with the WaMu loan
officer, who was often called a “loan consultant.” WaMu considered all retail channel loans to
be “prime” loans, regardless of the characteristics of the loan or the creditworthiness of the
borrower, and sometimes referred to the retail channel as the “prime” channel. The retail
channel originated significant numbers of Option ARM loans, which WaMu treated as prime
loans, despite their inherent risks. According to the Inspectors General of the U.S. Treasury
Department and the FDIC, who prepared a report on WaMu’s failure (hereinafter “IG Report”),
“Option ARMs represented as much as half of all loan originations from 2003 to 2007 and
approximately $59 billion, or 47 percent, of the home loans on WaMu’s balance sheet at the end
108 See, e.g., “Mortgage Lender Rankings by Residential Originations,” charts prepared by
(indicating WaMu was one of the top three issuers of U.S. residential mortgages from 2003 to 2005); “Washington
Mutual to Acquire PNC’s Residential Mortgage Business,” Business Wire (10/2/2000),
of 2007.”109 The retail channel was also used to originate substantial numbers of home equity
loans and home equity lines of credit.
Wholesale Channel. According to WaMu, its “wholesale channel” loans were loans that
the bank acquired from third party mortgage brokers. These brokers, who were not WaMu
employees, located borrowers interested in purchasing a home or refinancing an existing
mortgage, and explained available loans that could be underwritten by WaMu. The borrower’s
primary, and sometimes sole, contact was with the mortgage broker. The mortgage broker
would then provide the borrower’s information to a WaMu loan officer who would determine
whether the bank would finance the loan. If the bank decided to finance the loan, the broker
would receive a commission for its efforts. Third party mortgage brokers typically received little
guidance or training from WaMu, aside from receiving daily “rate sheets” explaining the terms
of the loans that WaMu was willing to accept and the available commissions. WaMu treated
wholesale loans issued under the WaMu brand as prime loans.
Subprime Channel. WaMu also originated wholesale loans through its subprime
affiliate and later subsidiary, Long Beach Mortgage Company (“Long Beach”). Long Beach was
a purely wholesale lender, and employed no loan officers that worked directly with borrowers.
Instead, its account executives developed relationships with third party mortgage brokers who
brought prospective loans to the company, and if Long Beach accepted those loans, received a
commission for their efforts. WaMu typically referred to Long Beach as its “subprime channel.”
Later, in 2007, when the bank decided to eliminate Long Beach as a separate entity, it rebranded
Long Beach as its “Wholesale Specialty Lending” channel.
At times, WaMu also acquired subprime loans through “correspondent” or “conduit”
channels, which it used to purchase closed loans—loans that had already been financed—from
other lenders for investment or securitization. For example, WaMu at times operated a
correspondent channel that it referred to as “Specialty Mortgage Finance” and used to purchase
subprime loans from other lenders, especially Ameriquest, for inclusion in its investment
portfolio. In addition, in 2005, its New York securitization arm, Washington Mutual Capital
Corporation, established a “subprime conduit” to purchase closed subprime loans in bulk from
other lenders for use in securitizations. At the end of 2006, WaMu reported that its investment
portfolio included $4 billion in subprime loans from Long Beach and about $16 billion in
subprime loans from other parties.110
Other Channels. At times, WaMu also originated or acquired loans in other ways. Its
“Consumer Direct” channel, for example, originated loans over the phone or internet; borrowers
did not need to meet in person with a WaMu loan officer. In addition, in 2004, Washington
Mutual Capital Corporation (WCC) set up a conduit to purchase closed Alt A loans in bulk from
109 4/2010 “Evaluation of Federal Regulatory Oversight of Washington Mutual Bank,” report prepared by the
Offices of Inspector General at the Department of the Treasury and Federal Deposit Insurance Corporation, Hearing
Exhibit 4/16-82 (hereinafter “IG Report”).
110 See 3/1/2007 Washington Mutual Inc. 10-K filing with the SEC, at 56.
other lenders and use them in securitizations. WCC shut down both the Alt A and subprime
conduits in April 2008, after it became too difficult to find buyers for new securitizations.111
The Treasury and the FDIC IG report examining the failure of WaMu found that, from
2003 to 2007, the bulk of its residential loans—from 48% to 70%—came from third party
lenders and brokers.112 That report also determined that, in 2007, WaMu had 14 full-time
employees overseeing 34,000 third party brokers doing business with the bank nationwide, and
criticized the Bank’s oversight and staffing effort.113
(3) Long Beach
WaMu had traditionally originated mortgages to well qualified prime borrowers. But in
1999, WaMu bought Long Beach Mortgage Company,114 which was exclusively a subprime
lender to borrowers whose credit histories did not support their getting a traditional mortgage.115
Long Beach was located in Anaheim, California, had a network of loan centers across the
country, and at its height had as many as 1,000 employees.
Long Beach made loans for the express purpose of securitizing them and profiting from
the gain on sale; it did not hold loans for its own investment. It had no loan officers of its own,
but relied entirely on third party mortgage brokers bringing proposed subprime loans to its
doors. In 2000, the year after it was purchased by WaMu, Long Beach made and securitized
approximately $2.5 billion in home loans. By 2006, its loan operations had increased more than
tenfold, and Long Beach securitized nearly $30 billion in subprime home loans and sold the
securities to investors.116
Long Beach’s most common subprime loans were short term, hybrid adjustable rate
mortgages, known as “2/28,” “3/27,” or “5/25” loans. These 30-year mortgages typically had a
low fixed “teaser” rate, which then reset to a higher floating rate after two years for the 2/28,
three years for the 3/27, or five years for the 5/25.117
111 See 6/11/2007 chart entitled, “Capital Markets Division Growth,” JPM_WM03409858, Hearing Exhibit 4/13-
Long Beach typically qualified borrowers
according to whether they could afford to pay the initial, low interest rate rather than the later,
112 See prepared statement of Treasury IG Eric Thorson, “Wall Street and the Financial Crisis: Role of the
Regulators,” before the U.S. Senate Permanent Subcommittee on Investigations, S.Hrg. 111-672 (April 16, 2010)
(hereinafter “April 16, 2010 Subcommittee Hearing”), at 5.
113 4/2010 IG Report, at 11, Hearing Exhibit 4/16-82.
114 Washington Mutual Inc. actually purchased Long Beach Financial Corporation, the parent of Long Beach
Mortgage Corporation, for about $350 million.
115 12/21/2005 OTS internal memorandum from OTS examiners to Darrel Dochow, OTSWMS06-007 0001009,
Hearing Exhibit 4/16-31 (“LBMC was acquired… as a vehicle for WMI to access the subprime loan market.
LBMC’s core business is the origination of subprime mortgage loans through a nationwide network of mortgage
116 “Securitizations of Washington Mutual Subprime Home Loans,” chart prepared by the Subcommittee, Hearing
Exhibit 4/13-1c.
117 For more information about these types of loans, see Chapter II.
higher interest rate.118 For “interest-only” loans, monthly loan payments were calculated to
cover only the interest due on the loan and not any principal. After the fixed interest rate period
expired, the monthly payment was typically recalculated to pay off the entire remaining loan
within the remaining loan period at the higher floating rate. Unless borrowers could refinance,
the suddenly increased monthly payments caused some borrowers to experience “payment
shock” and default on their loans.
From 1999 to 2006, Long Beach operated as a subsidiary of Washington Mutual Inc., the
parent of Washington Mutual Bank. Long Beach’s loans repeatedly experienced early payment
defaults, high delinquency rates, and losses, and its securitizations were among the worst
performing in the market.119 In 2006, in a bid to strengthen Long Beach’s performance, WaMu
received permission from its regulator, OTS, to purchase the company from its parent and make
it a wholly owned subsidiary of the bank. WaMu installed new management, required the head
of Long Beach to report to its Home Loans Division President, and promised OTS that it would
improve Long Beach. When Long Beach’s loans continued to perform poorly, in June 2007,
WaMu shut down Long Beach as a separate entity, and took over its subprime lending
operations, rebranding Long Beach as its “Wholesale Specialty Lending” channel. WaMu
continued to issue and securitize subprime loans. After the subprime market essentially shut
down a few months later in September 2007, WaMu ended all of its subprime lending.
From 2000 to 2007, Long Beach and WaMu together securitized tens of billions of
dollars in subprime loans, creating mortgage backed securities that frequently received AAA or
other investment grade credit ratings.120 Although AAA securities are supposed to be very safe
investments with low default rates of one to two percent, of the 75 Long Beach mortgage backed
security tranches rated AAA by Standard and Poor’s in 2006, all 75 have been downgraded to
junk status, defaulted, or been withdrawn.121 In most of the 2006 Long Beach securitizations,
the underlying loans have delinquency rates of 50% or more.122
(4) Securitization
Washington Mutual depended on the securitization process to generate profit, manage
risk, and obtain capital to originate new loans. Washington Mutual and Long Beach sold or
securitized most of the subprime home loans they acquired. Initially, Washington Mutual kept
most of its Option ARMs in its proprietary investment portfolio, but eventually began selling or
securitizing those loans as well. From 2000 to 2007, Washington Mutual and Long Beach
118 See April 13, 2010 Subcommittee Hearing at 50.
119 See 4/14/2005 email exchange between OTS examiners, “Fitch – LBMC Review,” Hearing Exhibit 4/13-8a
(discussing findings by Fitch, a credit rating agency, highlighting poor performance of Long Beach securities).
120 “Securitizations of Washington Mutual Subprime Home Loans,” chart prepared by the Subcommittee, Hearing
Exhibit 4/13-1c.
121 See Standard and Poor’s data at
122 See, e.g., (subscription website maintained by JPMorgan Chase with data on Long Beach
and WaMu mortgage backed securities showing, as of March 2011, delinquency rates for particular mortgage
backed securities, including LBMLT 2006-1 – 58.44%; LBMLT 2006-6 – 60.06%; and LBMLT 2005-11 –
securitized at least $77 billion in subprime home loans. Washington Mutual sold or securitized
at least $115 billion of Option ARM loans, as well as billions more of other types of high risk
loans, including hybrid adjustable rate mortgages, Alt A, and home equity loans.
When Washington Mutual began securitizing its loans, it was dependent upon investment
banks to help underwrite and sell its securitizations. In order to have greater control of the
securitization process and to keep securitization underwriting fees in house, rather than paying
them to investment banks, WaMu acquired a company able to handle securitizations and
renamed it Washington Mutual Capital Corporation (WCC), which became a wholly owned
subsidiary of the bank.123 WCC was a registered broker-dealer and began to act as an
underwriter of WaMu and Long Beach securitizations.124 WCC worked with two other bank
subsidiaries, Washington Mutual Mortgage Securities Corp. and Washington Mutual Asset
Acceptance Corp., that provided warehousing for WaMu loans before they were securitized.
WCC helped to assemble RMBS pools and sell the resulting RMBS securities to investors. At
first it worked with other investment banks; later it became the sole underwriter of some WaMu
WCC was initially based in Seattle with 30 to 40 employees.125 In 2004, it moved its
headquarters to Manhattan.126 At the height of WCC operations, right before the collapse of the
securitization market, WCC had over 200 employees and offices in Seattle, New York, Los
Angeles, and Chicago, with the majority of its personnel in New York.127 WCC closed its doors
in December 2007, after the securitization markets collapsed.
(5) Overview of WaMu’s Rise and Fall
Washington Mutual Bank (WaMu) was a wholly owned subsidiary of its parent holding
company, Washington Mutual Inc.128 From 1996 to 2002, WaMu acquired over a dozen other
financial institutions, including American Savings Bank, Great Western Bank, Fleet Mortgage
Corporation, Dime Bancorp, PNC Mortgage, and Long Beach, expanding to become the nation’s
largest thrift and sixth largest bank. WaMu also became one of the largest issuers of home loans
in the country. Washington Mutual kept a portion of those loans for its own investment
portfolio, and sold the rest either to Wall Street investors, usually after securitizing them, or to
Fannie Mae or Freddie Mac. From 2001 to 2007, Washington Mutual sold approximately $430
billion in loans to Fannie Mae and Freddie Mac, representing nearly a quarter of its loan
production during those years.
123See 6/11/2007 chart entitled, “Capital Markets Division Growth,” JPM_WM03409858, Hearing Exhibit 4/13-47c.
124 Prepared statement of David Beck, April 13, 2010 Subcommittee Hearing at 2.
125 Subcommittee interview of David Beck (3/2/2010).
126 Id.
127 Id.
128 9/25/2008 “OTS Fact Sheet on Washington Mutual Bank,” Dochow_Darrel-00076154_001, at 002. Washington
Mutual Inc. also owned a second, much smaller thrift, Washington Mutual Bank, FSB. Id.
In 2006, WaMu took several major actions that reduced the size of its Home Loans
Group. It sold $140 billion in mortgage servicing rights to Wells Fargo; sold a $22 billion
portfolio of home loans and other securities; and reduced its workforce significantly.129
In July 2007, after the Bear Stearns hedge funds collapsed and the credit rating agencies
downgraded the ratings of hundreds of mortgaged backed securities, including over 40 Long
Beach securities, the secondary market for subprime loans dried up. In September 2007, due to
the difficulty of finding investors willing to purchase subprime loans or mortgage backed
securities, Washington Mutual discontinued its subprime lending. It also became increasingly
difficult for Washington Mutual to sell other types of high risk loans and related mortgage
backed securities, including its Option ARMs and home equity products. Instead, WaMu
retained these loans in its portfolios. By the end of the year, as the value of its loans and
mortgage backed securities continued to drop, Washington Mutual began to incur significant
losses, reporting a $1 billion loss in the fourth quarter of 2007, and another $1 billion loss in the
first quarter of 2008.
In February 2008, based upon increasing deterioration in the bank’s asset quality,
earnings, and liquidity, OTS and the FDIC lowered the bank’s safety and soundness rating to a 3
on a scale of 1 to 5, signaling it was a troubled institution.130 In March 2008, at the request of
OTS and the FDIC, Washington Mutual allowed several potential buyers of the bank to review
its financial information.131 JPMorgan Chase followed with a purchase offer that WaMu
declined.132 Instead, in April 2008, Washington Mutual’s parent holding company raised $7
billion in new capital and provided $3 billion of those funds to the bank.133 By June, the bank
had shut down its wholesale lending channel.134 It also closed over 180 loan centers and
terminated 3,000 employees.135 In addition, WaMu reduced its dividend to shareholders.136
In July 2008, a $30 billion subprime mortgage lender, IndyMac, failed and was placed
into receivership by the government. In response, depositors became concerned about
Washington Mutual and withdrew over $10 billion in deposits, putting pressure on the bank’s
liquidity. After the bank disclosed a $3.2 billion loss for the second quarter, its stock price
continued to drop, and more deposits left.
129 Subcommittee interview of Steve Rotella (2/24/2010). See also 3/1/2007 Washington Mutual Inc. 10-K filing
with the SEC, at 1 (Washington Mutual reduced its workforce from 60,789 to 49,824 from December 31, 2005 to
December 31, 2006.); “Washington Mutual to cut 2,500 jobs,” MarketWatch (2/15/2006), available at
130 See 2/27/2008 letter from Kerry Killinger to Washington Mutual Board of Directors, Hearing Exhibit 4/16-41.
131 Subcommittee interviews of WaMu Chief Financial Officer Tom Casey (2/20/2010); and OTS West Region
Office Director Darrel Dochow (3/3/2010); 4/2010 “Washington Mutual Regulators Timeline,” prepared by the
Subcommittee, Hearing Exhibit 4/16-1j.
132 Subcommittee interview of Tom Casey (2/20/2010).
133 4/2010 “Washington Mutual Regulators Timeline,” prepared by the Subcommittee, Hearing Exhibit 4/16-1j.
134 See 2/27/2008 letter from Kerry Killinger to Washington Mutual Board of Directors, Hearing Exhibit 4/16-41.
135 “Washington Mutual to Take Writedown, Slash Dividend,” Bloomberg (12/10/2007), available at
136 Id.
On September 8, 2008, Washington Mutual signed a public Memorandum of
Understanding that it had negotiated with OTS and the FDIC to address the problems affecting
the bank. Longtime CEO Kerry Killinger was forced to leave the bank, accepting a $15 million
severance payment.137 Allen Fishman was appointed his replacement.
On September 15, 2008, Lehman Brothers declared bankruptcy. Three days later, on
September 18, OTS and the FDIC lowered Washington Mutual’s rating to a “4,” indicating that a
bank failure was a possibility. The credit rating agencies also downgraded the credit ratings of
the bank and its parent holding company. Over the span of eight days starting on September 15,
nearly $17 billion in deposits left the bank. At that time, the Deposit Insurance Fund contained
about $45 billion, an amount which could have been exhausted by the failure of a $300 billion
institution like Washington Mutual. As the financial crisis worsened each day, regulatory
concerns about the bank’s liquidity and viability intensified.
Because of its liquidity problems and poor quality assets, OTS and the FDIC decided to
close the bank. Unable to wait for a Friday, the day on which most banks are closed, the
agencies acted on a Thursday, September 25, 2008, which was also the 119th anniversary of
WaMu’s founding. That day, OTS seized Washington Mutual Bank, placed it into receivership,
and appointed the FDIC as the receiver. The FDIC facilitated its immediate sale to JPMorgan
Chase for $1.9 billion. The sale eliminated the need to draw upon the Deposit Insurance Fund.
WaMu’s parent, Washington Mutual, Inc., declared bankruptcy soon after.
C. High Risk Lending Strategy
In 2004, Washington Mutual ramped up high risk home loan originations to borrowers
that had not traditionally qualified for them. The following year, Washington Mutual adopted a
high risk strategy to issue high risk mortgages, and then mitigate some of that risk by selling or
securitizing many of the loans. When housing prices stopped climbing in late 2006, a large
number of those risky loans began incurring extraordinary rates of delinquency as did the
securities that relied on those loans for cash flow. In 2007, the problems with WaMu’s High
Risk Lending Strategy worsened, as delinquencies increased, the securitization market dried up,
and the bank was unable to find buyers for its high risk loans or related securities.
The formal initiation of WaMu’s High Risk Lending Strategy can be dated to January
2005, when a specific proposal was presented to the WaMu Board of Directors for approval.138
137 “Washington Mutual CEO Kerry Killinger: $100 Million in Compensation, 2003-2008,” chart prepared by the
Subcommittee, Hearing Exhibit 4/13-1h.
WaMu adopted this strategy because its executives calculated that high risk home loans were
more profitable than low risk loans, not only because the bank could charge borrowers higher
interest rates and fees, but also because higher risk loans received higher prices when securitized
and sold to investors. They garnered higher prices because, due to their higher risk, the
securities paid a higher coupon rate than other comparably rated securities.
138 See 1/2005 “Higher Risk Lending Strategy ‘Asset Allocation Initiative,’” submitted to Washington Mutual Board
of Directors Finance Committee Discussion, JPM_WM00302975-93, Hearing Exhibit 4/13-2a.
Over a five-year period from 2003 to 2008, Washington Mutual Bank shifted its loan
originations from primarily traditional 30-year fixed and government backed loans to primarily
higher risk home loans. This shift included increased subprime loan activity at Long Beach,
more subprime loans purchased through its Specialty Mortgage Finance correspondent channel,
and more bulk purchases of subprime loans through its conduit channel for use in securitizations.
WaMu also increased its originations and acquisitions of Option ARM, Alt A, and home equity
loans. While the shift began earlier, the strategic decision to move toward higher risk loans was
not fully articulated to regulators or the Board of Directors until the end of 2004 and the
beginning of 2005.139
In about three years, from 2005 to 2007, WaMu issued hundreds of billions of higher risk
loans, including $49 billion in subprime loans140 and $59 billion in Option ARMs.141 Data
compiled by the Treasury and the FDIC Inspectors General showed that, by the end of 2007,
Option ARMs constituted about 47% of all home loans on WaMu’s balance sheet and home
equity loans made up $63.5 billion or 27% of its home loan portfolio, a 130% increase from
2003.142 According to an August 2006 internal WaMu presentation on Option ARM credit risk,
from 1999 until 2006, Option ARM borrowers selected the minimum monthly payment more
than 95% of the time.143 The data also showed that at the end of 2007, 84% of the total value of
the Option ARMs was negatively amortizing, meaning that the borrowers were going into deeper
debt rather than paying off their loan balances.144 In addition, by the end of 2007, stated income
loans—loans in which the bank had not verified the borrower’s income—represented 73% of
WaMu’s Option ARMs, 50% of its subprime loans, and 90% of its home equity loans.145 WaMu
also originated numerous loans with high loan-to-value (LTV) ratios, in which the loan amount
exceeded 80% of the value of the underlying property. The Treasury and the FDIC Inspectors
General determined, for example, that 44% of WaMu’s subprime loans and 35% of its home
equity loans had LTV ratios in excess of 80%.146 Still another problem was that WaMu had high
geographic concentrations of its home loans in California and Florida, states that ended up
suffering above-average home value depreciation.147
139 See, e.g., 12/21/2004 “Asset Allocation Initiative: Higher Risk Lending Strategy and Increased Credit Risk
Management,” Washington Mutual Board of Directors Discussion, JPM_WM04107995-8008, Hearing Exhibit 4/13-
2b; 1/2005 “Higher Risk Lending Strategy ‘Asset Allocation Initiative,’” submitted to Washington Mutual Board of
Directors Finance Committee Discussion, JPM_WM00302975-93, Hearing Exhibit 4/13-2a.
140 “Securitizations of Washington Mutual Subprime Home Loans,” chart prepared by the Subcommittee, Hearing
Exhibit 4/13-1c.
141 4/2010 IG Report, at 9, Hearing Exhibit 4/16-82.
142 Id. at 9-10.
143 See 8/2006 Washington Mutual internal report, “Option ARM Credit Risk,” chart entitled, “Borrower-Selected
Payment Behavior,” at 7, Hearing Exhibit 4/13-37. The WaMu report also stated: “Almost all Option ARM
borrowers select the minimum payment every month with very high persistency, regardless of changes in the interest
rates or payment adjustments.” Id. at 2.
144 4/2010 IG Report, at 9, Hearing Exhibit 4/16-82.
145 Id. at 10.
146 Id.
147 Id. at 11.
(1) Strategic Direction
In 2004, WaMu set the stage for its High Risk Lending Strategy by formally adopting
aggressive financial targets for the upcoming five-year time period. The new earnings targets
created pressure for the bank to shift from its more conservative practices towards practices that
carried more risk. Mr. Killinger described those targets in a June 2004 “Strategic Direction”
memorandum to WaMu’s Board of Directors: “Our primary financial targets for the next five
years will be to achieve an average ROE [Return on Equity] of at least 18%, and average EPS
[Earnings Per Share] growth of at least 13%.”148 In his memorandum to the Board, Mr. Killinger
predicted continuing growth opportunities for the bank:
“In a consolidating industry, it is appropriate to continually assess if shareholder value
creation is best achieved by selling for a short-term change of control premium or to
continue to build long-term value as an independent company. We believe remaining an
independent company is appropriate at this time because of substantial growth
opportunities we see ahead. We are especially encouraged with growth prospects for our
consumer banking group. We would also note that our stock is currently trading at a
price which we believe is substantially below the intrinsic value of our unique franchise.
This makes it even more important to stay focused on building long-term shareholder
value, diligently protecting our shareholders from inadequate unsolicited takeover
proposals and maintaining our long held position of remaining an independent
Mr. Killinger identified residential nonprime and adjustable rate mortgage loans as one of the
primary bank businesses driving balance sheet growth.150 Mr. Killinger also stated in the
memorandum: “Wholesale and correspondent will be nationwide and retooled to deliver higher
margin products.”151
(2) Approval of Strategy
After 2002, Washington Mutual stopped acquiring lenders specializing in residential
mortgages,152 and embarked upon a new strategy to push the company’s growth, focused on
increasing its issuance and purchase of higher risk home loans. OTS took note of this strategy in
WaMu’s 2004 Report on Examination:
148 6/1/2004 Washington Mutual memorandum from Kerry Killinger to the Board of Directors, “Strategic
Direction,” JPM_WM05385579 at 581.
149 Id. at 582.
150 Id.
151 Id. at 585.
152 The only new lender that Washington Mutual acquired after 2004 was Commercial Capital Bancorp in 2006.
“Management provided us with a copy of the framework for WMI’s 5-year (2005-2009)
strategic plan [which] contemplates asset growth of at least 10% a year, with assets
increasing to near $500 billion by 2009.”153
OTS directed the bank to spell out its new lending strategy in a written document that had to be
presented to and gain approval by the WaMu Board of Directors.154
In response, in January 2005, WaMu management developed a document entitled,
“Higher Risk Lending Strategy” and presented it to its Board of Directors for approval to shift
the bank’s focus from originating low risk fixed rate and government backed loans to higher risk
subprime, home equity, and Option ARM loans.155 The Strategy disclosed that WaMu planned
to increase both its issuance of higher risk loans and its offering of loans to higher risk
borrowers. The explicit reasoning for the shift was the increased profitability of the higher risk
loans, measured by actual bank data showing that those loans produced a higher “gain on sale”
or profit for the bank compared to lower risk loans. For example, one chart supporting the
Strategy showed that selling subprime loans garnered more than eight times the gain on sale as
government backed loans.156
The WaMu submission to the Board noted that, in order for the plan to be successful,
WaMu would need to carefully manage its residential mortgage business as well as its credit risk,
meaning the risk that borrowers would not repay the higher risk loans.157 During the Board’s
discussion of the strategy, credit officers noted that losses would likely lag by several years.158
153 See 3/15/2004 OTS Report of Examination, at OTSWMS04-0000001509, Hearing Exhibit 4/16-94 [Sealed
These documents show that WaMu knew that, even if loan losses did not immediately come to
pass after initiating the High Risk Lending Strategy, it did not mean the strategy was free of
154 6/30/2004 OTS Memo to Lawrence Carter from Zalka Ancely, OTSWME04-0000005357 at 61 (“Joint Memo #9
- Subprime Lending Strategy”); 3/15/2004 OTS Report of Examination, at OTSWMS04-0000001483, Hearing
Exhibit 4/16-94 [Sealed Exhibit]. See also 1/2005 “Higher Risk Lending Strategy Presentation,” submitted to
Washington Mutual Board of Directors, at JPM_WM00302978, Hearing Exhibit 4/13-2a (“As we implement our
Strategic Plan, we need to address OTS/FDIC 2004 Safety and Soundness Exam Joint Memos 8 & 9 . . . Joint Memo
9: Develop and present a SubPrime/Higher Risk Lending Strategy to the Board.”).
155 1/2005 “Higher Risk Lending Strategy Presentation,” submitted to Washington Mutual Board of Directors, at
JPM_WM00302978, Hearing Exhibit 4/13-2a; see also 4/2010 “WaMu Product Originations and Purchases by
Percentage – 2003-2007,” chart prepared by the Subcommittee, Hearing Exhibit 4/13-1i.
156 4/18/2006 Washington Mutual Home Loans Discussion Board of Directors Meeting, at JPM_WM00690894,
Hearing Exhibit 4/13-3 (see chart showing gain on sale for government loans was 13; for 30-year, fixed rate loans
was 19; for option loans was 109; for home equity loans was 113; and for subprime loans was 150.).
157 See 4/18/2006 Washington Mutual Home Loans Discussion Board of Directors Meeting, at JPM_WM00690899,
Hearing Exhibit 4/13-3 (acknowledging that the risks of the High Risk Lending Strategy included managing credit
risk, implementing lending technology and enacting organizational changes).
158 1/18/2005 Washington Mutual Inc. Washington Mutual Bank FA Finance Committee Minutes,
JPM_WM06293964; see also 1/2005 “Higher Risk Lending Strategy Presentation,” submitted to Washington
Mutual Board of Directors, at JPM_WM00302987, Hearing Exhibit 4/13-2a (“Lags in Effects of Expansion,” chart
showing peak loss rates in 2007).
(3) Definition of High Risk Lending
As part of the 2005 presentation to the Board of Directors outlining the strategy, OTS
recommended that WaMu define higher risk lending.159 The January 2005 presentation
contained a slide defining “Higher Risk Lending”:
“For the purpose of establishing concentration limits, Higher Risk Lending
strategies will be implemented in a ‘phased’ approach. Later in 2005 an
expanded definition of Higher Risk Lending—encapsulating multiple risk
layering and expanded underwriting criteria—and its corresponding
concentration limit—will be presented for Board approval.
“The initial definition is ‘Consumer Loans to Higher Risk Borrowers’,
which at 11/30/04 totaled $32 Billion or 151% of total risk-based capital,
comprised of:
-Subprime loans, or all loans originated by Long Beach Mortgage
or purchased through our Specialty Mortgage Finance program
-SFR [Single Family Residential] and Consumer Loans to
Borrowers with low credit scores at origination.”160
A footnote on the slide defined “low credit scores” as less than a 620 FICO score for first lien
single family residence mortgages, home equity loans, and home equity lines of credit. It
defined low credit scores as less than 660 for second lien home equity loans (HEL) and lines of
credit (HELOC), and other consumer loans.161
While the January 2005 presentation promised to present a fuller definition of higher risk
loans for Board approval at some future date, a more complete definition had already been
provided to the Board a few weeks earlier in a December 21, 2004 presentation entitled, “Asset
Allocation Initiative: Higher Risk Lending Strategy and Increased Credit Risk Management.”162
This presentation contained the same basic definition of higher risk borrowers, but also provided
a definition of higher risk loans.
Higher risk loans were defined as single family residence mortgages with a loan-to-value
(LTV) ratio of equal to or greater than 90% if not credit enhanced, or a combined-loan-to-value
159 6/30/2004 OTS Memo to Lawrence Carter from Zalka Ancely (“Joint Memo #8 - Loans to ‘Higher-Risk
Borrowers’”), OTSWME04-0000005357 at 61.
160 1/2005 “Higher Risk Lending Strategy Presentation,” submitted to Washington Mutual Board of Directors, at
JPM_WM00302979, Hearing Exhibit 4/13-2a.
161 Id. at JPM_WM00302979.
162 12/21/2004 “Asset Allocation Initiative: Higher Risk Lending Strategy and Increased Credit Risk Management,”
Washington Mutual Board of Directors Presentation, at JPM_WM04107995-8008, Hearing Exhibit 4/13-2b.
(CLTV) ratio of 95%. These numbers are a notable departure from the 80% LTV ratio
traditionally required for a prime loan.163 For home equity loans and lines of credit, WaMu
considered a first lien to be high risk if it had a greater than 90% LTV ratio, and considered a
second lien to be high risk if had a greater than 80% CLTV ratio.164
The December 2004 presentation also defined higher risk lending on the basis of
expanded underwriting criteria and multiple risk layering:
“Expanded Criteria
-‘No Income’ loan documentation type
-All Manufactured Housing loans …
Multiple Risk Layering in SF[R] and 1st lien HEL/HELOC loans
-Higher A- credit score or lacking LTV as strong compensating factor and
-An additional risk factor from at least three of the following:
-Higher uncertainty about ability to pay or ‘stated income’
documentation type
-higher uncertainty about willingness to pay or collateral value”165
This document indicates that WaMu considered a mortgage to be higher risk if it lacked
documentation regarding the borrower’s income, described as a “no income” or “stated income”
WaMu held billions of dollars in loans on its balance sheet.166 Those assets fluctuated in
value based on the changes in the interest rate. Fixed rate loans, in particular, incurred
significant interest rate risk, because on a 30-year fixed rate mortgage, for example, WaMu
agreed to receive interest payments at a certain rate for 30 years, but if the prevailing interest rate
went up, WaMu’s cost of money increased and the relative value of the fixed mortgages on its
balance sheet went down. WaMu used various strategies to hedge its interest rate risk. One way
to incur less interest rate risk was for WaMu to hold loans with variable interest rates, such as
Hybrid ARMs typical of WaMu’s subprime lending, or Option ARMs, WaMu’s flagship “prime”
product. These adjustable rate mortgages paid interest rates that, after the initial fixed rate period
expired, were typically pegged to the Cost of Funds Index (COFI) or the Monthly Treasury
Average (MTA), two common measures of prevailing interest rates.
163 See, e.g., 10/8/1999 “Interagency Guidance on High LTV Residential Real Estate Lending,”, and discussion of high LTV loans in section
D(2)(b), below.
164 12/21/2004 “Asset Allocation Initiative: Higher Risk Lending Strategy and Increased Credit Risk Management,”
Washington Mutual Board of Directors Presentation, JPM_WM04107995-8008 at 7999, Hearing Exhibit 4/13-2b.
165 Id. This slide lists only the two additional risk factors quoted, despite referring to “at least three of the
166 See 9/25/2008 “OTS Fact Sheet on Washington Mutual Bank,” Dochow_Darrel-00076154_001 (“Loans held:
$118.9 billion in single-family loans held for investment - this includes $52.9 billion in payment option ARMs and
$16.05 billion in subprime mortgage loans”).
(4) Gain on Sale
WaMu’s internal documents indicate that the primary motivation behind its High Risk
Lending Strategy was the superior “gain on sale” profits generated by high risk loans.167
Washington Mutual management had calculated that higher risk loans were more profitable
when sold or securitized. Prior to sale, higher risk loans also produced greater short term profits,
because the bank typically charged the borrowers a higher rate of interest and higher fees.
Higher risk home loans placed for sale were more profitable for WaMu, because of the
higher price that Wall Street underwriters and investors were willing to pay for them. The profit
that WaMu obtained by selling or securitizing a loan was known as the “gain on sale.” Gain on
sale figures for the loans produced by the bank were analyzed and presented to the WaMu Board
of Directors. On April 18, 2006, David Schneider, the President of WaMu Home Loans division,
provided the Board of Directors a confidential presentation entitled, “Home Loans
Discussion.”168 The third slide in the presentation was entitled, “Home Loans Strategic
Positioning,” and stated: “Home Loans is accelerating significant business model changes to
achieve consistent, long term financial objectives.”169 Beneath this heading the first listed
objective was: “Shift from low-margin business to high-margin products,”170 meaning from less
profitable to more profitable loan products. The next slide in the presentation was entitled:
“Shift to Higher Margin Products,” and elaborated on that objective. The slide listed the actual
gain on sale obtained by the bank, in 2005, for each type of loan WaMu offered, providing the
“basis points” (bps) that each type of loan fetched on Wall Street:
2005 WaMu Gain on Sale
Margin by Product
in bps171
Government 13
Fixed 19
Hybrid/ARM 25
Alt A 40
Option ARM 109
Home Equity 113
Subprime 150
167 1/18/2005 Washington Mutual Inc. Washington Mutual Bank FA Finance Committee Minutes at
JPM_WM06293964; see also 1/2005 “Higher Risk Lending Strategy Presentation,” submitted to Washington
Mutual Board of Directors, at JPM_WM00302977, Hearing Exhibit 4/13-2a
168 4/18/2006 “Home Loans Discussion Board of Directors Meeting,” WaMu presentation, JPM_WM00690890-901,
Hearing Exhibit 4/13-3.
169 Id. at 893 [emphasis in original removed].
170 Id.
171 Id. at 894 [formatting as in the original].
Mr. Schneider told the Subcommittee that the numbers listed on the chart were not
projections, but the numbers generated from actual, historical loan data.172 As the chart makes
clear, the least profitable loans for WaMu were government backed and fixed rate loans. Those
loans were typically purchased by government sponsored enterprises (GSEs) like Fannie Mae,
Freddie Mac, and Ginnie Mae which paid relatively low prices for them. Instead of focusing on
those low margin loans, WaMu’s management looked to make profits elsewhere, and elected to
focus on the most profitable loans, which were the Option ARM, home equity, and subprime
loans. In 2005, subprime loans, with 150 basis points, were eight times more profitable than a
fixed rate loan at 19 basis points and more than 10 times as profitable as government backed
The gain on sale data WaMu collected drove not only WaMu’s decision to focus on
higher risk home loans, but also how the bank priced those loans for borrowers. In determining
how much it would charge for a loan, the bank calculated first what price the loan would obtain
on Wall Street. As Mr. Beck explained in his testimony before the Subcommittee:
“Because WaMu’s capital markets organization was engaged in the secondary mortgage
market, it had ready access to information regarding how the market priced loan
products. Therefore my team helped determine the initial prices at which WaMu could
offer loans by beginning with the applicable market prices for private or agency-backed
mortgage securities and adding the various costs WaMu incurred in the origination, sale,
and servicing of home loans.”173
(5) Acknowledging Unsustainable Housing Price Increases
In 2004, before WaMu implemented its High Risk Lending Strategy, the Chief Risk
Officer Jim Vanasek expressed internally concern about the unsustainable rise in housing prices,
loosening lending standards, and the possible consequences. On September 2, 2004, just months
before the formal presentation of the High Risk Lending Strategy to the Board of Directors, Mr.
Vanasek circulated a prescient memorandum to WaMu’s mortgage underwriting and appraisal
staff, warning of a bubble in housing prices and encouraging tighter underwriting. The
memorandum also captured a sense of the turmoil and pressure at WaMu. Under the subject
heading, “Perspective,” Mr. Vanasek wrote:
“I want to share just a few thoughts with all of you as we begin the month of September.
Clearly you have gone through a difficult period of time with all of the changes in the
mortgage area of the bank. Staff cuts and recent defections have only added to the stress.
Mark Hillis [a Senior Risk Officer] and I are painfully aware of the toll that this has taken
on some of you and have felt it is important to tell you that we recognize it has been and
continues to be difficult.
172 Subcommittee interview of David Schneider (2/16/2010).
173 April 13, 2010 Subcommittee Hearing at 53.
“In the midst of all this change and stress, patience is growing thin. We understand that.
We also know that loan originators are pushing very hard for deals. But we need to put
all of this in perspective.
“At this point in the mortgage cycle with prices having increased far beyond the rate of
increase in personal incomes, there clearly comes a time when prices must slow down or
perhaps even decline. There have been so many warnings of a Housing Bubble that we
all tend now to ignore them because thus far it has not happened. I am not in the business
of forecasting, but I have a healthy respect for the underlying data which says ultimately
this environment is no longer sustainable. Therefore I would conclude that now is not the
time to be pushing appraisal values. If anything we should be a bit more conservative
across the board. Kerry Killinger and Bill Longbrake [a Vice Chair of WaMu] have both
expressed renewed concern over this issue.
“This is a point where we should be much more careful about exceptions. It is highly
questionable as to how strong this economy may be; there is clearly no consensus on
Wall Street. If the economy stalls, the combination of low FICOs, high LTVs and
inordinate numbers of exceptions will come back to haunt us.”174
Mr. Vanasek was the senior-most risk officer at WaMu, and had frequent interactions with Mr.
Killinger and the Board of Directors. While his concerns may have been heard, they were not
Mr. Vanasek told the Subcommittee that, because of his predictions of a collapse in the
housing market, he earned the derisive nickname “Dr. Doom.”175 But evidence of a housing
bubble was overwhelming by 2005. Over the prior ten years, housing prices had skyrocketed in
an unprecedented fashion, as the following chart prepared by Paulson & Co. Inc., based on data
from the Bureau of Economic Analysis and the Office of Federal Housing Enterprise Oversight,
174 9/2/2004 Washington Mutual memorandum from Jim Vanasek, “Perspective,” Hearing Exhibit 4/13-78b.
175 Subcommittee interview of Jim Vanasek (12/18/2009).
176 “Estimation of Housing Bubble,” PSI-Paulson&Co-02-00003, Hearing Exhibit 4/13-1j.
Mr. Vanasek shared his concerns with Mr. Killinger. At the Subcommittee’s hearing,
Mr. Killinger testified: “Now, beginning in 2005, 2 years before the financial crisis hit, I was
publicly and repeatedly warning of the risks of a potential housing downturn.”177 In March
2005, he engaged in an email exchange with Mr. Vanasek, in which both agreed the United
States was in the midst of a housing bubble. On March, 10, 2005, Mr. Vanasek emailed Mr.
Killinger about many of the issues facing his risk management team, concluding:
“My group is working as hard as I can reasonably ask any group to work and in several
cases they are stretched to the absolute limit. Any words of support and appreciation
would be very helpful to the morale of the group. These folks have stepped up to fixing
any number of issues this year, many not at all of their own making.”178
Mr. Killinger replied:
“Thanks Jim. Overall, it appears we are making some good progress. Hopefully, the
Regulators will agree that we are making some progress. I suspect the toughest thing for
us will be to navigate through a period of high home prices, increased competitive
conditions for reduced underwriting standards, and our need to grow the balance sheet. I
177 April 13, 2010 Subcommittee Hearing at 85.
178 3/2005 WaMu internal email chain, Hearing Exhibit 4/13-78.
have never seen such a high risk housing market as market after market thinks they are
unique and for whatever reason are not likely to experience price declines. This typically
signifies a bubble.”
Mr. Vanasek agreed:
“I could not agree more. All the classic signs are there and the likely outcome is
probably not great. We would all like to think the air can come out of the balloon slowly
but history would not lean you in that direction. Over the next month or so I am going to
work hard on what I hope can be a lasting mechanism (legacy) for determining how
much risk we can afford to take ….”
Despite Mr. Killinger’s awareness that housing prices were unsustainable, could drop suddenly,
and could make it difficult for borrowers to refinance or sell their homes, Mr. Killinger
continued to push forward with WaMu’s High Risk Lending Strategy.
(6) Execution of the High Risk Lending Strategy
WaMu formally adopted the High Risk Lending Strategy in January 2005.179 Over the
following two years, management significantly shifted the bank’s loan originations towards
riskier loans as called for in the plan, but had to slow down the pace of implementation in the
face of worsening market conditions. In retrospect, WaMu executives tried to portray their
inability to fully execute the plan as a strategic choice rather than the result of a failed strategy.
For example, Mr. Killinger testified at the Subcommittee hearing that the bank’s High Risk
Lending Strategy was only contemplated, but not really executed:
“First, we had an adjustment in our strategy that started in about 2004 to gradually
increase the amount of home equity, subprime, commercial real estate, and multi-family
loans that we could hold on the balance sheet. We had that long-term strategy, but … we
quickly determined that the housing market was increasing in its risk, and we put most of
those strategies for expansion on hold.”180
Mr. Killinger’s claim that the High Risk Lending Strategy was put “on hold” is contradicted,
however, by WaMu’s SEC filings, its internal documents, and the testimony of other WaMu
Washington Mutual’s SEC filings contain loan origination and acquisition data showing
that the bank did implement its High Risk Lending Strategy. Although rising defaults and the
2007 collapse of the subprime secondary market prevented WaMu from fully executing its plans,
WaMu dramatically shifted the composition of the loans it originated and purchased, nearly
179 See 3/13/2006 OTS Report of Examination, at OTSWMS06-008 0001677, Hearing Exhibit 4/16-94 [Sealed
180 April 13, 2010 Subcommittee Hearing at 88.
doubling the percentage of higher risk home loans from 36% to 67%. The following chart,
prepared by the Subcommittee using data from WaMu’s SEC filings, demonstrates the shift.181
In 2003, 64% of WaMu’s mortgage originations and purchases were fixed rate loans, and
only 19% were subprime, Option ARM, or home equity loans. In 2004, 31% of WaMu’s
mortgage originations and purchases were fixed rate loans, and 55% were subprime, Option
ARM, or home equity loans. In 2005, 31% of WaMu’s mortgage originations and purchases
were fixed rate loans, and 56% were subprime, Option ARM, or equity loans. By 2006, only
25% of WaMu’s mortgage originations and purchases were fixed rate loans, and 55% were
subprime, Option ARM, or home equity loans.182 Even after market forces began taking their
toll in 2007, and WaMu ended all subprime lending in the fall of that year, its higher risk
originations and purchases at 47% were double its fixed rate loans at 23%.183
181 4/2010 “WaMu Product Originations and Purchases by Percentage – 2003-2007,” chart prepared by the
Subcommittee, Hearing Exhibit 4/13-1i.
182 Id.
183 Id.
Mr. Killinger’s annual “Strategic Direction” memoranda to the Board in 2005, 2006, and
2007, also contradict his testimony that the strategy of expanding high risk lending was put on
hold. On the first page of his 2005 memorandum, Mr. Killinger wrote: “We continue to see
excellent long-term growth opportunities for our key business lines of retail banking, mortgage
banking, multi-family lending and sub-prime residential lending.”184 Rather than hold back on
WaMu’s stated strategy of risk expansion, Mr. Killinger told the Board that WaMu should
accelerate it:
“In order to reduce the impact of interest rate changes on our business, we have
accelerated development of Alt-A, government and sub-prime loan products, as well as
hybrid ARMs and other prime products, specifically for delivery through retail,
wholesale and correspondent channels.”185
The 2005 strategic direction memorandum also targeted Long Beach for expansion:
“Long Beach is expected to originate $30 billion of loans this year, growing to $36
billion in 2006. To facilitate this growth, we plan to increase account managers by 100.
We expect Long Beach to have 5% of the sub-prime market in 2005, growing to [a] 6%
share in 2006.”186
Despite warning against unsustainable housing prices in March 2005, Mr. Killinger’s
2006 “Strategic Direction” memorandum to the Board put even more emphasis on growth than
the 2005 memorandum. After reviewing the financial targets set in the five-year plan adopted in
2004, Mr. Killinger wrote: “To achieve these targets, we developed aggressive business plans
around the themes of growth, productivity, innovation, risk management and people
development.”187 His memorandum expressed no hesitation or qualification as to whether the
high risk home lending strategy was still operative in 2006. The memorandum stated:
“Finally, our Home Loan Group should complete its repositioning within the next twelve
months and it should then be in position to grow its market share of Option ARM, home
equity, sub prime and Alt. A loans. We should be able to increase our share of these
categories to over 10%.”188
Contrary to Mr. Killinger’s hearing testimony, the 2006 memorandum indicates an expansion of
WaMu’s high risk home lending, rather than any curtailment:
“We are refining our home loans business model to significantly curtail low margin
Government and conventional fixed rate originations and servicing, and to significantly
184 6/1/2005 Washington Mutual memorandum from Kerry Killinger to the Board of Directors, “Strategic
Direction,” JPMC/WM - 0636-49 at 36, Hearing Exhibit 4/13-6c.
185 Id. at 644.
186 Id. at 646.
187 6/6/2006 Washington Mutual memorandum from Kerry Killinger to the Board of Directors, “Strategic
Direction,” JPM_00808312-324 at 314, Hearing Exhibit 4/13-6d.
188 Id. at 315 [emphasis in original removed].
increase our origination and servicing of high margin home equity, Alt. A, sub prime and
option ARMs. Action steps include merging Longbeach sub prime and the prime
business under common management, merging correspondent activities into our
correspondent channel, getting out of Government lending, curtailing conventional fixed
rate production, expanding distribution of targeted high margin products through all
distribution channels and potentially selling MSRs [Mortgage Servicing Rights] of low
margin products. We expect these actions to result in significantly higher profitability
and lower volatility over time.”189
The April 16, 2006 “Home Loans Discussion” presentation by Home Loans President
David Schneider, discussed above, also confirms WaMu’s ongoing efforts to shift its loan
business toward high risk lending. Page four of that presentation, entitled, “Shift to Higher
Margin Products,” shows two pie charts under the heading, “WaMu Volume by Product.”190
One chart depicts loan volume for 2005, and the second chart depicts projected loan volume for
WaMu Volume By Product
$ In Billions191
These charts demonstrate WaMu’s intention to increase its loan originations over three
years by almost $30 billion, focusing on increases in high risk loan products. Subprime
originations, for example, were expected to grow from $34 billion in 2005 to $70 billion in 2008;
Alt A originations were projected to grow from $1 billion in 2005 to $24 billion in 2008; and
189 Id. at 319.
190 4/18/2006 “Home Loans Discussion Board of Directors Meeting,” WaMu PowerPoint presentation,
JPM_WM00690890-901 at 894, Hearing Exhibit 4/13-3.
191 Id. [formatted for clarity].
Option ARM
Home Equity
2005 Fixed
Option ARM
Home Equity
New Product
Alt A
$206 Billion $232 Billion
Home Equity originations were projected to grow from $4 billion in 2005 to $30 billion in 2008.
On the other hand, WaMu’s low risk originations were expected to be curtailed dramatically.
Government backed loan originations, which totaled $8 billion in 2005, were projected to be
eliminated by 2008. Fixed rate loan originations were projected to decline from $69 billion in
2005 to $4 billion in 2008.
The 2007 “Strategic Direction” memorandum to the Board is dated June 18, 2007, well
after U.S. housing prices had begun to decline, as Mr. Killinger acknowledged:
“For the past two years, we have been predicting the bursting of the housing bubble and
the likelihood of a slowing housing market. This scenario has now turned into a reality.
Housing prices are declining in many areas of the country and sales are rapidly slowing.
This is leading to an increase in delinquencies and loan losses. The sub-prime market
was especially rocked as many sub-prime borrowers bought houses at the peak of the
cycle and now find their houses are worth less and they are having difficulties refinancing
their initial low-rate loans.”192
While the memorandum’s section on home loan strategy no longer focused on overall growth, it
continued to push the shift to high risk lending, despite problems in the subprime market:
“Home Loans is a large and important business, but at this point in the cycle, it is
unprofitable. The key strategy for 2008 is to execute on the revised strategy adopted in
2006. … We need to optimize the sub-prime and prime distribution channels with
particular emphasis on growing the retail banking, home loan center and consumer direct
channels. We also expect to portfolio more of Home Loans’ originations in 2008,
including the new Mortgage Plus product. We will continue to emphasize higher-risk
adjusted return products such as home equity, sub-prime first mortgages, Alt A
mortgages and proprietary products such as Mortgage Plus.”193
The testimony of other WaMu executives further confirms the bank’s implementation of
its High Risk Lending Strategy. Ronald Cathcart, who joined WaMu in 2006, to become the
company’s Chief Risk Officer, testified:
“The company’s strategic plan to shift its portfolios towards higher margin products was
already underway when I arrived at WaMu. Basically, this strategy involved moving
away from traditional mortgage lending into alternative lending programs involving
adjustable-rate mortgages as well as into subprime products. The strategic shift to
192 6/18/2007 Washington Mutual memorandum from Kerry Killinger to the Board of Directors, “Strategic
Direction,” JPM_WM03227058-67 at 60, Hearing Exhibit 4/13-6a.
193 Id. at 66 [emphasis in original removed]. See also 1/2007 Washington Mutual presentation, “Subprime Mortgage
Program,” JPM_WM02551400, Hearing Exhibit 4/13-5 (informing potential investors in its subprime RMBS
securities that: “WaMu is focusing on higher margin products”).
higher-margin products resulted in the bank taking on a higher degree of credit risk
because there was a greater chance that borrowers would default.”194
Likewise, Steven Rotella, WaMu’s President and Chief Operating Officer, who began with the
bank in January 2005, testified before the Subcommittee:
“In particular, I want to be very clear on the topic of high-risk lending, this
Subcommittee’s focus today. High-risk mortgage lending in WaMu’s case, primarily
Option ARMs and subprime loans through Long Beach Mortgage, a subsidiary of WaMu,
were expanded and accelerated at explosive rates starting in the early 2000s, prior to my
hiring in 2005…. In 2004 alone, the year before I joined, Option ARMs were up 124
[percent], and subprime lending was up 52 percent.”195
In his testimony, Mr. Rotella took credit for curtailing WaMu’s growth and high risk
lending.196 Mr. Rotella’s own emails, however, show that he supported the High Risk Lending
Strategy. On October 15, 2005, Mr. Rotella emailed Mr. Killinger about WaMu’s 2006 strategic
plan: “I think our focus needs to be on organic growth of home eq, and subprime, and greater
utilization of [the Home Loans division] as we know it today to facilitate that at lower
acquisition costs and greater efficiency.”197
Mr. Killinger replied by email the next day: “Regarding Longbeach, I think there is a
good opportunity to be a low cost provider and gain significant share when the industry
implodes.”198 Responding to Mr. Rotella’s ideas about the Home Loans division, Mr. Killinger
wrote: “It makes sense to leverage the home loans distribution channels with home equity, sub
prime, and alt. A.”199 In this late 2005 email exchange, WaMu’s two senior-most executives
contemplate reducing prime lending, not subprime. Mr. Killinger wrote: “If we can’t make a
shift in our business model, we might be better off exiting the prime space.”200
Mr. Rotella replied to Mr. Killinger’s email later on October 16, 2005. He continued to
emphasize the importance of focusing on high risk lending, referring to his previous experience
as a mortgage banker at JPMorgan Chase:
“We did these kinds of analyses all the time at Chase which led us to run as fast as we
could into home eq, alt a, subprime (our investment banking brethren stopped us from
going too far here). We viewed prime as a source of scale benefits in servicing for the
other areas and a conduit of higher margin product and aimed to hold our prime servicing
194 April 13, 2010 Subcommittee Hearing at 18-19.
195 Id. at 83.
196 See id., e.g., at 83-84.
197 10/15/2005-10/16/2005 email from Steve Rotella to Kerry Killinger, JPM_WM00665373-75.
198 Id. at JPM_WM00665374.
199 Id.
200 Id.
flat to down. I feel strongly that where we need to land is a new home loan unit that
includes prime, heq, and subprime. It is a far superior model.”201
In July 2008, just two months before the collapse of WaMu, Home Loans President
David Schneider prepared an internal presentation entitled, “Home Loans Story, External &
Internal Views.”202 The presentation was retrospective, providing timelines of WaMu’s major
strategy, policy, and personnel changes. The first substantive page of the presentation bears the
heading, “Three fundamental business shifts occurred in Home Loans this millennium which
shaped its performance and position in a volatile competitive landscape”:
“2001 to 2005
‘Mono-line’ business model focused on generating high volume of low-margin, prime
products ….
Targeted production franchise toward higher margin products to become a market leader
in specific product segments….
2007 & Beyond
Subprime mortgage implosion fuels credit and liquidity crisis and the non-agency
secondary market disappears[.]”
Mr. Scheider’s retrospective presentation of the changes that occurred at WaMu is
unambiguous: by 2006, WaMu had “targeted production franchise toward higher margin
products.”203 According to the same presentation, that model change also lowered earnings
volatility for WaMu by lessening exposure to Mortgage Servicing Rights.204 Later slides provide
more detail. A quarterly timeline is presented with the heading: “In an environment of internal
and external large-scale change, Home Loans took bold actions to redefine its business into a
sustainable model.” In the strategy section for the second quarter of 2006, Mr. Schneider wrote:
“New business model, high margin products.”205
Despite warnings by some within its management about the unsustainable housing price
bubble, WaMu pursued a High Risk Lending Strategy to generate short term profits from the
favorable gain-on-sale margins offered by Wall Street for high risk loans and securitizations, for
which the credit rating agencies continued to award AAA ratings. To succeed, the strategy was
premised upon borrowers being able to refinance or sell their homes to pay off their loans in the
event of a default. Stagnant or declining house prices made refinancing and home sales more
201 Id. at JPM_WM00665373.
202 7/2008 “Home Loans Story, External & Internal Views,” Washington Mutual PowerPoint presentation, Hearing
Exhibit 4/13-80.
203 Id. at 1.
204 Id.
205 Id. at 4.
Effective implementation of the High Risk Lending Strategy also required robust risk
management. But while WaMu was incurring significantly more credit risk than it had in the
past, risk managers were marginalized, undermined, and subordinated to WaMu’s business units.
As a result, when credit risk management was most needed, WaMu found itself lacking in
effective risk management and oversight.
D. Shoddy Lending Practices
At the same time they increased their higher risk lending, WaMu and Long Beach
engaged in a host of poor lending practices that produced billions of dollars in poor quality loans.
Those practices included offering high risk borrowers large loans; steering borrowers to higher
risk loans; accepting loan applications without verifying the borrower’s income; using loans with
low teaser rates to entice borrowers to take out larger loans; promoting negative amortization
loans which led to many borrowers increasing rather than paying down their debt over time; and
authorizing loans with multiple layers of risk. WaMu and Long Beach also exercised weak
oversight over their loan personnel and third party mortgage brokers, and tolerated the issuance
of loans with fraudulent or erroneous borrower information.
(1) Long Beach
Throughout the period reviewed by the Subcommittee, from 2004 until its demise in
September 2007, Long Beach was plagued with problems. Long Beach was one of the largest
subprime lenders in the United States,206 but it did not have any of its own loan officers. Long
Beach operated exclusively as a “wholesale lender,” meaning all of the loans it issued were
obtained from third party mortgage brokers who had brought loans to the company to be
financed. Long Beach “account executives” solicited and originated the mortgages that were
initiated by mortgage brokers working directly with borrowers. Long Beach account executives
were paid according to the volume of loans they originated, with little heed paid to loan quality.
Throughout the period reviewed by the Subcommittee, Long Beach’s subprime home
loans and mortgage backed securities were among the worst performing in the subprime
industry. Its loans repeatedly experienced early payment defaults, its securities had among the
highest delinquencies in the market, and its unexpected losses and repurchase demands damaged
its parent corporation’s financial results. Internal documentation from WaMu shows that senior
management at the bank was fully aware of Long Beach’s shoddy lending practices, but failed to
correct them.
2003 Halt in Securitizations. For a brief period in 2003, Long Beach was required by
WaMu lawyers to stop all securitizations until significant performance problems were remedied.
While the problems were addressed and securitizations later resumed, many of the issues
returned and lingered for several years.
206 See 1/2007 Washington Mutual Presentation, “Subprime Mortgage Program,” Hearing Exhibit 4/13-5 (slide
showing Long Beach Annual Origination Volume).
The problems with Long Beach’s loans and securitizations predated the company’s
purchase by WaMu in 1999, but continued after the purchase. An internal email at WaMu’s
primary federal regulator, the Office of Thrift Supervision (OTS), observed the following with
respect to Long Beach’s mortgage backed securities:
“Performance data for 2003 and 2004 vintages appear to approximate industry average
while issues prior to 2003 have horrible performance. LBMC finished in the top 12 worst
annualized NCLs [net credit losses] in 1997 and 1999 thru 2003. LBMC nailed down the
worst spot at top loser… in 2000 and placed 3rd in 2001.”207
In 2003, Long Beach’s performance deteriorated to the point that WaMu’s legal
department put a stop to all Long Beach securitizations until the company improved its
operations.208 An internal review of Long Beach’s first quarter 2003 lending “concluded that
40% (109 of 271) of loans reviewed were considered unacceptable due to one or more critical
errors.”209 According to a 2003 joint report issued by regulators from the FDIC and Washington
State: “This raised concerns over LBMC’s ability to meet the representations and warranty’s
made to facilitate sales of loan securitizations, and management halted securitization activity.”210
A Long Beach corporate credit review in August 2003 confirmed that “credit management and
portfolio oversight practices were unsatisfactory.”211
As a result of the halt in securitizations, Long Beach had to hold loans on its warehouse
balance sheet, which increased by approximately $1 billion per month and reached nearly $5
billion by the end of November 2003. Long Beach had to borrow money from WaMu and other
creditors to finance the surge.212 The joint visitation report noted that unless Long Beach
executed a $3 billion securitization by January 2004, “liquidity will be strained.”213 WaMu
initiated a review of Long Beach led by its General Counsel Faye Chapman.214 Her team
evaluated the loans that had accumulated during the halt in securitizations. The joint visitation
report noted that of 4,000 Long Beach loans reviewed by WaMu by the end of November 2003,
less than one quarter, about 950, could be sold to investors, another 800 were unsaleable, and the
rest—over half of the loans—had deficiencies that had to be remediated before a sale could take
207 4/2005 OTS internal email, Hearing Exhibit 4/13-8(a).
208 Subcommittee interview of Faye Chapman, WaMu General Counsel (2/9/2010). See also 12/21/2005 OTS
memorandum, “Long Beach Mortgage Corporation (LBMC),” OTSWMS06-007 0001010, Hearing Exhibit 4/16-31.
209 1/13/2004 report on “Joint Visitation Dated October 14, 2003,” jointly prepared by the FDIC and the State of
Washington Department of Financial Institutions, FDIC-E_00102515, at 3, Hearing Exhibit 4/13-8b (citing a Long
Beach quality assurance report).
210 Id.
211 Id. (citing a Long Beach Corporate Credit Review report).
212 Id.
213 Id.
214 Subcommittee interview of Fay Chapman (2/9/2010).
215 1/13/2004 report on “Joint Visitation Dated October 14, 2003,” jointly prepared by the FDIC and the State of
Washington Department of Financial Institutions, FDIC-E_00102515, at 3, Hearing Exhibit 4/13-8b

No comments:

Post a Comment