WaMu To Stop Offering Cetain Types Of Subprime Mortgages

WaMu, the nations largest Savings & Loan, is going to stop issuing certain risky types of subprime loans.

From Marketwatch:

Effective immediately, the Seattle company will no longer offer subprime mortgages that carry fixed rates for the first two or three years and then reset to higher market rates. Those loans, also known as 2/28 and 3/27 subprime loans, pose higher default risk as the housing slump makes it harder for financially stretched homeowners to refinance or sell their homes.
WaMu will also require subprime borrowers to provide full documentation. Over the past two years, heightened competition has led home lenders to peddle so-called stated-income loans – under which borrowers have to disclose their income but aren’t required to provide verification. The skipped paperwork, however, has contributed to higher default rates as some borrowers overstated their financial strength in order to get loans to buy houses they really can’t afford.
“I want to emphasize that we remain committed to providing subprime loans to creditworthy borrowers,” WaMu Chief Executive Kerry Killinger said in remarks prepared for its earnings conference call after the market close Wednesday.

Providing loans to people who can’t offer income documentation is irresponsible, and we’re pleased to see these reforms being made… even if it is a bit late.

According to analysts, it’s also important that lenders take into account the full amount that borrowers will need to pay per month when determining if they can afford the loan… this seems self-evident, but it’s not always done.

According to Marketwatch, fully 1/3 of 2-year “teaser rate” borrowers wouldn’t have qualified for their loans if the larger interest rate had been considered.


Washington Mutual to stop offering certain subprime loans
[MarketWatch]
(Photo:cmorran123)

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  1. evil_doer420 says:

    I’m all for this, I’m sick of seeing foreclosures and bankruptcies because banks will give money to anyone who asks.

  2. enm4r says:

    Providing loans to people who can’t offer income documentation is irresponsible, and we’re pleased to see these reforms being made… even if it is a bit late.

    No doubt, but I’d go so far to say that overstating your income to get a mortgage is more irrestponsible.

  3. The Walking Eye says:

    The lenders who loaned people who could not afford the homes got what they deserve. Why oh why would you be dumb enough to give someone hundreds of thousands and not verify that their income is what they say it is?

  4. ArtDonovansDrunkenLovechild says:

    (Full disclosure- I am a licensed mortage broker who has participated in a number of ethics seminars and now consults brokers on training and hiring)

    Well, to bring a little fairness to this discussion, stated income loans are not always a bad thing. The problem as I see it is the economy has changed in such a dynamic way that the rules governing lending havent kept up. Additionally, unrealistic pricing advertisements have forced brokers to scramble to close bad loans or loans with minimal fees.

    Lets consider three cases from my own experiences.

    1. Couple wants to buy a home valued at $600k. Wife has a salaried job that pays about 60k plus bonuses that bring her average yearly to about 80k. Husband is a doctor who recently moved from a government job to private practice. Works for multiple employers now along with his private practice. Makes about 200k a year but can really only document about 40k.

    Now on a full doc loan there is no way this couple can get the financing they really should be entitled to. The DTI is out of whack and either they will have to pull money out of investments or buy a lesser house. Now, taking them stated income /Verified assets I can show they have an ability to pay their bills and can put them in a solid 80/20 or 100% loan.

    2. Single male. Financial Advisor making about 10k a month on average. Been doing this 4 years and is just now really seeing the solid income return. He has some bad credit issues still floating around from when he was in college, keeping his score in the low 600s (collections that wont drop for another year. FTHB. Takes a 2/28 loan at a high interest rate, stated. His intention is to refinance this loan within the first 2 years. Because of this he buys out the Prepay penalty with an additional .25% to his rate. He knows that in 18 months he will have been paying this loan and his credit will improve dramatically. Additionally, his income will be documented via 2 years worth of tax returns and he can move from stated to full doc.

    3. 55 year old woman, government job 60k salary, no bonuses . Just divorced and has attrocious credit. Sold of her house that was held jointly and has paid off all debts, and come collections accounts. Score is sub 500. She takes a 3/27 loan, based purely on income which is stable. This is a high risk loan so the rate is high (10%+ in come cases). Now, within 12 months most of her credit cards will report 0 balances (it takes some time sometimes) and her credit will rocket up . Refinance her again into another arm, and repeat the process to get her into a Fannie type loan in 3-4 years.

    Now these are just three examples of GOOD stated or high interest arm loans, there are millions and we should not condemn a progam based on terminology. the problem is brokers, hurting due to drastically reduced fees and the total loss of any true consumer contol (they will change lenders over a few dollars after a lot of work) they are desperate to either create new loans or get rates lower . Customers demand the lowest possible rates based on commercials, and a broker who can get someone into a full doc fixed at 7 puts them into a Interest only stated at 5.5% with a very low payment to get the loan closed and make any money on it (they do have a right to earn a living). This is where the problems come from and the customers are as much to blame as the brokers. We all need to reevaluate the process.

  5. ArtDonovansDrunkenLovechild says:

    Sorry essay (I do that every time I post it seems)

  6. DownwardSpiral says:

    @ARTDONOVANSDRUNKENLOVECHILD: Agreed, those are all good examples of situations when these kind of ‘exotic’ products are very useful. I’m not sure getting rid of them altogether is the best solution.

    The root of the problem is that, in the face of the house price appreciation boom, the banks were facing so much pressure to generate more and more volume that they were approving all sorts of unfeasible loans with very loose underwriting.

    Both the banks and the lenders would have been fine had prices kept going up and up, but they clearly weren’t prepared for the tides to turn and now all these shops are closing down and all these people can’t get out of these loans and we see what we see.

  7. storm says:

    There’s nothing wrong with stated income loans. No one should be telling people what percent of their income they should be spending on housing. I know people that make half as much money as I do that spend far more money on what I consider junk and spend less on housing. I am willing to restrain myself a little and have a nicer house.

    Also, as hard as we like to be on individuals for being “irresponsible,” the lenders are in business to make money, and if they choose to make a loan and it’s a bad one, that’s too bad for them. The minute I see this kind of thing turned into a moral debate, I shut down. It’s business.
    If you can deal with the hit on your credit, you should feel no shame about walking away from a bad loan in a property that’s a bad investment and leave the lender holding the bag. Any for profit business would do the same.

    If lenders couldn’t predict that 2/28 or 3/27 ARMs would result in a ton of foreclosures, then they will be removed from the herd, Darwin-style. The historically low rates 5 years ago were going to go up—anyone could have seen that.

  8. swalve says:

    Who cares if WaMu issues loans “irresponsibly”? These are SECURED loans, if you don’t pay it back, the bank owns the house. If WaMu wants to loan money and the buyer wants to borrow it, who are we to stop them or call them stupid?

  9. Noah_Bodie says:

    I think WAMU is getting out of the subprime mortgage market, sorta, because it doesn’t pay. Period.

    Banks have been in, and shall remain in, the subprime credit card business. Despite the defaults, the profits to be made are huge. Fees, interest, overlimit fees, late fees, universal default ratejacking, et al.

    According to Harvard Law Professor Liz Warren, in the must see documentary “Maxed Out”, defaulted credit card debt is comprised of $1 in actual debt for every $2 in tacked on fees and interest. When they write off the chargeoff to P&L they’ve sufficiently padded the loss so it’s effectively not a loss–courtesy of the taxpayer.