WaMu Told Washington That Adjustable Rate Mortgages Were Safer Than Some Fixed Ones

The Associated Press says that a review of regulatory documents shows that years before the subprime mortgage crises developed into a full blown economic meltdown— the government ignored warnings and listened instead to lobbyists who represented some of the same banks that have now failed.

From the AP:

Bowing to aggressive lobbying — along with assurances from banks that the troubled mortgages were OK — regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.

“These mortgages have been considered more safe and sound for portfolio lenders than many fixed rate mortgages,” David Schneider, home loan president of Washington Mutual, told federal regulators in early 2006. Two years later, WaMu became the largest bank failure in U.S. history.

The AP goes on to list several proposals from 2005 that were ignored. Here they are:

Regulators told bankers exotic mortgages were often inappropriate for buyers with bad credit.

Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses.

Regulators proposed a cap on risky mortgages so a string of defaults wouldn’t be crippling.

Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying.

Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.

Countrywide, then the nation’s largest mortgage lender, called the proposals “excessive” and claimed they would “inhibit future innovation in the marketplace.” Whooooops.

AP IMPACT: US diluted loan rules before crash [AP]
(Photo: dooleymtv )

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  1. woogychuck says:

    Is anybody surpised by this? This kind of garbage has been happening for decades and will likely continue.

    The fact is, even when massive crisis happen, most states keep re-electing the same people. Same people = same garbage = more problems.

    • vastrightwing says:

      @woogychuck: Since lobbying is how things are done, let’s throw out the senate and the house and hire our own lobbyists. Let’s change the system so that we actually pay politicians to do what we want. This is all they want anyway. From now on, we pay our taxes directly to our own politicians and make them responsible for how they spend it. Simple! No more IRS as such, we pay the politicos and they make sure they pay the government using our money. If we don’t like what they do with it, we pay someone else instead, or even split our payments among different politicians. Before you complain this won’t work, think about things are working right now.

  2. Ronin-Democrat says:

    What do they care, they’ll get their bonuses no matter what!!!!!

    WOOOOOOOT, first to post

  3. savdavid says:

    Sadly, I agree with Ronin, the CEO and executives will get their bonuses, retire as millionaires and live happily ever after. They lobbied to prevent regulation, Bush said “yes, masters” and when it all crashed around everyone they asked the government to give them money to bail them out. However, the money went to them, not the middle-class victims. Sad commentary on Bush, the GOP and the power of money and the lobbies.

    • emis says:

      @savdavid:

      the problems are party agnostic and started before Bush… so please don’t turn this into a Bush sh*t-throwing-fest because it’s really a problem for every political party.

      The fact is that these people were horridly greedy and this is one time that I’m in favor of ballooning the government to hire enough investigators to check and double check every g-damn email, letter, note on a napkin, voice mail, etc to figure out who the liars are so that they can be properly prosecuted for whatever laws were certainly broken by them providing false information.

    • RurouniX says:

      @savdavid: I never claimed to be an expert on politics and the workings of Washington but the whole concept of lobbying still astounds me. Is it me or does it seem to be the same as bribery? Why is one legal and the other illegal? You’re exchanging money for favor…isn’t it the same?

      • lockers says:

        @RurouniX: Lobbying is guaranteed in the constitution via the first amendment. Getting rid of lobbying would be unconstitutional.

        Having said that, campaign donations tied with lobbying is a form of bribery. The supreme court has found that bribery in that context is a free speech issue and also protected by the first amendment.

        Here, the claimed difference is that giving money for personal use is bribery and campaign use is not. which is crap.

      • howie_in_az says:

        @RurouniX: Lobbying is legal while prostitution and bribery are illegal for the same reason: the people in government have declared it so.

    • ChrisC1234 says:

      @savdavid: the CEO and executives will get their bonuses, retire as millionaires and live happily ever after.

      I’m not so sure about that anymore. If the US dollar becomes worthless, they could very well be much more screwed than us poor folks.

    • craptastico says:

      @savdavid: blaming this on Bush? Clinton loosened regulation in 1998. the Democratic Congress pushed FNMA and FHLMC to lend to poor people under the argument that it was discriminatory not too. This F up is too colossal to blame on any one party. As much as we like to blame the banks and their execs, the consumers taking these mortgages are equally to blame, as they also let their greed dictate their actions over common sense

      • mac-phisto says:

        @craptastico: FNMA & FHLMC don’t lend to consumers – they buy & sell on the secondary market. please get your facts straight before you start spewing misinformation all over the place.

        • craptastico says:

          @mac-phisto: they don’t lend directly to consumers, but FNMA and FHLMC set lending standards because the majority of banks don’t underwrite loans that they can’t sell to the secondary market, which is FNMA and FHLMC. When FHLMC Gold standards required 20% down and a 30 year fixed rate, that’s what banks sold.

      • econobiker says:

        @craptastico: “This F up is too colossal to blame on any one party.” I have always blamed it on the two political parties which are business owned…

        Doubt that most of the alternative political parties would have stood for this type of stuff or, inversely, regulated anything at all (nor bailed out businesses either)…

        Teddy Roosevelt, where are you now???

        • Hands says:

          @econobiker: With an extraordinary amount of luck, he’s getting ready to occupy the White House on January 20th.

          Hard to believe but I said that with a straight face?

  4. B says:

    But adjustable mortgages are safer than fixed rate ones*

    * As long as interest rates keep going down and property values keep going up**

    ** What do you mean interest rates can go up and property values can go down?

    Also, note how they safer for the portfolio lenders, not safer for the borrowers.

    • JustThatGuy3 says:

      @B:

      For the lender, an adjustable rate mortgage is “safer,” as it eliminates the risk if rates go up.

  5. zentex says:

    Countrywide, then the nation’s largest mortgage lender, called the proposals “excessive” and claimed they would “inhibit future innovation in the marketplace.”

    If by ‘innovation’ they meant that mergers and acquisitions wouldn’t happen, then yes Countrywide was absolutely correct.

  6. logicalnoise says:

    man what assbasg, when i finally closed my wamu account a few weeks ago and they asked why and I explained that i originally joined WAMU to get away from chase and obviously i was now joining 53rd for the same reason. Poor low paid teller said I shouldn’t rush things since chase was grandfathering in wamu’s policies for a year and a half. I politely explained that it didn’t matetr and went on my way. A week passes by and I hear that wamu dropped their annual overdraft waiver to save costs. Glad to see they still tell things like they are.

    • econobiker says:

      @logicalnoise:

      Even if it was true that “Chase was grandfathering in wamu’s policies for a year and a half” do you think that the bank would have informed anyone of the end of the grandfathered policies except in a small “update in terms” brochure printed in micro print font sent as an enclosure with your monthly statement or available for review on the website???

    • nicemarmot617 says:

      @logicalnoise: Unfortunately you will soon find that Fifth Third is even more evil than Wamu or Chase.

      *I found this out when they bought my bank. Then they closed my account. So I opened another one at a new bank. Then they took over that bank, and closed my second account. FIFTH THIRD IS THE WORST BANK IN THE HISTORY OF BANKS.

  7. working class Zer0 says:

    What’s the sense of having regulators if they do not have the power to impose common sense regulations?
    This is not Monday morning quarterback thinking. Anyone with half a brain would look at the proposals (that were rejected) and wholeheartly agree to include them.
    Please find a way to punish all these greedy, low life money grubbing bastards that created this mess!!!!!

    • ameyer says:

      @working class Zer0: And, for that matter, why have regulators the regulators aren’t even managing to make the banks comply with federal banking regulations?
      Yeah, I’m looking at you, Fifth-Third.

  8. Ash78 ain't got time to bleed says:

    Maybe they should do mandatory payroll withholdings so people will have enough money to pay after the rate reset.

    The government has been doing this for a long time with taxes, and it seems to have worked pretty well.

  9. Anonymous says:

    I have to admit, I feel that my mortgage lender — GMAC/Ditech — seems to have done right by us during our 2006 home purchase. While other lenders tried to get us into ridiculous adjustable rate loans and others had even more imaginative programs, Ditech was honest with us up front and got us the best fixed rate loan they could considering our mediocre credit. They verified our income with a microscope and never mislead us. Two years later they haven’t sold the note, either, like many mortgage companies have done. Looking over the proposals listed above, I see nothing to dissuade an honest company from doing business.

    • RedwoodFlyer says:

      @HadleyGriffin: The problem is…many borrowers aren’t reasonable like you. Ditech has been known to be “picky” about who/how much they approve for loans, in order to prevent things like this from happening. That reluctance to let the bellhop and his bartender wife buy a McMansion = many people got mad at Ditech and gave them a bad name!

    • Roeroica says:

      @HadleyGriffin: selling the loan isn’t a bad thing. GMAC might be servicing the loan but that doesn’t necessarily mean they didn’t sell it.

  10. pmcpa2 says:

    Can’t any of these people saying that these Adj mortgages were safe face criminal charges for lying under oath or something?

    • ameyer says:

      @pmcpa2: Not if they can say “I actually believed that adjustable rate mortgages were safer” under oath with a straight face.

      To be fair, I would think regular non-exotic ARMs that are indexed to the prime rate with a cap on how much the rate can increase per year aren’t that much more likely to default.
      As far as I can tell, many (most?) of the mortgages that are defaulting had a sudden increase in the monthly payment written into the contract such as interest only changing into interest+principal or a low teaser rate expiring and changing into an insane subprime rate and a borrower who planned to refinance or sell when the higher payment hit.

      • mac-phisto says:

        @ameyer: plus, the approval process was bastardized to the point that even a nominal increase left cash-strapped borrowers unable to pay when an increase hit.

        & that’s really what should be investigated here – serial misrepresentation of data by brokers on behalf of borrowers to game an approval thru the underwriting software.

        the question is whether this was a result of explicit directives to underwriters to ignore red flags or just poor training & lack of oversight that just blew up in everyone’s face.

      • econobiker says:

        @ameyer:

        Teaser rates: People who only buy on “I can afford this monthly payment amount” are destined to lose- more so in real estate than automobile purchases.

        Refinancing prior to higher rate hitting: It all works out while there is a housing value bubble inflating but comes crashing down when the value bubble is deflating

    • craptastico says:

      @pmcpa2: he said they were safer to the mortgage lender, not the borrower. the mortgage lender has less interest rate risk by holding an adjustable rate mortgage, so it’s kind of true. of course they’re taking on greater credit risk by underwriting mortgages people can’t afford

  11. Marshfield says:

    Today hundreds if not thousands of WaMu employees will be getting pink slips.

  12. bsalamon says:

    you mean Congress messed up. It’s a good thing we voted for change in Congress…oh wait

    • thefncrow says:

      @bsalamon: You really didn’t read the article, did you?

      First, federal regulators are part of the Executive Branch of government. Their rules are passed up to and signed off on by the President. Congress, on the other hand, is the Legislative Branch. Totally different thing.

      Second, we actually did vote for change in Congress, we just did it in the 2006 elections, because we could affect that change then. If Bush could have been voted out early, he would have been tossed out on his ear back then too, but, alas, we had to wait for this year. The stuff described in the story happened in 2005 and 2006, back when Congress was controlled by, oh yeah, the Republicans.

      So, even if Congress was to blame for the described conduct, which it’s not, the Congress that would be to blame would be the Republicans, who we’ve since tossed out on their ear. Nice try at a snarky comment, though. Back it up with some facts next time, and it won’t blow up on you like this again.

  13. oneandone says:

    That’s a pretty strongly-worded article. AP seems to be taking a bold analysis. It made me think of the problem like this:

    Federal agencies usually get input on proposed regulation from a variety of stakeholders. Environmental regulations are the most clear cut – usually industry and environmental groups facing off against each other. Labor regulations usually get unions and lobbyists on behalf of corporations. Regulators & heads of agencies will hear different perspectives on what they’re proposing. Here, though, it seems like it was just a conversation between the banks and the regulators – and even though some regulators saw potential problems, that’s not the same as a citizen group (or even paid lobbyists) saying the same thing.

    So who’s the other side on this? Who should the regulators have been listening to in order to get a more complete picture of what would happen?

    /assuming the govt works the way it should and actually takes into account public input

    • econobiker says:

      @oneandone: Alan Greenspan thought that the businesses would self-regulate this market. He just didn’t figure that bank failure would be the methodology…

      Poor old Alan G. with his stuck in the 1950s economics…

    • econobiker says:

      @oneandone:

      “Who should the regulators have been listening to in order to get a more complete picture of what would happen?” Somebody like Suze Orman or Dave Ramsey, but those folks don’t get involved in government issues…

      • oneandone says:

        @econobiker: I was thinking about them – and also Peter Schiff – but still feeling the need for a heavyweight organization, or trade group, or something. But I guess everyone on every level was getting fat off the process and didn’t want to slow it down.

        The article mentioned a few small organizations in California concerned with fair practices re: low income and minority mortgages, and it made me sad that we don’t have a national equivalent, or anything involved in consumer protection that is a Big Deal kind of group – who could make the regulators take a closer, more critical look at the story the banks were selling.

  14. econobiker says:

    One big f-ng question about this whole mess is:

    Are these banks and bank-like businesses being bailed out the same ones which got the bankruptcy laws changed a few years back because supposedly “consumers were abusing the bankruptcy process”?

    This irony needs to be pointed out by someone…

    • mac-phisto says:

      @econobiker: yes. & they also succeeded in stripping out all significant changes to chapter 11 bankruptcy. nice, huh?

    • varro says:

      @econobiker: MBNA – biggest promoter of the 2005 bankruptcy laws. Bought by Bank of America.

      Countrywide, biggest abuser of adjustable rate and NINJA loans. Also bought by Bank of America.

  15. Brazell says:

    I’m glad that it took the AP until after November 4th to come out with this stunning announcement, the rest of the world that hasn’t had their head in the sand has known about it since 2004.

  16. econobiker says:

    It would be great if someone could video ambush these people with their old quotes and see what they have to say now…

    • econobiker says:

      @econobiker:

      At least Lehman’s guy was into the securities industry lobbying effort full time…

      [74.125.45.132]

      Mr. Joseph Polizzotto
      Managing Director and General Counsel of Lehman Brothers

      Joseph Polizzotto is a Managing Director and General Counsel of Lehman Brothers, a position he assumed in 1999. …. Mr. Polizzotto is involved in a number of securities industry activities and is a past Chair of the Securities Industry Association’s (now SIFMA) Federal Regulation Committee. In recognition of his work on behalf of the securities industry, Mr. Polizzotto received a Distinguished Leadership Award from the Securities Industry Association in November 2002. …

  17. Radoman says:

    I had a WAMU rep tell me directly that ARM mortgages were safer and cost less money. When I pointed out that ARM mortgages were cheaper only as long as the rates were low, and that rates were at a historic low, he was visibly agitated. His response? He asked if I was questioning his 20 years of experience. I kid you not. This guy was aggressively pushing an adjustable rate mortgage on someone who knew better and didn’t want one.

    If they were willing to try to push off these loans onto customers who knew better and didn’t want ARM loans, it comes as no surprise to me that they were telling Washington that ARM loans were safer. Must have made a heck of a lot of money before imploding…

  18. kwsventures says:

    ARM safer than a fixed rate? Well, this explains why WaMu went on the scrap heap of history recently. Even terrible management might survive a bull market for real estate. But, the first whiff of trouble and the horrible management caves in the company.

  19. 310Drew says:

    Yes arms are in fact cheaper then a fixed mortgage, they reduce your cost of borrowing and repayment the average shelf life of a loan is 5 years roughly. Taking into account that your not going to pay off any principal in those years, seeing as your not even on paying principal and interest until half way through the 20th year of a 30 year mortgage. The standard 30 year is a suckers bet its like financing a car on an 84 month payment schedule. Not to mention the closing costs which average about 3% of the loan amount vs a heloc which has no costs usually and has an interest only period of 5 or 10 years and when you make more then the minimum payment it is directly applied to the principal allowing you to make some serious reductions on your mortgage. But im sure everybody on here already knew all of that…..

    • RedwoodFlyer says:

      @310Drew: Actually…it all depends on what your money would be doing if it isn’t going towards a house payment. We’re certainly capable of nearly paying off our house (year 2 of a 30 yr.) but instead of forking over the $xx, decided to invest it. Currently, we’re short selling like crazy and it’s definitely paying off. The only way it makes sense to pay off your house sooner than you have to is if your ROI on your money is less than the % rate.

    • JustThatGuy3 says:

      @310Drew:

      You have interesting views on math.

    • Radoman says:

      @310Drew: “Yes arms are in fact cheaper then a fixed mortgage, they reduce your cost of borrowing and repayment the average shelf life of a loan is 5 years roughly.”

      Sure, as long as the rates stay low, the payments for an ARM are initially cheaper. Ask all these people defaulting on their loans right now if an ARM was a safer idea. It’s exactly this kind of denial that got us into this mess. What happens if things change? Then your “5 year” loan becomes a lot harder to get out from under, because no one is buying and home values are falling. People are still losing their homes right now because of this effect.

      “Taking into account that your not going to pay off any principal in those years, seeing as your not even on paying principal and interest until half way through the 20th year of a 30 year mortgage. The standard 30 year is a suckers bet”

      I don’t know what kind of crazy 30 year loan you’re talking about, but any 30 year mortgage I’ve ever heard of has you paying both principal and interest on the very first payment. Google “30 year amortization” and it’s plainly obvious to see this fact. The initial payments pay less to principal than interest, sure, but saying “your not going to pay off any principal in those years, seeing as your not even on paying principal and interest until half way through the 20th year of a 30 year mortgage” is demonstrably and completely incorrect. You’re also free to pay additional principal on any payment you’d like with a 30 year mortgage. Calling a safe, affordable, predictable repayment schedule “a sucker’s bet” is incredibly naive. Betting that rates will go up from historic lows sounds pretty reasonable.

      And finally: Not to mention the closing costs which average about 3% of the loan amount vs a heloc which has no costs usually and has an interest only period of 5 or 10 years and when you make more then the minimum payment it is directly applied to the principal allowing you to make some serious reductions on your mortgage. But im sure everybody on here already knew all of that…..

      3% closing for a 30 year would be small price to pay to keep your house payment from fluctuating wildly, but if your credit is good it costs less than that anyway. Then you mention a HELOC costs less to close vs a 30 year. A HELOC is not a mortgage. An ARM is not a HELOC. The article refers to Adjustable Rate Mortgages vs Fixed Rate Mortgages, not ARMs vs adjustable rate Home Equity Lines Of Credit. You cannot purchase a home with a HELOC if you don’t already own a home to begin with, because a HELOC is not a mortgage. So, what makes you think HELOC’s are relevant to this conversation?

      You have to be careful on consumerist. There is no “edit” button. When you make wildly factually inaccurate rambling statements, they remain for all to see. But I’m sure you knew that…

  20. Radoman says:

    @310Drew: “Yes arms are in fact cheaper then a fixed mortgage, they reduce your cost of borrowing and repayment the average shelf life of a loan is 5 years roughly.”

    Sure, as long as the rates stay low, the payments for an ARM are initially cheaper. Ask all these people defaulting on their loans right now if an ARM was a safer idea. It’s exactly this kind of denial that got us into this mess. What happens if things change? Then your “5 year” loan becomes a lot harder to get out from under, because no one is buying and home values are falling. People are still losing their homes right now because of this effect.

    “Taking into account that your not going to pay off any principal in those years, seeing as your not even on paying principal and interest until half way through the 20th year of a 30 year mortgage. The standard 30 year is a suckers bet”

    I don’t know what kind of crazy 30 year loan you’re talking about, but any 30 year mortgage I’ve ever heard of has you paying both principal and interest on the very first payment. Google “30 year amortization” and it’s plainly obvious to see this fact. The initial payments pay less to principal than interest, sure, but saying “your not going to pay off any principal in those years, seeing as your not even on paying principal and interest until half way through the 20th year of a 30 year mortgage” is demonstrably and completely incorrect. You’re also free to pay additional principal on any payment you’d like with a 30 year mortgage. Calling a safe, affordable, predictable repayment schedule “a sucker’s bet” is incredibly naive. Betting that rates will go up from historic lows sounds pretty reasonable.

    And finally: Not to mention the closing costs which average about 3% of the loan amount vs a heloc which has no costs usually and has an interest only period of 5 or 10 years and when you make more then the minimum payment it is directly applied to the principal allowing you to make some serious reductions on your mortgage. But im sure everybody on here already knew all of that…..

    3% closing for a 30 year would be small price to pay to keep your house payment from fluctuating wildly, but if your credit is good it costs less than that anyway. Then you mention a HELOC costs less to close vs a 30 year. A HELOC is not a mortgage. An ARM is not a HELOC. The article refers to Adjustable Rate Mortgages vs Fixed Rate Mortgages, not ARMs vs adjustable rate Home Equity Lines Of Credit. You cannot purchase a home with a HELOC if you don’t already own a home to begin with, because a HELOC is not a mortgage. So, what makes you think HELOC’s are relevant to this conversation?

    You have to be careful on consumerist. There is no “edit” button. When you make wildly factually inaccurate rambling statements, they remain for all to see. But I’m sure you knew that…

  21. Smorgasbord says:

    This is a perfect example of how money talks with the politicians. According to OpenSecrets.org the “Top Recipients of Fannie Mae and Freddie Mac Campaign Contributions, 1989-2008″ were: (#1) Christopher Dodd $133,900 (#2) John Kerry 111,000 (#3) Barack Obama $105,849 (#4) Hillary Clinton $75,550.

    These are all Democrats. Did WaMu give any money to the democrats? If so how much?

    The person who got the 3rd highest amount from Fannie Mae and Freddie Mac (Barack Obama) to let them get away with what they did, now will be the main one who has to solve it. Talk about wallowing in your own mud!!!

    Barack Obama helped the banks bypass regulations that would have kept most of the people in trouble now from getting a loan in the first place. The Democrat controlled Congress mandated the banks had to make these loans. It was one of their ways to help the poor. How does getting them a loan they can’t pay back help them?