Meet The Savings & Loan That Destroyed Wachovia
60 Minutes recently took a look at World Savings Bank, the acquisition that ultimately wounded Wachovia so badly that it had to be acquired by Wells Fargo. What was wrong with an institution for which Wachovia was willing to pay $25 billion? Well, one whistleblower claims that World Savings was engaged in fraud and predatory lending — tricking its customers into signing up for dangerous "option-arm" or (as they cheerfully called them) "pick-a-payment" loans.
Option-ARMs are so risky that they are illegal in many states — and offer payments that are so low that they don't even cover the monthly interest. This results in a mortgage that actually grows over time.
60 Minutes' whistleblower says that World Savings was "packaging" (their name for falsifying documents) loans in order to approve as many people as possible for risky mortgages. Their motivation was allegedly the huge fees that the bank and its mortgage brokers collected for processing each loan.
Maeve-Elyse Brown, a lawyer for a non-profit group working to save homeowners from foreclosure, says Betty Townes' actual income was about $1,875, but that the income written on her loan application was over $4,000.
Asked who did that, Brown told Pelley, "The interviewer that's listed is a staff person for World, for World Savings, according to the loan documents."
"What does that tell you?" Pelley asked.
"Looks like whoever typed up this document put in the number that they thought was the right number to get the loan approved," Brown said.
"The term was 'packaged.' It had to be packaged correctly when it got to the underwriter," Bishop told Pelley.
Bishop says a story like Betty's was common at his former office.
He says facts were manipulated on some loan documents to get past company underwriters who approved the loans. "You know, let's not say this. Let's delete these items that they're probably not gonna check on. Let's add this. Let's just move it around."
"Packaging the loan meant modifying [the loan]…to make sure it would pass the underwriters' inspection?" Pelley asked.
"Correct. It was one grand wink-wink, nod-nod," Bishop said.
60 Minutes says that World Savings' option-arm portfolio has now lost over $36 billion.
World Savings denies that there was any fraud or irresponsible lending at the bank.
World Of Trouble [CBS]
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Comments:
But -- but what about the greedy homebuyers? How can the noble bank reps be at fault?
Boot to da head! (nyah nyah!)
Boot to da head! (nyah nyah!)
World Bank needs to get their act together before the Stress Test coming up for the banks this week.
So, that qualifies as fraud. Why are these people (CEO, executives, and loan officers who faked this info) not in jail right now? Why is this being treated like it's no big deal just because the entire industry participated? Why is nobody paying dearly for this but the taxpayers?? Our national media is obviously bought out on this one too...I don't see them holding people accountable. Our country is no more. We are now a third world country with corruption running the show.
I had a client whose payment would have been more than her total income a year after the loan started. She was an older woman who didn't understand. She ended up refinancing the loan but World hit her with a FIVE year interest prepayment penalty.
Is World Savings taking this seriously?
Not only were these loans given to people who never had a hope of ever paying them back World S&L also did 80/15/5s on them. Meaning someone could have put down 5% only on a purchase, got into a loan which grew over time (often 2-3% per year), was a monthly adjustable of the fully indexed rate (never properly explained) and with a prepayment penalty of often 3%. This is why many brokers wrote these loans. They could make 3-5% commissions! This all meant that by the time the unsuspecting new home owner caught on that their balance was increasing they couldn't even get out. 95% loan to value and a 3% prepay penalty + new closing costs on a loan would push people over the 100% loan to value mark. Toxic as heck and sold to the masses when in actuality it only made sense for very few people (who usually should have just done a real FHA reverse mortgage anyhow).
Wait a second ... the income levels being talked about (the actual amount of $1875, and the fake amount of $4000) are MONTHLY incomes, right? Not annual. Surely ...
@hypnotik_jello: i saw the program. Betty knew they were going to put down $4000 based off of her deceased husband's previous earnings. Also, she got something like $15K to $20K each of the four times she refinanced. I feel bad for her, but not too bad.
@sumgai:
plausible deniability. Each link up the chain denies it and blames it on the previous link. For instance in this woman's case she signed the 1003 (Loan application) and by signing it stated that the information was correct and factual. All the broker/banker/officer needs to do is assert that the info on the 1003 is what the client told him and see here's where they signed it.
While I'm inclined to acknowledge the unethical practices of these loan sharks, there's only one person who can sign these loan applications: the home buyer. Only the buyer can decide to pay less than the freaking INTEREST payment.
It's the same way with credit cards. A cardholder can choose to only pay the minimum amount. Will their interest be higher than the minimum amount? Almost definitely. However, the cardholder knew the interest rate and minumum payment, yet they blatantly chose to pay it that way.
@FDCPAGuy: Well then. Either the lady committed fraud or the loan officer committed fraud.
If no one is being held accountable, what is the disincentive of lieing on loan applications in the future?
How can you lose $36 billion with no fraud involved? The only other option that I can come up with massive, systemic stupidity from top to bottom. And that seems a lot less plausible than fraud.
@captadam: No, it's obviously yearly. They gave a woman with an inflated income of less than $300 a month a house.
Twit.
@hypnotik_jello: Methinks someone needs to write a FireFox add-on that, when it encounters sarcasm, makes the entire passage flash red, with a stock-ticker scrolling across the entire monitor saying, "j-o-k-e..." until the user clicks an alert acknowledging that s/he had just encountered this thing called "humor". Twice.
The authors should call it "hypnotik_jello".
Said with LOVE! :D
There were major bank pushing option ARMs as well. When I bought my condo, the guy was pushing the hell out of one. I asked him why I should take a variable rate when fixed rates were at a historic low. He didn't have an answer. I told him I wouldn't take anything but fixed rate. He wrote me a fixed rate instead.
What possessed Wachovia to buy this company? Did they completely fail in their due diligence?
I had an option arm (which I luckily got rid of prior to the crash). It worked great for me at the time. I was doing consulting and needed to make low payments until my AR was received. Then I made a balloon payment to the mortgage. That's what the ARM was designed for. A very small percentage of the population.
Holy crap that was abused.
@wagenejm: "Sure the company or agency might be broke, but I guarantee the President, CEO, and most upper-level management has significant sums of money stashed away."
Probably not.
Most CEOs get paid in stock for some 95-99% of their salaries. For finance companies this stock is currently nearly worthless, Citigroup is about $2 a share now, down from a year ago.
As for these companies, the stock is worth literally nothing. The bank failed completely. The money no longer exists. There is nowhere to get the money from, it has ceased to be.
The same things that allow you to have growth where everyone gets wealthier allow contractions where everyone gets poorer.
Also, selling their crap isn't possible unless someone else (an equally overpaid CEO) buys it. If you're taking the stuff from all the executives in the US, nobody will be left to buy yachts.
What a great investment for Wachovia, pay 20 bil for a company and get stuck with their 34 bil debt.
Bill Maher had it right Friday...Hang at least two of these morons in front of the exchange. China sentences their CEOs to death when needed.
Good for you. I had a feeling these ARM crap were bad news beven back in 2004! I knew they were not good, I don't know about economics and stuff, but it just sounded too good to be true. My hunch was right, and thanks to that, we are in a depression now.
Cool to hear you dodged the bullet.@gttim:
@sleze69: The problem is that criminal prosecution requires that you prosecute someone in particular.
If you can say "one of these two people must have committed the crime," you can't prosecute either. You have to prosecute specific people for specific crimes. So yeah "either the loan officer or the homebuyer committed fraud," but unless you can tell me which one did, nobody goes to jail.
@BlackMage is doing the Time Warp agaaaaaaain!!!: I don't think we're disagreeing. From the caption above it appeared to me that the loan officer was blatantly perpetrating fraud. I didn't know the buyer was in cahoots.
"Looks like whoever typed up this document put in the number that they thought was the right number to get the loan approved," Brown said.
Wachovia was originally First Union, correct? The bank sued for refusing loans to minorities? I mean is there ANYONE in finance that isn't morally bankrupt??
@BlackMage is doing the Time Warp agaaaaaaain!!!: I don't believe your statement about credit cards is correct. Every card I have sets a minimum payment to an amount that is greater (albeit not substantially) than the monthly APR - it's usually 1% more. So eventually, you will pay the card off with minimum payments only, although it might take 20 years...
@gttim: You're lucky he didn't try to do a switcheroo on you - "There's been a snag with the bank, but I can still get you into an Option ARM by closing" - I've heard all sorts of stories about brokers putting buyers up against the wall with this tactic.
Too bad about World Savings; I was a customer with them for many years and they were always the nicest people to deal with in any of their offices, and I went to many over the years before I had an ATM card. But obviously their mortgage practices were really bad news.
As for why Wachovia bought them, that's why we have to pay these bank guys their big bonuses and huge salaries even as we bail them out. Otherwise we wouldn't have such brilliant people in charge, and imagine how awful that would be.
@wagenejm:
"all assets" means 10-55 trillion dollars, depending on your value of "all" (only the troubled ones or all) - that's a bigger bite than the US can chew.
b/c he gets a higher commission for the ARM, that's the only reason why
@sir_eccles: Just a guess, but I think Wachovia and the other big banks might have had a heads up that the Fed would be giving out huge amounts of bailout money for those who muck up their business the most. So, the best business decision would be to sink the ship as fast and hard as you possibly could.
@TinkishDelight: Wachovia *acquired* First Union around the end of the '90s/early '00s, but both had existed as separate entities before that buy-out.
@sir_eccles: They bought at the top of the market when mortgages were the best thing since sliced bread. Anyone and everyone wanted to be a part of the mortgage business, Wachovia at the time did not have a large mortgage shop and this was a great way to expand it.
Due diligence..... HA, DD is the biggest joke for most of these deals. They would have the jr staff audit team go in and "review" the loans and books, of a industry they knew nothing about.
@huadpe: That sort of thing, where an entire organization is corrupt but you have trouble pinning it on specific individuals, is what the RICO act was made for. That way, you can prosecute the leadership of the corrupt organization.
I think that this is also probably a case of securities fraud if the World Savings people lied to the Wachovia people about the financial health of their mortgage business. I would be pissed off beyond belief if I were a former Wachovia shareholder.
@huadpe: Prosecute both of them. Get a warrent for the borrower's tax returns if necessary.
If I sign a paper saying I earn $100k/year when I really make $15k/year in order to get a loan, that's fraud. If a lending officer takes my paperwork and punches in $100k instead of $15k and I don't sign, it's his fault.
@QrazyQat: The guys running these banks aren't stupid: it's just that they personally have had no reason to care whether the corporations they are running succeed or fail. And that's still the case: they all failed miserably, but they still got rich and will get to keep the money. It's not that they were stupid...it worked out well for them. They were greedy, not stupid.
@sumgai: The family that owned World Savings, the Sandlers, made off with a pretty big hunk of cash and sold at the right time. Their hands are wiped clean of the bank at this point. Too bad b/c World Savings was perceived to be a pretty conservative bank here in the Bay Area.
Some misconceptions (IMHO) are:
1) These teaser rate variable loans shouldn't exist
2) People keep faulting the "greedy homeowner"
A variable rate loan is a tool real estate investors use to develop properties and flip homes. They don't expect to hold the property long, and as an experienced investor assume the risk of the property value going down, and the interest rate going up (which is what happened.)
It should be the mortgage writer's responsibility to qualify the potential mortgage holder, because they are the professional, and the customer the layman. It should be assumed that the customer is not sophisticated, unless the customer can prove otherwise. If they can't, they are shown a more fitting mortgage.
An example of this philosophy in another industry is certain risky hedge-fund investing. The potential profit is high, but so is the risk, so the broker selling the fund has a fiduciary responsibility to qualify their client as a seasoned investor with a minimum net worth before letting them invest. This is to prevent Joe Six-pack from hearing about a "profitable" hedge-fund, sinking his life savings in it, and losing everything immediately.
It's my hope that when everything is said and done, the mortgage industry has a least this kind of regulation.
Yes, I know Wall Street needs more regulation as well.
@huadpe: In this case, if I am correct, World Savings and Loan was bought out by Wachovia - which means the stockholders got a nice check for their stock once the deal went through. However, to this day I don't know why Wachovia (or now Wells Fargo) hasn't sued the pants off of the execs at World for fraud. I also haven't read up much on this case, so if anyone could enlighten me, I'd love to hear it....
IMO, the fact congress gave these crooks a bailout instead of conducting an investigtion is proof that there is WAY too much corporate infuence over govt. These industries created an artificial housing bubble and took out the economy and they are being rewarded with OUR money, many of us whom didn't even get involved in real estate during the past few maniacal years. There were plenty of warnings for govt to have seen this was a sham...everyone from the FBI to bloggers and everyone in between saw it coming and warned. For anyone in the industry or govt or any of the talking heads on MSNBC, FOX, etc, to say no one could've seen this coming is ludicrous.
FYI- The guy who ran that bank before selling is Herb Sandler. He cashed out, and used some of that money to fund a nonprofit investigative website called ProPublica.
The journalists at ProPublica are in an interesting pickle. Do they bite the hand that feeds them? And how does it feel when your salary pretty much came from some poor chump that signed up for an ARM?
When the US decides to get serious about really cleaning up this mess, they would seize all the assets and savings up to the amount of money paid by these crooked companies to their crooked employees and leave THEM from broke, rather than those of us who are responsible.
Sure the company or agency might be broke, but I guarantee the President, CEO, and most upper-level management has significant sums of money stashed away. Sell their McMansions and Yachts and all their bloated and overpriced crap and let's put that money toward bailing out the real people that need it.