Finance

Senate Investigation: WaMu Mortgages 'Infected The Entire Financial System'

Former execs from Washington Mutual — the thrift that got rich off bad mortgages then became the biggest failed bank in U.S. history — are testifying in a Senate hearing today.

This pre-game statement from the Senate committee gives some idea of what's on tap.

Bank employees did well, even as they made loans based on fraudulent information, according to a Senate investigation:

A 2005 review of loans from two of Washington Mutual's top producing retail loan officers found fraud in 58% of the loans coming from one loan officer's operations and 83% from the other. Yet those two loan officers continued working for the bank for three years, receiving prizes for their loan production. ...

Employees were encouraged to get people to pay higher rates than they needed to:

Loan officers and mortgage brokers were also paid more when they got borrowers to pay higher interest rates, even if the borrower qualified for a lower rate — a practice that enriched WaMu in the short-term, but made defaults more likely down the road. ...

And, investigators say, the bank sold off questionable loans without telling investors what was going on:

Washington Mutual selected loans for its securities because they were likely to default, and failed to disclose that fact to investors. It also included loans that had been identified as containing fraudulent borrower information, again without alerting investors when the fraud was discovered. ...

There's more to come on Friday, when the committee will hear from government regulators that were supposed to be keeping an eye on WaMu. The New York Times says that a report to be released Friday will look into infighting between the Office of Thrift Supervision and the FDIC, both of which had responsibility for Washington Mutual.

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