Probe: Fraudulent Mortgages Brought Down WaMu

The former CEO of the failed Washington Mutual Bank is among those scheduled to testify at a Senate subcommittee hearing Tuesday. Senate investigators turned up high rates of fraud at WAMU, especially at two offices in Southern California. Among other things, they say WAMU's pay structure rewarded loan officers for churning out high interest rate loans.

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Today, some former top executives at Washington Mutual give testimony before Congress. When it went under in 2008, Washington Mutual was the largest failed bank in American history. A Senate investigation found that WaMu, as it was called, dumped vast amounts of toxic mortgage assets into the financial markets. NPR's Jim Zarroli joins us to talk about the case.

Jim, good morning.

JIM ZARROLI: Good morning, Steve.

INSKEEP: How did Washington Mutual's system work?

ZARROLI: Well, I think Washington Mutual was actually a really big player in the subprime mortgage market. It was one of the drivers of subprime mortgages. And the bank made the decision, in the mid-2000s, that this was a really profitable line of business to be in. And so it started offering subprime mortgages through a subsidiary, Long Beach Mortgage Corporation.

And it really pushed its loan officers and employees to sell as many of these mortgages as they could. In fact, people got paid more. They got bonuses based on how many of these loans they sold. And even if a customer qualified for a regular mortgage, according to the subcommittee, people were encouraged -customers were encouraged to take a subprime loan because the bank made more money off them.

So it became huge business for WaMu. The bank sold $77 billion worth of subprime loans between 2000 and 2007.

INSKEEP: Well, what made them any worse than all the other people who were trading in bad mortgage assets?

ZARROLI: Well, you could say that they weren't. A lot of - some of the same abuses have taken place in other banks, for sure. They were just one of the bigger ones. One of the interesting things here that's going to come out, I think, is that some of the information from the subcommittee suggests that the bank started seeing a lot of delinquencies really early on, back in 2006, even before the market started to tank.

A lot of these loans were what are called option arms. Now, that's also something that was offered by other banks. You got a low teaser rate on your mortgage for a few years. After that, you could keep paying a very low rate for a while. Then at some point, the mortgage reset, you had to pay more, and a lot of people couldn't afford it - especially because there was a great deal of fraud, according to the subcommittee, in the mortgage applications that people filled out.

There was an audit done in 2005. It looked at two of the top loan officers, and it said that 83 percent of the loans coming from one of them were fraudulent. And yet even after this was pointed out, the loan officer was allowed to keep working at WaMu for three years.

INSKEEP: Is the suggestion there that the top executives knew that this was going terribly wrong and did nothing about it?

ZARROLI: Yeah, I think that's one of the key questions right now, because the subcommittee released parts of a whole bunch of emails yesterday. They really made clear that people at the bank were warning about fraud for a long time.

In 2005, there was an audit that warned about an extensive level of loan fraud in the Southern California offices. And this was significant because it wasn't just the mortgage applicants that were hurt by that. WaMu was taking these mortgages and repackaging them as securities, and selling them to investors. And so there was a lot of fraud. It's the investors who were deceived.

INSKEEP: Well, I want to just ask very quickly. We've just got a few seconds. Sorry to interrupt, Jim. But because this bank was packaging these mortgages and selling them, dumping them on somebody else, how did it catch up with them? How did they go bankrupt?

ZARROLI: Well, I think eventually, the market turned. Prices started to fall. The securities were worth less. And everything came crashing down around them. But we're going to hear more about that. We're going to hear from the former president, the former chief executive today. And they'll be asked about that.

INSKEEP: And we'll be listening for your reporting on that. Jim, thanks very much.

ZARROLI: You're welcome.

INSKEEP: That's NPR's Jim Zarroli, reporting this morning from New York.

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