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Bad Company

Scott Jagow Oct 26, 2009

What national bank would make a loan to OJ Simpson after he was found liable for the deaths of his wife and her friend? And would not only make the loan but defend it with documentation from Simpson that he “didn’t do it”? Washington Mutual, that’s who.

The Seattle Times has an excellent two-parter on the collapse of WaMu. Read part one here and part two here.

WaMu’s overall business strategy fueled its implosion. Since riskier loans had more profit potential than safer loans, the bank paid its loan consultants and independent mortgage brokers more for making them. It pressured appraisers to inflate home values. It told its underwriters to find ways to make loans “work,” regardless of WaMu’s own standards.

The strategy’s momentum was so powerful and pervasive, one former top executive said, that the few dissenting voices inside upper management “were blown off.” Rather than avoiding the housing bubble, he said, “Washington Mutual chose its destiny, to be right smack dab in the middle to the hilt.”

The riskier loans were option ARMs. They become a core part of WaMu’s business. Loan officers could make triple the commission on them. Documentation? Not important:

“The big saying was ‘A skinny file is a good file,’ ” said Nancy Erken, a WaMu loan consultant in Seattle. She recalled helping credit-challenged borrowers collect canceled checks, explanatory letters and other documentation that they could afford their loans.

“I’d take the files over to the processing center in Bellevue and they’d tell me ‘Nancy, why do you have all this stuff in here? We’re just going to take this stuff and throw it out,” she said.

As for the OJ Simpson story, Erken explains what happened:

“Someone in Florida had made a second-mortgage loan to O.J. Simpson, and I just about blew my top, because there was this huge judgment against him from his wife’s parents,” she recalled. Simpson had been acquitted of killing his wife Nicole and her friend but was later found liable for their deaths in a civil lawsuit; that judgment took precedence over other debts, such as if Simpson defaulted on his WaMu loan.

“When I asked how we could possibly foreclose on it, they said there was a letter in the file from O.J. Simpson saying ‘the judgment is no good, because I didn’t do it.’ “

The series is worth reading, if only to understand that the abdication of personal responsibility wasn’t the only factor in the housing implosion. Some of these business practices were at best, mind-blowingly negligent. At worst – evil? Criminal?

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