KK’s mortgage factory

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The New York Times today runs an extraordinary article analysing how Washington Mutual, the largest failed bank in American history, went about lending money. The piece is based on interviews with two dozen former employees, mortgage brokers, real estate agents and appraisers and reveals the relentless pressure to churn out loans that produced the company’s meltdown. The reporters (Peter Goodman and Gretchen Morgenson) claim that their interviewees’ accounts are consistent with those of 89 other former employees who are confidential witnesses in a class action filed against WaMu in federal court in Seattle by former shareholders. The article is worth reading in full, but here are some of the juiciest quotes:

“We hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home Depot did to their industry. And I think if we’ve done our job, five years from now you’re not going to call us a bank.”

— Kerry K. Killinger, chief executive of Washington Mutual, 2003

“It was just disheartening,” said Sherri Zaback, a mortgage screener for Washington Mutual. “Just spit it out and get it done. That’s they wanted us to do. Garbage in, garbage out.”

As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes.

Yet even by WaMu’s relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer.

Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

WaMu gave mortgage brokers handsome commissions for selling the riskiest loans, which carried higher fees, bolstering profits and ultimately the compensation of the bank’s executives. WaMu pressured appraisers to provide inflated property values that made loans appear less risky, enabling Wall Street to bundle them more easily for sale to investors.

“It was the Wild West,” said Steven M. Knobel, a founder of an appraisal company, Mitchell, Maxwell & Jackson, that did business with WaMu until 2007. “If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.”

On the other end of the country, at WaMu’s San Diego processing office, Ms. Zaback’s job was to take loan applications from branches in Southern California and make sure they passed muster. Most of the loans she said she handled merely required borrowers to provide an address and Social Security number, and to state their income and assets.

She ran applications through WaMu’s computer system for approval. If she needed more information, she had to consult with a loan officer — which she described as an unpleasant experience. “They would be furious,” Ms. Zaback said. “They would put it on you, that they weren’t going to get paid if you stood in the way.”

On one loan application in 2005, a borrower identified himself as a gardener and listed his monthly income at $12,000, Ms. Zaback recalled. She could not verify his business license, so she took the file to her boss, Mr. Parsons.

He used the mariachi singer as inspiration: a photo of the borrower’s truck emblazoned with the name of his landscaping business went into the file. Approved.

On another occasion, Ms. Zaback asked a loan officer for verification of an applicant’s assets. The officer sent a letter from a bank showing a balance of about $150,000 in the borrower’s account, she recalled. But when Ms. Zaback called the bank to confirm, she was told the balance was only $5,000.

The loan officer yelled at her, Ms. Zaback recalled. “She said, ‘We don’t call the bank to verify.’ ” Ms. Zaback said she told Mr. Parsons that she no longer wanted to work with that loan officer, but he replied: “Too bad.”

Shortly thereafter, Mr. Parsons disappeared from the office. Ms. Zaback later learned of his arrest for burglary and drug possession.

The sheer workload at WaMu ensured that loan reviews were limited. Ms. Zaback’s office had 108 people, and several hundred new files a day. She was required to process at least 10 files daily.

“I’d typically spend a maximum of 35 minutes per file,” she said. “It was just disheartening. Just spit it out and get it done. That’s what they wanted us to do. Garbage in, and garbage out.”

By 2005, the word was out that WaMu would accept applications with a mere statement of the borrower’s income and assets — often with no documentation required — so long as credit scores were adequate, according to Ms. Zaback and other underwriters.

“We had a flier that said, ‘A thin file is a good file,’ ” recalled Michele Culbertson, a wholesale sales agent with WaMu.

Martine Lado, an agent in the Irvine, Calif., office, said she coached brokers to leave parts of applications blank to avoid prompting verification if the borrower’s job or income was sketchy.

“We were looking for people who understood how to do loans at WaMu,” Ms. Lado said.

Top producers became heroes. Craig Clark, called the “king of the option ARM” by colleagues, closed loans totaling about $1 billion in 2005, according to four of his former coworkers, a tally he amassed in part by challenging anyone who doubted him.

Christine Crocker, who managed WaMu’s wholesale underwriting division in Irvine, recalled one mortgage to an elderly couple from a broker on Mr. Clark’s team.

With a fixed income of about $3,200 a month, the couple needed a fixed-rate loan. But their broker earned a commission of three percentage points by arranging an option ARM for them, and did so by listing their income as $7,000 a month. Soon, their payment jumped from roughly $1,000 a month to about $3,000, causing them to fall behind.

I could go on, but you will get the point. One didn’t have to be a rocket scientist to know that this was madness. So how come the regulators didn’t spot it? And who is going to do a similar job on our own Northern Rock?

The giddy social whirl

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Like me, Andrew Brown doesn’t live in London. Like me, he has found himself having to go to a series of Xmas parties in the Big Smoke. But he has more stamina than me. One night recently, for example, he went to no fewer than three parties — one at the Swedish Embassy, one in the Travellers’ Club in Pall mall and one in a night-club.

And so to the last train back from Liverpool St, caught with a minute to spare: young man in a suit in that stage of drunkenness where all the small muscles of the face have gone, and a kind of long-jawed chimpanzee mask lolls on the neck; a carton of takeway curry with lots of rice splashed all over the floor by the doors to the carriage; the middle-aged man, also in a suit, who pushed past me out of the lavatory had just been copiously sick inside it. In the middle of the carriage, two jolly fat blondes in miniskirts and sombreros who looked up every time I passed them as if expecting conversation … outside, at Audley End, a hard frost and the noise of scraping windscreens carrying across the car park.

Been there, done that, got the tee-shirt. And one wonders afterwards why one does it? I suppose it’s called ‘networking’. Twitter’s easier. And cheaper.

Link.

Roll out the barrels

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Every year, on Boxing Day, the village of Grantchester holds a barrel-racing competition. A section of the road is cordoned off and lined with straw bales. Teams of four from pubs or nearby villages then proceed to race one another by rolling barrels from one end of the course to another. The origins of — or indeed the rationale for — these curious proceedings are unclear, and in any case may be beside the point: the organiser Francis Burkitt was once quoted as saying that “the whole point of the event is that it is pointless – it’s a slightly mad English holiday tradition which is great fun.”

Sounds simple, doesn’t it? Well, it ain’t.

I had great fun photographing the proceedings (see the photostream on Flickr if you’re interested). But of course for me the main interest was in watching the spectators. For example:

Or here:

Hmmm… Who was it who defined a psychologist as “someone who goes to the Folies Bergére and watches the audience”?

Still, at least I didn’t come on Jeffrey ‘Lord’ Archer, the village’s most notorious resident. One must be thankful for small mercies.

Going, going…

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Snapped outside Cambridge’s last remaining cigar shop. End of an era. When I came here as a student there were three specialist tobacconists.

Happy Christmas!

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Earthrise at Christmas — taken taken by the Apollo 8 crew in December 1968. Possibly the most influential photograph ever taken. Certainly it changed the way many of us see our home planet. Click on image to see a larger one.