December 28, 2008
Saying Yes, WaMu Built Empire on Shaky Loans
DIEGO — 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.
“I’d lie if I said every
piece of documentation was properly signed and dated,” said Mr. Parsons,
speaking through wire-reinforced glass at a California prison near here,
where he is serving 16 months for theft after his fourth arrest — all
While Mr. Parsons, whose
incarceration is not related to his work for WaMu, oversaw a team screening
mortgage applications, he was snorting methamphetamine daily, he said.
“In our world, it was
tolerated,” said Sherri Zaback, who worked for Mr. Parsons and recalls
seeing drug paraphernalia on his desk. “Everybody said, ‘He gets the job
At WaMu, getting the job
done meant lending money to nearly anyone who asked for it — the force
behind the bank’s meteoric rise and its precipitous collapse this year in
the biggest bank failure in American history.
On a financial landscape
littered with wreckage, WaMu, a Seattle-based bank that opened branches at a
clip worthy of a fast-food chain, stands out as a singularly brazen case of
lax lending. By the first half of this year, the value of its bad loans had
reached $11.5 billion, nearly tripling from $4.2 billion a year earlier.
Interviews with two dozen
former employees, mortgage brokers, real estate agents and appraisers reveal
the relentless pressure to churn out loans that produced such results. While
that sample may not fully represent a bank with tens of thousands of people,
it does reflect the views of employees in WaMu mortgage operations in
California, Florida, Illinois and Texas.
Their 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.
According to these accounts,
pressure to keep lending emanated from the top, where executives profited
from the swift expansion — not least, Kerry K. Killinger, who was WaMu’s
chief executive from 1990 until he was forced out in September.
Between 2001 and 2007, Mr.
Killinger received compensation of $88 million, according to the Corporate
Library, a research firm. He declined to respond to a list of questions, and
his spokesman said he was unavailable for an interview.
During Mr. Killinger’s
tenure, WaMu pressed sales agents to pump out loans while disregarding
borrowers’ incomes and assets, according to former employees. The bank set
up what insiders described as a system of dubious legality that enabled real
estate agents to collect fees of more than $10,000 for bringing in
borrowers, sometimes making the agents more beholden to WaMu than they were
to their clients.
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.”
JPMorgan Chase, which bought WaMu for $1.9 billion in September and
received $25 billion a few weeks later as part of the taxpayer bailout of
the financial services industry, declined to make former WaMu executives
available for interviews.
JPMorgan also declined to
comment on WaMu’s operations before it bought the company. “It is a
different era for our customers and for the company,” a spokesman said.
For those who placed their
faith and money in WaMu, the bank’s implosion came as a shock.
“I never had a clue about
the amount of off-the-cliff activity that was going on at Washington Mutual,
and I was in constant contact with the company,” said Vincent Au, president
of Avalon Partners, an investment firm. “There were people at WaMu that
orchestrated nothing more than a sham or charade. These people broke every
fundamental rule of running a company.”
‘Like a Sweatshop’
Some WaMu employees who
worked for the bank during the boom now have regrets.
“It was a disgrace,” said
Dana Zweibel, a former financial representative at a WaMu branch in Tampa,
Fla. “We were giving loans to people that never should have had loans.”
If Ms. Zweibel doubted
whether customers could pay, supervisors directed her to keep selling, she
“We were told from up above
that that’s not our concern,” she said. “Our concern is just to write the
The ultimate supervisor at
WaMu was Mr. Killinger, who joined the company in 1983 and became chief
executive in 1990. He inherited a bank that was founded in 1889 and had
survived the Depression and the
savings and loan scandal of the 1980s.
An investment analyst by
training, he was attuned to Wall Street’s hunger for growth. Between late
1996 and early 2002, he transformed WaMu into the nation’s sixth-largest
bank through a series of acquisitions.
A crucial deal came in 1999,
with the purchase of Long Beach Financial, a California lender specializing
in subprime mortgages, loans extended to borrowers with troubled credit.
WaMu underscored its
eagerness to lend with an advertising campaign introduced during the 2003
Academy Awards: “The Power of Yes.” No mere advertising pitch, this was also
the mantra inside the bank, underwriters said.
“WaMu came out with that
slogan, and that was what we had to live by,” Ms. Zaback said. “We joked
about it a lot.” A file would get marked problematic and then somehow get
approved. “We’d say: ‘O.K.! The power of yes.’ ”
Revenue at WaMu’s
home-lending unit swelled from $707 million in 2002 to almost $2 billion the
following year, when the “The Power of Yes” campaign started.
Between 2000 and 2003,
WaMu’s retail branches grew 70 percent, reaching 2,200 across 38 states, as
the bank used an image of cheeky irreverence to attract new customers. In
offbeat television ads, casually dressed WaMu employees ridiculed staid
bankers in suits.
Branches were pushed to
increase lending. “It was just disgusting,” said Ms. Zweibel, the Tampa
representative. “They wanted you to spend time, while you’re running teller
transactions and opening checking accounts, selling people loans.”
Employees in Tampa who fell
short were ordered to drive to a WaMu office in Sarasota, an hour away.
There, they sat in a phone bank with 20 other people, calling customers to
push home equity loans.
“The regional manager would
be over your shoulder, listening to every word,” Ms. Zweibel recalled. “They
treated us like we were in a sweatshop.”
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.
Mr. Parsons, who worked for
WaMu in San Diego from about 2002 through 2005, said his supervisors
constantly praised his performance. “My numbers were through the roof,” he
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
“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.”
Referral Fees for Loans
WaMu’s boiler room culture
flourished in Southern California, where housing prices rose so rapidly
during the bubble that creative financing was needed to attract buyers.
To that end, WaMu embraced
so-called option ARMs, adjustable rate mortgages that enticed borrowers with
a selection of low initial rates and allowed them to decide how much to pay
each month. But people who opted for minimum payments were underpaying the
interest due and adding to their principal, eventually causing loan payments
Customers were often left
with the impression that low payments would continue long term, according to
former WaMu sales agents.
For WaMu, variable-rate
loans — option ARMs, in particular — were especially attractive because they
carried higher fees than other loans, and allowed WaMu to book profits on
interest payments that borrowers deferred. Because WaMu was selling many of
its loans to investors, it did not worry about defaults: by the time loans
went bad, they were often in other hands.
mortgages expanded from about one-fourth of new home loans in 2003 to 70
percent by 2006. In 2005 and 2006 — when WaMu pushed option ARMs most
aggressively — Mr. Killinger received pay of $19 million and $24 million
The ARM Loan Niche
WaMu’s retail mortgage
office in Downey, Calif., specialized in selling option ARMs to Latino
customers who spoke little English and depended on advice from real estate
brokers, according to a former sales agent who requested anonymity because
he was still in the mortgage business.
According to that agent,
WaMu turned real estate agents into a pipeline for loan applications by
enabling them to collect “referral fees” for clients who became WaMu
Buyers were typically
oblivious to agents’ fees, the agent said, and agents rarely explained the
“Their Realtor was their
trusted friend,” the agent said. “The Realtors would sell them on a minimum
payment, and that was an outright lie.”
According to the agent, the
strategy was the brainchild of Thomas Ramirez, who oversaw a sales team of
about 20 agents at the Downey branch during the first half of this decade,
and now works for
Mr. Ramirez confirmed that
he and his team enabled real estate agents to collect commissions, but he
maintained that the fees were fully disclosed.
“I don’t think the bank
would have let us do the program if it was bad,” Mr. Ramirez said.
Mr. Ramirez’s team sold
nearly $1 billion worth of loans in 2004, he said. His performance made him
a perennial member of WaMu’s President’s Club, which brought big bonuses and
recognition at an awards ceremony typically hosted by Mr. Killinger in
tropical venues like Hawaii.
Mr. Ramirez’s success
prompted WaMu to populate a neighboring building in Downey with loan
processors, underwriters and appraisers who worked for him. The fees proved
so enticing that real estate agents arrived in Downey from all over Southern
California, bearing six and seven loan applications at a time, the former
WaMu banned referral fees in
2006, fearing they could be construed as illegal payments from the bank to
agents. But the bank allowed Mr. Ramirez’s team to continue using the
referral fees, the agent said.
Forced Out With Millions
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.
“He was a bulldozer when it
came to getting his stuff done,” said Lisa Alvarez, who worked in the Irvine
office from 2003 to 2006.
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
Mr. Clark, who now works for
JPMorgan, referred calls to a company spokesman, who provided no further
In 2006, WaMu slowed option
ARM lending. But earlier, ill-considered loans had already begun hurting its
results. In 2007, it recorded a $67 million loss and shut down its subprime
By the time shareholders
joined WaMu for its annual meeting in Seattle last April, WaMu had posted a
first-quarter loss of $1.14 billion and increased its loan loss reserve to
$3.5 billion. Its stock had lost more than half its value in the previous
two months. Anger was in the air.
Some shareholders were irate
that Mr. Killinger and other executives were excluding mortgage losses from
the computation of their bonuses. Others were enraged that WaMu turned down
an $8-a-share takeover bid from JPMorgan.
“Calm down and have a little
faith,” Mr. Killinger told the crowd. “We will get through this.”
WaMu asked shareholders to
approve a $7 billion investment by Texas Pacific Group, a private equity
firm, and other unnamed investors.
David Bonderman, a founder of Texas Pacific and a former WaMu director,
declined to comment.
Hostile shareholders argued
that the deal would dilute their holdings, but Mr. Killinger forced it
through, saying WaMu desperately needed new capital.
Weeks later, with WaMu in
tatters, directors stripped Mr. Killinger of his board chairmanship. And the
bank began including mortgage losses when calculating executive bonuses.
In September, Mr. Killinger
was forced to retire. Later that month, with WaMu buckling under roughly
$180 billion in mortgage-related loans, regulators seized the bank and sold
it to JPMorgan for $1.9 billion, a fraction of the $40 billion valuation the
stock market gave WaMu at its peak.
Billions that investors had
plowed into WaMu were wiped out, as were prospects for many of the bank’s
50,000 employees. But Mr. Killinger still had his millions, rankling
laid-off workers and shareholders alike.
“Kerry has made over $100
million over his tenure based on the aggressiveness that sunk the company,”
said Mr. Au, the money manager. “How does he justify taking that money?”
In June, Mr. Au sent an
e-mail message to the company asking executives to return some of their pay.
He says he has not heard back.
A version of this article
appeared in print on December 28, 2008, on page A1 of the New York edition.