The Bankwatch

Tracking the consumer evolution of financial services

First look – Wall Street and the Financial Crisis; Anatomy of a Financial Collapse

The banking /credit crisis seems so long ago now when we look at the dates in the US Levin/ Coburn report …

…  but it is fascinating reading  – all 650  pages.  The American media have been all over the lack of regulatory overview of Wall Street, but I am more interested in the complete disregard for banking principles and good governance.  Blaming Wall Street is like blaming schools for bad kids.  This is a family problem, and when you read this section it is obviously wrong.

To summarise what you can read in this extract, WaMu had a subsidiary that bought mortgages with no WaMu diligence or adjudication by either WaMu or the subsidiary Long Beach.

This section from Page 55 talks about WaMu and their mortgage origination practices. [emphasis mine]

But in 1999, WaMu bought Long Beach Mortgage Company,114 which was exclusively a subprime lender to borrowers whose credit histories did not support their getting a traditional mortgage. Long Beach was located in  Anaheim, California, had a network of loan centers across the country, and at its height had as many as 1,000 employees. Long Beach made loans for the express purpose of securitizing them and profiting from the gain on sale; it did not hold loans for its own investment. It had no loan officers of its own, but relied entirely on third party mortgage brokers bringing proposed subprime loans to its doors.

Long Beach’s most common subprime loans were short term, hybrid adjustable rate mortgages, known as “2/28,” “3/27,” or “5/25” loans. These 30-year mortgages typically had a low fixed “teaser” rate, which then reset to a higher floating rate after two years for the 2/28, three years for the 3/27, or five years for the 5/25.

Long Beach typically qualified borrowers according to whether they could afford to pay the initial, low interest rate rather than the later higher interest rate.118 For “interest-only” loans, monthly loan payments were calculated to cover only the interest due on the loan and not any principal. After the fixed interest rate period expired, the monthly payment was typically recalculated to pay off the entire remaining loan within the remaining loan period at the higher floating rate. Unless borrowers could refinance, the suddenly increased monthly payments caused some borrowers to experience “payment shock” and default on their loans.

From 2000 to 2007, Long Beach and WaMu together securitized tens of billions of dollars in subprime loans, creating mortgage backed securities that frequently received AAA or other investment grade credit ratings.120 Although AAA securities are supposed to be very safe investments with low default rates of one to two percent, of the 75 Long Beach mortgage backed security tranches rated AAA by Standard and Poor’s in 2006, all 75 have been downgraded to junk status, defaulted, or been withdrawn.  In most of the 2006 Long Beach securitizations, the underlying loans have delinquency rates of 50% or more.

Written by Colin Henderson

April 16, 2011 at 00:25

Posted in Uncategorized

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