Why Washington Mutual Deserved to Fail

September 28, 2008 by  
Filed under Loans and Borrowing

Mr. ToughMoneyLove has been beating up on Washington Mutual both before and after its failure.  It wasn’t always this way.  In fact, in 2007 I owned stock in WaMu but I sold it late in the year when WaMu cut its dividend.  When a bank reduces its a dividend payment, it is a warning sign of the highest magnitude.  It also caused me to research WaMu’s lending practices.

WaMu deserved to fail because it was reckless with its lending.  This week I came across this article in the American Bar Association Journal.  It described a single California family that in 2007, bought and sold 47 different properties using WaMu mortgages totaling at least $25 million.  WaMu is taking a $2.7 million collective loss on this family’s transactions.

One of the sales involved a flip in which the family bought a home for $440,000 and then sold if five weeks later for $660,000.  Who was the buyer?  The family’s gardener and handyman!  Of course, the home was foreclosed shortly thereafter.  The home value was $220,000 less than the mortgage balance.   WaMu issued both mortgages on this flip.  How much underwriting did it do on the handyman?  None.  WaMu also failed to discover that this family had felony convictions in 2003 for real estate fraud.

I am certain that there are many more stories like this one.  WaMu simply did not care who was borrowing money and for what purpose.  It was so drunk with profiteering that it disregarded the use of reasonable lending standards.  Eventually, the free market delivered the punishment.  Mr. ToughMoneyLove is hopeful that other businesses that behaved as WaMu did will suffer a similar fate.  Unfortunately, the pending federal bailout may interfere with free market actions and prevent that punishment from being delivered. 

I wonder – am I being too hard on WaMu?

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One Response to “Why Washington Mutual Deserved to Fail”
  1. I think that’s a fairly good assessment of the situation. Unfortunately it’s so wide-spread. Maybe banks will learn from their mistakes, but my gut feeling is that they won’t.

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