Washington Mutual’s “Mortgage Time Bomb”
A Senate investigation into the mortgage practices of Washington Mutual has revealed that the bank knowingly made sub-prime loans the bank knew would go bad in an effort to drum up new commissions as the bank plunged toward insolvency. WaMu then packaged these bad loans into mortgage securities and sold them to investors without revealing the true nature of the loans. As the LA Times reports:
In some cases, the bank took loans in which it had discovered fraudulent activity — such as misstated income by borrowers — and rolled them into mortgage securities sold to investors without disclosing the fraud, according to the report released Monday by the Senate’s Permanent Subcommittee on Investigations.
WaMu’s pay practices based pay, in part, on how many loans the bank could turn out. As the bank began to fail, it started churning out bad loans to increase commissions so that bankers could milk as much cash out of consumers as possible before the bank collapsed. The Senate report couldn’t have come at a worse time for the financial industry as Congress turns its sights toward new financial regulations, many focusing specifically on the pay practices of the banking industry.