(This is Part 1 of a two-part series. Read Part 2, "How option ARMs killed WaMu.")
Twelve years ago, Washington Mutual was on a can’t-miss roll.
The Seattle-based thrift had made 22 bank buys since 1983 and increased its lead over the competition in mortgage lending in all Northwest states. It was riding high on the commercial success of the "Rodeo Grandmas," a television advertisement featuring four women aged 68-92 who adoringly yodeled and roped viewers into "corralling" WaMu’s new concept of free checking for its customers.
Executives still subscribed to the Nordstrom philosophy of answering their own telephones and would even suggest that you call them at home if you needed a mortgage comment or statistic — or if you had found a new place in Washington state’s Puget Sound to catch Dungeness crab. While its operations had evolved from a boutique Seattle bank to a big state bank to an even bigger Northwest lender, it still managed to accurately do business inside its cozy moniker "A Friend of the Family."
How things change … On Sept. 25, 2008 — WaMu’s 119th birthday — the Office of Thrift Supervision seized control of the nation’s sixth-largest bank and handed it over to Federal Deposit Insurance Corp. JP Morgan Chase then appeared on the scene and paid $1.9 billion for WaMu’s liabilities and assets, culminating the largest bank failure in the history of the United States.
Washington Mutual loved checking, savings and certificates of deposit but its primary engine was tuned to make home loans — and a lot of them. It veered from plain-vanilla, fixed-rate programs by acquiring institutions that were heavily armed with adjustable rate mortgages and eventually even acquired a sub-prime only player — the absolutely antithesis of its norm. The speed of the acquisitions took its toll, despite genuine attempts to blend different loan cultures, increase efficiencies and resolve customer service challenges.
The Washington Mutual load first got too big for it wheels with the 1996 purchase of Keystone Holdings, the parent company of American Savings that had a huge presence in California. WaMu then followed a year later with the deal that clinched its standing as the biggest lender in the Golden State when it acquired Great Western Bank, which gave the Seattle-based operation 1,200 offices in 38 states.
The buying frenzy continued. In 1998, WaMu took over H.F. Ahmanson, WaMu’s chief competitor for Great Western. It picked up subprime lender Long Beach Savings in 1999 and followed that with blockbuster deals for PNC, Bank United and Fleet (2001) before storming into New York to take over Dime Bancorp in 2002. WaMu got hip-deep into credit cards when it acquired Providian Financial in 2005.
Ah … the benefits of being the largest lender in the country and in the most populated state. It didn’t stop there. Nearly overnight, WaMu had become the biggest lender of residential mortgages in the country. Loan executives were racing to merge new lending customs with processes already in place. They were challenged with training new managers in new territories to embrace the WaMu way, while their longtime customers were confused and upset by the bank’s lack of focus and concern.
A new correspondence philosophy was sent through the ranks: No employee could speak with reporters unless granted permission by a designated official. Interviews were often conducted with a media relations person on the phone line or in an office or studio.
I got my first taste of the new system in 1999 when I quoted a longtime source and loan officer about the company’s new option adjustable-rate mortgage (ARM). She said was "called out on the carpet" for her name appearing in a newspaper without first going through the proper channels.
Washington Mutual made impressive, steady progress during the staccato period of 1979-1989. The bank grew during the tough times and high interest rates of the early 1980s, and made an earnest effort to hire enough loan officers to service the buying frenzy that began in late 1988 and roared into 1989.
In 1986, when installment debt was no longer deductible, Washington Mutual was the first local lender to introduce a program that blended installment debt and a home mortgage secured by a first deed of trust. Like all programs, "Buyer’s Choice" had pluses and minuses. The good news was that it was a genuine attempt to wrap credit card, high-interest debt into the lower rates brought by first mortgages. The problem was that it confused not only consumers but also the loan officers trying to explain it. The bank was also smart enough to pull it off the market.
What the bank did not do was pull back on its option ARM when loan brokers had no idea how to properly explain the potential fallout to consumers or were captivated by the money they could make by putting marginal borrowers in the loan. Consumers were to blame, too, betting that future appreciation would cover greedy decisions. The fallout occurred — big-time — bringing down the entire bank and several of its banking teammates.
You wonder what the Rodeo Grandmas are saying now.
Next week: WaMu’s option ARM was "the only loan you’d ever need."
To get even more valuable advice from Tom, visit his Second Home Center.
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