Inside WaMu’s orgy of liar-lending

Reckless American home buyers and lax federal regulation deserve a healthy share of the responsibility for the international credit crisis. But there’s no calculating the blame that belongs to reckless mortgage lenders.

The New York Times this week detailed the loan-mongering frenzy that brought down Seattle-based Washington Mutual in the biggest bank failure in history. It’s an appalling portrait of a once-responsible corporate culture gone rogue.

Under the leadership of CEO Kerry Killinger, WaMu morphed from a well-run company into a giant medicine show touting high-risk loans. Loan supervisor John Parsons was one of the barkers. Now in prison on drug-related theft charges, Parsons said he was doing meth daily while running a team that “screened” loan applications.

One such application came from a self-styled mariachi singer who claimed to be pulling in a six-figure income. That income could not be verified; Parsons finessed the problem by having the borrower photographed in mariachi costume in front of his house.

No one seems to have minded Parsons’ drug use. He got the job done.

That singer’s mortgage was what’s known as a “liar loan” – a loan extended with little or no attempt to determine whether the borrower can make the payments. Under Killinger’s leadership, WaMu couldn’t write enough of them. “If you were alive, they would give you a loan,” said an appraisal expert. “Actually, I think if you were dead, they would still give you a loan.”

The company’s practices crossed the line into what looks an awful lot like corruption. It pressed appraisers to appraise high. It paid lucrative “referral fees” to real estate agents who sent buyers its way.

In at least one Florida WaMu branch, employees who didn’t get on board enthusiastically were dispatched to a boiler room-style phone bank where they were ordered to call customers to push home equity loans.

WaMu wasn’t merely failing to look hard enough at applicants’ qualifications. It was deliberately signaling borrowers, with a wink and a nod, that they didn’t need qualifications. Its practices amounted to leaving thousand-dollar bills on the sidewalk, artfully booby-trapped for anyone foolish enough to bend down and pick them up.

In a rational world, WaMu’s orgy of liar-lending would have hurt only itself. In the cockamamie world of real finance, it could bundle the bad loans and have them resold to investors as mortgage-backed securities. They became someone else’s problem. Many of those supposed securities now go by a different name: toxic assets.

At the height of the orgy, from 2001 to 2007, huckster-in-chief Killinger collected $88 million in compensation. This while buying the nation’s sixth-largest bank an express ticket to ruin – and helping terrify investors around the world.

To think of the business ethics textbooks that $88 million could have bought.