HIGHLIGHTS OF FDIC/WAMU COMPLAINT —- USE IT!

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SEE THE WHOLE COMPLAINT: FDICWAMU

EDITOR’S NOTE: If the FDIC is right then many WAMU loans were not sold into the secondary market, at first. Chase probably did that when they acquired the portfolio. So the securitization profile is a little different and perhaps a lot different than the usual scenario. BUT it is also clear that the TILA violations giving rise to right of rescission are basically admitted by the FDIC and stated as a matter of fact. So it looks like the WAMU originated loans should be more targeted to TILA violations and a forensic mortgage analysis to  back that up, than the other cases where the loans were table-funded at the outset. It also appears as though they knew and fully expected that the borrowers were being deceived as to value of the property and as to the actual APR. Common law and statutory actions for fraud would seem to apply.

[APPRAISAL FRAUD] 5.    Defendants knowingly pushed their Higher Risk Lending Strategy at a point in the housing cycle when prices were unsustainably high. WaMu focused its growth in a few geographic areas – notably California and Florida – where housing prices had escalated most rapidly and were most at risk for significant decline. Defendants thus gambled billions of dollars of WaMu’s money on the prospect that the Bank somehow would manage to avoid losses on higher risk loans to high-risk borrowers in high-risk areas, despite their own awareness of the inevitable decline in the overheated housing market.

Once the “housing bubble” burst, they each knew that borrowers faced with “payment shock” likely would default in large numbers because they would no longer have an ability to refinance, and that WaMu would incur substantial losses because the collateral for the loans would no longer be sufficient to pay off the underlying loans.

118. Later, after significant numbers of WaMu’s Option ARM loans became delinquent or defaulted, Schneider admitted that the Bank – contrary to the Guidance – had relied on the ability of borrowers to refinance their adjustable rate loans. In a November 2007 email to Killinger, Rotella, and others concerning loan workouts for borrowers in danger of default, Schneider admitted:
“None of these borrowers ever expected that they would have to pay at a rate greater than the start rate. In fact, for the most part they were qualified at the start rate. . . .When we booked these loans, we anticipated an average life of 2 years and never really anticipated the rate adjustments. [TILA VIOLATION — APR MISSTATED BASED UPON LIFE OF LOAN EXPECTED AT 2 YEARS INSTEAD OF 30 YEARS)”

1. Officer Stephen J. Rotella (“Rotella”), and Home Loans President David C. Schneider (“Schneider”) caused Washington Mutual Bank (“WaMu” or “the Bank”) to take extreme and historically unprecedented risks with WaMu’s held-for-investment home loans portfolio. They focused on short term gains to increase their own compensation, with reckless disregard for WaMu’s longer term safety and soundness. Their negligence, gross negligence and breaches of fiduciary duty caused WaMu to lose billions of dollars. The FDIC brings this Complaint to hold these three highly paid senior executives, who were chiefly responsible for WaMu’s higher risk home lending program, accountable for the resulting losses.

3.    In order to achieve this level of growth in its HFI residential loan portfolio, Defendants layered multiple risks on top of otherwise inherently risky loan products such as Option ARMs, Home Equity Lines of Credit (“HELOCs”), and subprime mortgages. Option ARMs – WaMu’s “key flagship product” – enticed marginal borrowers with low teaser interest rates and modest initial mortgage payments. But those loans often resulted in “payment shock” could not afford them and owed amounts exceeding the value of their homes. In addition, HELOCs were sold widely, creating many highly leveraged borrowers with home loans of 90 percent or more combined loan-to-value ratios. Furthermore, subprime loans were made to one of the riskiest segments of the SFR market, borrowers with poor credit scores and bad credit histories.

4. risky products with additional risk factors, including stated income and stated asset loans approved with little or no documentation (so-called “liars’ loans”); loans to borrowers with high debt-to-income ratios who often could not afford to repay those loans; and loans to speculators and second home buyers who had very little personally invested in the property. WaMu not only originated these multiple risk-layered loans for its HFI portfolio, but also purchased similar risk-layered loans originated by third-party brokers, correspondents and conduit channels over which WaMu failed to exercise proper quality controls.

22. In a June 2004 Strategic Direction memorandum, Killinger presented a newfive-year strategic plan by which WaMu would take on “more credit risk (with more home his vision to grow WaMu’s assets “by at least 10% per year, reaching about $500 billion in 2009,” and achieve an “average ROE [return on equity] of at least 18% and average EPS [earnings per share] growth of at least 13%.” [E.S.] He also set forth an annual goal for 2005 to “[i]ncrease residential mortgage portfolio (primarily option ARMs) by $25 billion.”

On June 1, 2005, Killinger authored a second Strategic Direction memorandum, in which he acknowledged the most speculative “housing bubble” in decades:

The macro factor that troubles us the most is the rapid escalation in housing prices. We are currently experiencing the most speculative housing market we have seen in many decades. Reports from many areas of the country confirm rampant speculation…. Whatever the exact outcome, it is highly likely that housing will not be a stimulant to the economy and could easily become a significant drag on consumer confidence and consumer spending.

That same day, June 20, 2005, the Bank’s Chief Enterprise Risk Officer again emphasized to Killinger and Rotella the need for continuing credit risk management in connection with the five-year plan, and stressed a number of “present day realities”:
•    Home prices increasing unsustainably fast

•    Negative amortization and payment shock potential in our primary
product,    Option ARM Adjustable Rate Mortgages

•    Increasingly liberal credit terms offered in the market include: interest-
only, 100% loan-to-value, sub-prime second mortgages, higher risk loan
types available even at low borrower credit quality, and

•    Housing speculation by non-owner occupied buyers.

78. The Chief Enterprise Risk Officer similarly noted in an April 2008 Enterprise Risk Management Report that “WaMu is much more concentrated in portfolio-held loans than other assets when compared to its top ten competitors; WaMu’s loan portfolio is twice as concentrated in real estate loans.”

[FRAUDULENT CONVEYANCE] 198. In or about August 2008, Kerry Killinger and his wife, Linda Killinger, transferred their residence in Palm Desert, California, to two irrevocable qualified personal residence trusts (“QPRTs”) named the “KK QPRT I 2008 Trust” (which appointed Kerry Killinger as trustee) and the “LCK QPRT I 2008 Trust” (which appointed Linda Killinger as trustee).
199.    In or about August 2008, Kerry Killinger transferred an undivided one-half interest in his residence in Shoreline, Washington, to his wife, Linda Killinger. Shortly thereafter, Kerry Killinger and Linda Killinger each transferred their respective undivided one- half interests in this residence to two irrevocable QPRTs named the “KK QPRT II 2008 Trust” (which appointed Kerry Killinger as trustee) and the “LCK QPRT II 2008 Trust” (which appointed Linda Killinger as trustee).

Tags: APR, borrower, disclosure, FDIC, foreclosure defense, foreclosure offense, fraud, Lender Liability, payment shock, predatory lending, rescission, securitization, WAMU
Posted in bubble, Corruption, Eviction, securities fraud |