Senate Panel Grills Former WaMu Heads over Selling Delinquency-Prone Mortgages

The US Senate Permanent Subcommittee on Investigations grilled former Washington Mutual heads of home loans and capital markets over the practice of selling delinquency-prone mortgages in whole loan and securitized transactions. Despite earlier testimony to the Senate panel that swelling investor demand helped to fuel high-risk lending practices at WaMu, David Schneider, the former president of home loans at the bank, said demand for securities did not drive business operations. Witnesses earlier in the day noted the consolidation of affiliate Long Beach Mortgage Company (LBMC) with WaMu’s home loans group in late 2005 exposed the bank to significant loan risk associated with subprime lending. And the practices of subprime lending and securitization continued to grow, according to 666 pages of exhibits (download here) provided by the Subcommittee. The volume of WaMu/LBMC supbrime securitization peaked in 2006: Schneider said repurchase requests submitted to LBMC from loan buyers spiked in Q306 and Q406. He indicated, however, that some repurchase requests cannot be approved. “The buyers asserted that the underwriting or performance of these loans was allegedly inconsistent with representations and warranties Long Beach had made in connection with their sales,” he said in prepared remarks. “Buyers sometimes demand repurchase when it is not appropriate, and repurchase demands are typically evaluated in consultation with the buyer and do not always and necessarily lead to repurchase.” The former division head of capital markets at WaMu, David Beck, blamed the earlier panel of witnesses — including former general auditor Randy Melby former chief risk officers Ronald Cathcart and James Vanasek — for failing to ensure the proper mortgages were securitized and sold to investors. But when pressed by the panel on his role in informing bondholders of the risk within their investments, Beck said potential buyers of securities had access to data about the securities before purchase. “Investors also had access to extensive information, released on a monthly basis, about the performance of prior securitizations of loan pools made up of the same type of loan product,” he said in prepared remarks. “Investors could review all of this information before deciding whether purchasing the particular offering would fit into their overall investment strategy.” Write to Diana Golobay.

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