Even a year later - WaMu failure still in the headlines

Washington Mutual was a bank that desperately deserved to fail. Even a year after its demise, WaMu is still making the headlines. One example is is the CNN Money article below...

WaMu: The Forgotten Bank Failure

The biggest-ever bank collapse didn't lead to chaos, but Americans will pay the price for its unsound lending for years to come.

Washington Mutual is long gone, but its lax lending could haunt us for years.

The Seattle-based institution collapsed in the largest-ever U.S. bank failure last September. WaMu ran out of cash after business customers, unnerved by the implosion of Lehman Brothers, withdrew their uninsured deposits.

After the chaos surrounding Lehman's demise, WaMu was put to rest with little fuss. Regulators seized the nation's sixth-biggest bank on a Thursday night — a departure from the customary Friday — and sold it to JPMorgan Chase for $1.9 billion.

The move wiped out WaMu's 56,000 shareholders of record and left bondholders nursing billions of dollars in losses. But the WaMu deal spared the federal deposit insurance fund and thus was, unlike so many federal actions over the past year, an unalloyed positive for taxpayers.

http://finance.yahoo.com/loans/article/107676/wamu-the-forgotten-bank-failure.html?mod=loans-home >

Fannie and Freddie

Obviously the biggest news on Wall Street this week was the Federal Government seizing Fannie Mae and Freddie Mac before both of these mortgage giants failed in a catastrophic manner. These companies have been faltering for many months while looking for lines of credit to bail them out, the government went one step further and completely took over the firms while giving top executives the boot.

The entire situation is also another example of intervention not allowing proper capitalism to play out in the market. The term “moral hazard” comes to mind in which businesses do not take responsibility for their risky behavior; this only entices other businesses to take poor risks. Especially in an environment where it appears that “gains for privatized and losses are socialized”.

While the government takeover may have buffered the mortgage market in the short term and cheered up Wall Street on Monday, the long term picture is much less clear. The U.S. tax payer is going to be stuck with the tab. The question remains on just how big the tab will be – estimates range from $250 billion to $5 trillion. The actual cost is very dependent on how the housing market and associated credit recovers. One recent article outlined how the seizure of these mortgage giant is the taxpayer’s risk (If takeover tanks, we're holding bag).

Similar too many previous government interventions, this action with Freddie and Fannie may help alleviate the short term crisis, but the toll down the road will be much greater and more painful.

Countrywide Chairman tells Homeowners they are Disgusting

Countrywide Financial Corp. Chairman Angelo Mozilo reaped $132 million as the mortgage lender got hammered in 2007. It appears this wad of cash has not made him appreciative of his customers; he views homeowners as “disgusting”.

Apparently Mozilo does not know the difference between the reply and forward buttons, setting the stage to send an absurd email response to a homeowner. It does reveal the contempt that the executive holds for homeowners seeking help with unaffordable adjustable-rate mortgages, loans that were pressed on them due to Countrywide’s inappropriate business practices.

As outlined by the government and consumer groups, the mortgage giant has a history of focusing on loans that generate the maximum fees even if they were totally unsuitable for the homeowners, while not properly explaining the terms of the loan. Furthermore many loan agents, as shown in this case once again, made “promises” about refinancing and other loan attributes that would defined in most courts as fraud.

Despite these mortgage companies claiming in Washington that they are taking steps to alleviate the pain of homeowners; the email exchange underlines the stark reality that the mortgage giants actually could give less than two hoots about these mortgage-holders.

Mozilo on distressed borrower's appeal for help: "disgusting"

Countrywide Financial Chairman Angelo Mozilo's e-mail sets off a furor

Your Tax Dollars at work: Housing Bailout

Want to know where $1.7 Billion of your tax dollars are going? Thanks to Congress your money is going directly to bail out speculators and irresponsible lenders.

The Senate leaders moved closer today to passing a bill that would provide $300 billion in direct mortgages to homeowners; requiring a reduction in principal and cost basis so these homeowners will not be under-water. The majority of these homeowners would never have received loans under traditional lending criteria. Many will still go into foreclosure eventually even under a government financing program, leaving taxpayers holding the bag.

This Senate bill will be merged with an earlier bill passed in the House, Congressional analysts have estimated the House version of the bill would cost taxpayers $1.7 billion. It is an open question of how much the Senate measure would tack on to this.

Despite the twisting of words from politicians that Fannie Mae and Freddie Mac are actually “funding” the mortgage measure, the reality is that every last dime of this measure is backed by your tax dollars. So much for moral hazard, the only lesson learned in the housing fiasco will be that it pays to speculate in the housing market for both gamblers and financial institutions. Washington will always be happy to bail you out of your mistakes.

Dodd, Shelby Agree on $300 Billion Mortgage-Insurance Measure

Bring back Glass Steagall

The Great Depression brought about many needed regulatory reforms. These acts served to curb excess speculation, and to keep the funds of bank depositors safe. One of the primary reasons for the insolvency of many commercial banks in the 1930s was the loaning of money for stock market speculation in a market that allowed absurd levels of leverage. Many of these banks owned brokerage security operations, and found an easy path to executive riches by pressing these loans on depositors prior the 1929 crash.

The Glass-Steagall Act tamed this circus by prohibiting banks from owning financial companies. This created a wall that stopped the ridiculous activities of banks that were not in the best interest of customers. Coupled with the creation of the FDIC and other reforms included in the act, the Glass-Steagall legislation protected both bank account customers and investors. The act prohibited a commercial bank from offering investment and insurance services while maintaining better regulatory scrutiny on capital ratios.

Unfortunately, the provisions that separated cross-ownership were over-turned by the Gramm-Leach-Bliley Act of 1999. Financial companies spent more than $300 million in lobbying over 20 years in their attempts to repeal Glass-Steagall.

Not merely content to simply mine the riches offered by the combination of insurance underwriting, securities underwriting, and commercial banking; Wall Street championed unregulated derivatives. The securities industry claimed that these contracts would distribute risk and regulating derivatives would impede economic development. Supported by the Federal Reserve the merged financial industry drove the wide-scale introduction of derivatives into traditional commercial banking markets such as mortgages.

Since 1999, the derivatives have grown on a parabolic curve. There are now over $516 trillion in derivatives outstanding.

In a short eight years, the rapid proliferation of derivative contracts has become the Trojan horse that is likely to undermine the entire modern banking system. The collapse of Bear Stearns should act as a warning for the entire financial market. It is time for regulators to step in and properly unwind the most troubled instruments, while providing concrete oversight to the entire derivatives industry. Obviously the lunatics have been found unfit to run the derivative financial asylum. Deregulation has run amok, and financial checks and balances must be restored to protect the economies of major nations.

Investment banks’ culture of risk is diametrically opposed to the purpose of commercial savings banks which is the preservation of customers’ assets. The introduction of derivatives as the primary under-pinning for the mortgage industry with little regulatory oversight was an event that was obviously going to end in a calamity; similar to giving liquor and a car to a chronic drunk.

The continuous reduction of the protections of Glass-Steagall, by politicians in Washington driven by banking PAC money, is the root cause of the current painful credit crunch which is undermining the entire U.S. economy. In order to fix the core problems, the protections created by Glass-Steagall after the harsh lessons of the Great Depression must be restored by Congress. A clear separation of commercial and investment banking must be reestablished.

A recent PBS Frontline outlined The Long Demise of Glass-Steagall.

Watch out for Foreclosure Rescue Scams

ABC News recently presented a good segment on avoiding foreclosure rescue scams. There are two types of common scams; the first is where a firm charges you hefty upfront fees to negotiate with your bank and then promptly disappears while doing nothing. The second is where the firm buys your house for below market value, and leases it back to you on unfavorable terms. Eventually the former homeowner can not keep up with the rental payments and is evicted, leaving the firm owning the house.

Catch the ABC News clip:
http://cosmos.bcst.yahoo.com/up/player/popup/?rn=3906861&cl=7408730&ch=4226721&src=news

From across the pond: The Banking Crisis

The mortgage credit crunch has not only impacted banks in the U.S., but has shocked financial institutions overseas. Filmed after the demise of Northern Rock in the U.K., this edition of Dispatches featuring Jon Moulton outlines the financial meltdown. The clip is an excellent educational summary of the greed-driven problems in the credit market that has left the world on the brink of recession.

Quick Takes: Rising Taxes, Home Equity Crisis

Many people hold the misguided belief that their taxes will go down during a recession. If everyone is spending less then won’t the government need less? Unfortunately it never works out like this. During recessionary periods, government spending is normally in crisis as sales and income tax revenues drop, this leads to outsized tax increases to support rising spending as social program needs increase. The longer a recession lasts, the higher taxes tend to get.

MarketWatch outlines 9 reasons your taxes are going up. Facing a huge national debt load, it is unlikely that taxes will retreat. Irrespective of which party is in office, the entire situation will result in taxes being raised. There is no other possible real alternative to dig out from under the mountain of debt at the federal, state, and local levels of government – except for tax increases. (Nobody should be so naïve to believe that government spending will drop).

Taxes are not the only problem for consumers. The credit crisis is about to fold over to another sector, home equity loans are under pressure. Americans owe over $1.1 trillion on home equity loans. Many of these loans were unwritten during the bubble period with lax standards. Many home equity loans did not require income verification or were combined in “piggy-backing” deals for no cash down. All the questionable practices over the past few years in the mortgage market equally apply to the home equity loan sector.

A good portion of these home equity funds will not be repaid to the lending institutions. Especially in markets where housing prices have dropped significantly, second-lien holders are being left with nothing in short sale scenarios. The percentage of delinquent home equity loans was up to 5.7 percent in December, the figure is expected to be over 7% by the end of March.

Equity Loans as Next Round in Credit Crisis

The Great Mortgage Industry Heist

Each evening newscast brings the latest fall-out of the mortgage industry bubble; the credit failures on Wall Street, “sub-prime” as the word of the year in 2007, job losses in the financial and construction industry… the coverage is regularly the lead story. As local homes sit on the market for months and neighbors search for jobs, the crisis appears closer but not directly in our wallets.

The credit crisis triggered by the sub-prime lending caused the Fed to quickly reduce rates and inject huge amounts of cash into the banking system in an attempt to alleviate the financial liquidity issues. An increased money supply makes the cash a consumer holds worth less -- a classic definition of inflation. Reminiscent of Germany printing currency after World War I until a loaf of bread cost millions of deuchmarks. Overall the U.S. government action has led to increased inflation, a falling dollar, and spiraling commodity costs; all in support of bailing out an industry that created its own problems due to its insatiability for riches.

Of course, mortgage executives and Wall Street deal makers are not feeling any pain. Lax lending standards allowed everyone to profit at every level of the food chain. The entire mortgage industry was focused on greed rather than proper lending standards. This includes every level within the mortgage industry from the broker who placed homeowners into improper loans for increased fees to the Wall Street bank executives whose firms packaged up junk mortgage paper and painted lipstick on these CDO pigs as triple-A investments. No thought to proper risk control was given; the entire industry was driven by a voracious hunger for money.

Countrywide Financial Corp. chairman and chief executive officer Angelo Mozilo, former Merrill Lynch CEO E. Stanley O’Neal and Charles Prince, former chairman and CEO of Citigroup, have all been in front of Congress attempting to explain why their multi-hundred million compensation packages were justified while their companies went down the flusher. Certainly the Wall Street bonus machine felt little pain.

In the end, who is holding the bag? Many would state that it is the main street consumer. A number of people may not think that these events impact their pockets; however this is no longer true. Every time a consumer fills up their tank or goes to the local grocery store they are paying the price for the greed of the mortgage industry. Welcome to the Great Mortgage Industry Heist – the greed that placed money in the pockets of a few impacting everybody.

The credit crisis, triggered by the sub-prime fiasco, has driven an inflationary economy with prices for most necessities spiraling at nearly unprecedented rates. Not only are the prices increasing but the associated total taxes being paid on necessities is rising – regressively impacting those who can afford it the least.

Consumers dropping by their local grocery don’t only encounter rising prices for milk, bread, and other basics – as prices increase the total collected sales tax on the necessities rises. While from a county level the total sales tax collected may be offset by the drop in consumer spending on non-necessity items such as clothes, electronics and other items as consumers are more stressed --- the staples needed to live are in the increased collections column.

The situation is no different at the pump, as fuel costs increase the associated gas tax in many states rise, making the commute to work more expensive.

Rising inflation due to action by the government and its agencies can in itself be viewed as a tax on the entire population. Certainly there is an option to let these institutions fail instead of extending liquidity by printing money and lowering rates, but for some reason this is viewed as a worse alternative than effectively taxing the entire population for the greed-driven decisions of the financial industry. “Too Big to Fail” can regularly be seen in print as government decision makers defend their actions to bail out larger banks.

Is it simply a choice between a deflationary depression and an inflationary recession? Government policy can drive either alternative. Either allow the market to wash out the excesses without interference or continually bail-out institutions. A good case can be made that the Great Depression would have lasted a much shorter period of time if the government had allowed the financial markets to run their course.

The sub-prime bubble will act as the historical example of a greed-driven institutional credit balloon which overwhelmed banks and governments. The contagion to other credit markets will drive required systemic reforms in risk management while placing many Wall Street quantitative models into the historic dust bin.
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An excellent overview of the bursting of the Mortgage Bubble can be found at:
http://www.blownmortgage.com/files/presentation3-2008.pdf

The 75 page power-point presentation, put together by T2 Partners LCC, includes many graphs and provides first-rate set of fact & figures about the situation, and demonstrates why the implosion is still in the early innings.

Warning: Reverse Mortgages

The financial industry made a killing in fees by marketing annuities to senior citizens. These products were not usually appropriate for the people who were urged to buy them, and now many are stuck with them while the financial firm agents padded their bank accounts. Many firms such as MetLife and Prudential were slapped by regulators for their sleazy practices in selling annuities.

What is the new sleaze that is replacing the annuities? – Reverse Mortgages. Even in the down real estate market, the financial industry has found they can make a killing by selling reverse mortgages to senior citizens. Reverse mortgages have high fees, many times well over 7% of the home’s value – making this a very lucrative business for agents on commission.

FINRA (the Financial Industry Regulatory Authority) issued a warning this week about reserve mortgage products, urging senior citizens to carefully weigh their options before using reverse mortgages to tap their home equity for additional retirement income.

So how many homeowners will be underwater?

Sometimes you have to wonder if press headlines indicate the bottom of the economic downside in some sort of contrary manner. The most recent incarnation, It's So Much Worse Than You Think, actually focuses on the number of homeowners that will have negative equity as housing prices continue to fall.

As outlined in the article, currently housing prices are down 8.4% placing 13.5% of homeowners in a situation where they have negative equity in their homes. The downside of housing prices is likely to reach 15% without a recession and 30% with a recession. A 30% decrease in housing prices would leave 39% of U.S. homeowners with negative equity in their homes.

Owning more money than the home is worth; many of these homeowners may simply walk away from their homes. We have seen this occur with local housing crashes in the past, such as Texas during the oil bust. Now the table is set for a nationwide incarnation of this scenario.

This of course will place the banks under additional stress that normally plan for a mere 1 or 2% default rate; rather than the 5 or 6% default rate from prime loans which would be seen with this type of recession.

On one hand the article may be on target that vicious cycle of additional housing driven downside remains; on the other hand it could serve as a signal that it is time to start buying rental housing on the cheap.

More: Avoid Foreclosure Scams

Mortgage scams are not only prevalent in rising real estate markets, but are common in falling markets as owners are desperate to avoid foreclosure. Freddie Mac has come out with a video about foreclosure scams that I would urge folks to watch.


Another complete summary of the many different types of mortgage fraud can be found here:
Let Me Count The Ways
http://alamedalearning.com/reality/2007/06/08/let-me-count-the-ways/

I would urge everyone to be knowledgeable and avoid these scams. You don't even have to be financially troubled for solicitations to start arriving via mail and phone for these scams. Know what to look for and ditch the scammers.

Quick Takes: BW labels mortgage CDOs a pyramid scheme

Business Week provides a detailed look at the Bear Stearns’ Hedge Funds which collapsed and outlines their similarities to a pyramid scheme. A good read…

The Bear Flu: How It Spread
A novel financing scheme used by Bear Stearns' hedge funds became a template for subprime disaster.
http://www.businessweek.com/magazine/content/07_53/b4065000402886.htm

“The global markets are dealing with the consequences: The tab from the mortgage mess could run up to $500 billion, and central bankers are struggling to stave off recession. As investigators sort through the wreckage, the records of Bear Stearns' doomed hedge funds are turning out to be some of the most revealing in an era of financial folly.”

Quick Takes: The biggest crisis of the last half century?

We can thank the mortgage industry and the wizards on Wall Street for brewing the huge subprime credit crisis. Smug in their beliefs that real estate values always rise nationwide, people always pay their mortgages, and that generating new finanical vehicles will eliminate risk, a catastrophe has been created. One that will be with us for years probably causing $6T or more in housing wealth to evaporate.

The Wall Street Journal provides their perspective:

U.S. Mortgage Crisis Rivals S&L Meltdown
http://finance.yahoo.com/loans/article/104050/US-Mortgage-Crisis-Rivals-S&L-Meltdown

Avoid Foreclosure Scams

In the current dismal real estate market, there are many foreclosure scams making an appearance. Most of these scams promise homeowners that they can prevent foreclosure if they are late on their payments. The reality is that most of these “plans” are simply scams whose primary purpose is to take advantage of the homeowner and rip them off.

A recent articles came out that provides good information on how to avoid these scams. I would urge anyone facing late payments on their mortgage (or is trying to help someone in this position) to read this article. Even those up to date on their mortgages will benefit from it, especially the advice to watch out for unsolicited letters appearing to be from a division of your mortgage company demanding additional money.

How to Spot a Foreclosure Rescue Scam
http://finance.yahoo.com/expert/article/millionaire/58089

The Mortgage Plan

The administration rolled out its mortgage initiative late this week. The plan will help 340,000 mortgage holders whose teaser rates are due to reset. Another 60,000 sub-prime customer are already so far behind on payments that they will not qualify for the plan. The standards for inclusions in the plan require that “the loan must have been originated between January 1, 2005 and July 31, 2007 when underwriting standards were at their worst. They must also have been made for at least 97 percent the value of the home, and the borrower cannot be more than 30 days delinquent.” The rate freeze scheme would lock in the initial teaser rates for a period of five years, avoiding payment increases for homeowners.

With an estimated 1.4 million homeowners expected to enter foreclosure in 2008, any plan that will possibly enable nearly a quarter of the houses to escape the situation is likely to be received positively on Wall Street. Reducing the number of foreclosures by 25% clearly reduces the stress on mortgage-backed derivative debt.

However the immediate upbeat reaction ignores the reality that the bulk of outstanding mortgages are still likely to flounder. A report released today shows that mortgage delinquencies have risen to a 20 year high. One in five adjustable-rate sub-prime loans had late payments in the quarter. The deterioration of the housing situation is accelerating. The U.S. is likely to establish new standards for peaks in foreclosures, crests that even exceed those in the 1930s.

U.S. Mortgage Delinquencies Rise to 20-Year High
http://www.bloomberg.com/apps/news?pid=20601087&sid=aNNNcUnDqS_g&refer=worldwide

Subprime plan seen reaching 340,000
http://www.reuters.com/article/ousiv/idUSN0731666420071207

The Mortgage Bailout: Moral Hazard

The federal government is working with the financial industry to hammer out a proposal to temporarily freeze interest rates on troubled sub-prime and adjustable rate mortgages. Treasury Secretary Henry Paulson is scheduled to reveal the details of the plan at a national housing conference on Monday,

The major thrust of the proposal would be for lenders to extend for a number of years the lower, introductory teaser rates that were offered on subprime mortgages. Initial details suggest an extension of the lock period to seven years.

Over 2 million of those initial "teaser" rates are scheduled to rise to much higher levels by the end of next year. Many homeowners will not be able to meet the higher payments, likely triggering hundreds of thousands of defaults. Naturally this would dump more unsold homes on an already suffering housing market, pushing home prices down further, further jolting consumer confidence and increasing the probability of a full-blown recession.

Most of the hue and cry in the press recently focuses on the moral hazard of saving homeowners who made very bad choices, few articles focus on the absurdity of bailing out irresponsible banks.
Mortgage aid plan sparks hope and resentment
http://news.yahoo.com/s/nm/20071130/us_nm/usa_housing_hazard_dc

"It's not the government's job to bail them out."
"It feeds into the mentality that the next time you screw up, someone will rescue you."

These statements are even more applicable to the banks than to the stressed homeowners. In reality this plans is about saving the bacon of the banks. Since when does the government actually care about individual homeowners, this entire bailout is about salvaging the entire banking system from a crisis. The concept of moral hazard is even more applicable to bailing out these banks.

Some industry specialists such as Peter Schiff, president of Euro Pacific Capital present a more comprehensive perspective. He recently stated, "The rhetoric is 'We've got to help homeowners,' but the reality is it's designed to help the fat cats, Wall Street. It's bailing out the lenders."

Many historians view the Great Depression would have lasted a mere two years rather than ten if the government had allowed the implosion of the excesses of the financial system to run their downhill course. The intervention of the government to prop up banks and interfere with market activity caused the dismal economic conditions to linger for many years. Only the intervention of WWII caused a turn-around.

At this point it appears that the bail-out plan in some form is a sure lock. Major players in the mortgage industry such as Citigroup, Wells Fargo & Co. and Countrywide are on board. The holders of the CDO notes may cry about reduced interest payments. However CDO holders such as pension and hedge funds face a stark reality either getting paid nothing at all as the entire stack of derivative dominoes tumble or losing a portion of the interest. Most will gladly grab the horns at this point and accept the reduced payments. It is likely that only the lower tranches will suffer and the higher tranches get paid first, leaving only the holders of the lower quality segment of the mortgage derivatives out in the cold.

Maybe this time, the U.S. should simply allow the excesses to be washed out of the financial system. The pain, however sharp, will last for a shorter period of time then a continually cycle of bailouts. Wall Street has a long history of ignoring risks in order to make a quick buck; this leads to constant repetitious cycle of poor financial management. The game ends the same each time; with individuals left out in the cold, the financial firms propped up, bankers flashing big bonuses while every taxpayer is zinged, and another cycle of unnecessary government intervention. Is it time to steer a new course?

Reference:
An earlier post discusses the moral hazard of bailing out Citi
Should Citi Pay for its Mistakes
http://hingefire.blogspot.com/2007/10/should-citi-pay-for-its-mistakes.html

Foreclosures increase crime and drop property values

Suddenly foreclosures rather than “how to flip your home to make millions” is the focus of the majority of homeownership articles. It only took a mere six months to go from one extreme to the other in the financial press.

In a tribute to “Captain Obvious”, recent articles hawk the reality that foreclosed homes are a magnet for crime and cause neighboring property values to drop. One figure to note, each foreclosed house in your neighborhood will cause your home value to drop by 1%.

In the meantime, those turning off the lights at bankrupt mortgage companies wring their hands and exclaim, “Who would’ve thought that lending money to people who never could have repaid it would cause a crisis in neighborhoods across America.”

Empty Houses Home to Crime As Loans Fail
Neighborhoods Suffer As Crime Follows Foreclosures Into Vacant Houses
http://biz.yahoo.com/ap/071113/vacant_homes_crime.html?.v=1&.pf=insurance

Protecting your Home’s Value in the Era of Foreclosures
Foreclosures can affect the value of your property even if you've been paying your mortgage faithfully. Here are some ways you can protect your home's worth if your area is hit hard by foreclosures.
http://biz.yahoo.com/cnnm/071115/111507_toptips.html?.v=2&.pf=loans

Dismal Housing: No End in Sight

Fannie, Freddie, Countrywide, and some builders crowded the front page of the financial press today as their stocks dived to new significant lows.

Freddie Mac (FRE) reported a $2 billion dollar loss as the fair value of its assets dropped by $8.1 billion. Freddie indicated that it must seek outside funding in order to meet regulatory liquidity requirements; meaning an immediate infusion of up to $4 billion is needed to keep the government sponsored mortgage entity afloat. Additionally, the firm was forced to increase its provision for credit losses to $1.2 billion, from $112 million, a year ago. Most investors view Fannie Mae (FNM) as being in a similar situation. The speculation is that the issues will just keep getting worse in upcoming quarters.

Countrywide (CFC) spent most of the day denying bankruptcy rumors as their stock tumbled below $10 for the bulk of the trading day. This is a case of the stronger and more frequent the denials, then the greater the probability of the filing occurring sooner rather then later. Many local investors give them less than six weeks in our bank “death-watch pool”. The situation may possibly end with some sort of merger with another bank in which assets are valued for pennies on the dollar as the last resort

On the homebuilding front, D.R Horton reported (DHI) reported huge quarterly losses today. While there is speculation that many builders will go under due to liquidity issues, Standard Pacific (SPF) sunk over 20% today on this type of concern. Many more will surely follow.

Some traders would look at the huge tumbles of FNM and FRE as short time buying opportunities as the market was over enthusiastic in punishing both stocks for the negative news from Freddie. There is a good likelihood of a short term rebound. However the recent news today that drove the stocks to 10 year lows is just the leading edge of further write-downs that will occur in upcoming quarters. Leaving both government sponsored entities drained of capital and desperately seeking financial assistance. This may amount to further issuing of preferred instruments which smacks the existing common shareholders, to the straight-out begging for a bailout from the federal government (read as “possible bail-out with your tax dollars”).

Housing's Roof Collapsing
http://www.thestreet.com/_yahoo/newsanalysis/realestate/10391123.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

“The drop in housing prices is causing most of the pain. A report from real estate information firm Zillow.com released Tuesday shows that U.S. home values fell 6% in the third quarter, the largest decline in the last 10 years.”

“On top of that, nearly 16% of homeowners who bought houses in the past year now have negative equity in their homes, meaning they owe more than what their homes are currently worth, the report says.”


The turmoil leaves many of those focused on mortgages or housing with a knot in their stomach. The question for many active investors will be “when will it be time to start bottom feeding and grabbing the survivors at rock bottom prices”. Who wants to catch the falling knife or should we just let it bounce off the floor and grab the handle down the road?

Washington Mutual: Going down in flames

First let me disclose my long term dislike for Washington Mutual; therefore it difficult to describe this bank without some level of bias. I heartily cheered when this institution stopped doing business in North Carolina after the state banking regulators basically told them to take a hike.

Even the most ardent optimists would have difficulty in seeing a shiny side of the WaMu coin now. The recent stock price slide pretty much tells the story as WM now hits lows not seen for over 7 years. All the risk items that I have outlined in the past about this bank have come home to roost, and this appears to be only the leading edge of the story.

In the opinion of many people, Washington Mutual has had a long history of shady business practices, abusive interactions with customers, and financial statements that are less then transparent. Some of the particular items that WaMu has been accused of include:

• Improper handling of acquired loans in a manner that was abusive to customers with the sole intent of generating increased revenues for the firm.
• Pushing people into improper loans that had higher fees. Regularly breaking the federal truth in lending laws in a deliberate manner.
• Pushing for appraisal of homes above market value. WaMu is currently being investigated for this by N.Y. Attorney General Andew Cuomo.
• Improper reflection of the both the loan write-downs and derivative pricing on company books. Failure to disclose the actual financial state of the company and follow standards consistent with GAAP.
• Lack of proper understanding regarding the handling of credit risk and failure to disclose relevant business information to shareholders.

One of the classic articles about WaMu and their improper treatment of mortgage holders can be found at:
'I Can't Believe They Treat People Like This.'
Washington Mutual, the nation's no. 1 mortgage lender, calls itself a customer-friendly bank. Many customers beg to differ.
http://www.smartmoney.com/mag/index.cfm?story=nov02-wmutual

Further information critical of Washington Mutual can be found at:
http://www.wamufraud.com/

I would urge people to read all of this information before doing business with Washington Mutual.


Recent Washington Mutual Press Articles:
N.Y. Attorney General says WaMu demanded higher appraisals
http://biz.yahoo.com/bizj/071101/1545150.html?.v=1

Washington Mutual: Things Are Worse
http://www.forbes.com/2007/11/07/washington-mutual-closer-markets-equity-cx_cg_1107markets44.html?partner=yahootix

Washington Mutual Falls Hard, Again
http://www.forbes.com/2007/11/07/washington-mutual-credit-markets-equity-cx_cg_1107markets29.html?partner=yahootix