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Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: tejek who wrote (564642)	5/4/2010 7:51:01 PM
From: bentway	Read Replies (1) \| Respond to of 1576954

Office of Thrift Supervision failed to address problems at WaMu, inpection finds govdocsblog.kentlaw.edu ( UFB! "Approximately 90 percent of all of WaMu’s home equity loans, 73 percent of Option ARMs, and 50 percent of subprime loans were ‘stated income’ loans.") The Office of Thrift Supervision (OTS) failed to ensure that Washington Mutual Bank (WaMU) took the necessary steps to correct weaknesses identified by OTS examiners prior to WaMu’s failure in September 2008, and OTS continued to assign WaMu strong ratings despite evidence of risks to the bank’s asset quality and management, according to an investigative report. The joint report (pdf, 415kb) of the inspectors general of the Treasury Department and the Federal Deposit Insurance Corporation (FDIC) said WaMu’s risky lending was the cause of the bank’s failure, but OTS failed to follow its own guidelines when rating WaMu’s asset qualities, and relied too heavily on WaMu’s self-reporting of actions it took to address examiner-identified weaknesses. The report said WaMu made a management decision in 2005 to “shift its business strategy away from originating traditional fixed-rate and conforming single family residential loans, towards riskier nontraditional loan products and subprime loans.” “WaMu underwriting policies and practices made what were already inherently high-risk products even riskier. For example, WaMu originated a significant number of loans as ‘stated income’ loans. Stated income loans, sometimes referred to as ‘low-doc’ loans, allow borrowers to simply write in their income on the loan application without providing any supporting documentation. Approximately 90 percent of all of WaMu’s home equity loans, 73 percent of Option ARMs, and 50 percent of subprime loans were ‘stated income’ loans. WaMu also originated loans with high loan-to-value ratios. Specifically, WaMu held a significant percentage of loans where the loan amount exceeded 80 percent of the underlying property. For example, WaMu’s 2007 financial statements showed that 44 percent of subprime loans, 35 percent of home equity loans, and 6 percent of Option ARMs were originated for total loan amounts in excess of 80 percent of the value of the underlying property. Further, WaMu did not require borrowers to purchase private mortgage insurance (PMI). PMI protects lenders against the loss on default when the loan amount exceeds 80 percent of the home’s value.” OTS risk assessments and examinations identified the risky lending, poor underwriting, and weak risk controls that eventually caused WaMu’s failure, but “(w)hile we saw some evidence that OTS followed up on examination findings, OTS relied largely on WaMu management to track progress in correcting examiner-identified weaknesses and accepted assurances from WaMu management and its Board of Directors that problems would be resolved. OTS, however, did not adequately ensure that WaMu management corrected those weaknesses,” the report said. The report’s authors found it “difficult to understand” why OTS continued to assign ratings that assessed the bank’s performance as “fundamentally sound” throughout 2007 despite “the multiple repeat findings related to asset quality and management.” It was not until February 2008 that OTS lowered WaMu’s composite rating to a level reflecting “some degree of supervisory concern in one or more of the component areas,” and September 2008, days before the bank’s failure, that it lowered the rating again to reflect “unsafe and unsound practices or conditions.” “We asked OTS examiners why they did not lower WaMu’s asset quality ratings earlier. Examiners responded that even though underwriting and risk management practices were less than satisfactory, WaMu was making money and loans were performing. Accordingly, the examiners thought it would have been difficult to lower WaMu’s asset quality rating. In this regard, OTS guidance provides that: ‘[if] an association has a high exposure to credit risk, it is not sufficient to demonstrate that the loans are profitable or that the association has not experienced significant losses in the near term.’” The report identified a difficult working relationship between OTS, the primary federal regulator for WaMu with responsibility for assessing the bank’s safety and soundness, and FDIC, which was responsible for monitoring WaMu’s risk to the Deposit Insurance Fund (DIF). The report concluded that the interagency agreement setting out FDIC’s responsibilities “did not provide FDIC with the access to information that it needed to assess WaMu’s risk to the DIF.” “The logic of the interagency agreement is circular – FDIC must show a high level of risk to receive access, but FDIC needs access to information to determine an institution’s risk to the DIF. OTS resisted providing FDIC examiners greater on-site access to WaMu information because they did not believe that FDIC met the requisite need for that information according to the terms of the interagency agreement and believed FDIC could rely on the work performed by OTS.” The Senate Permanent Subcommittee on Investigations released a collection of documents in connection with a series of hearings it is conducting on Wall Street and the Financial Crisis. Unfortunately, it did so in an all-but-unusable 50.47 MB, 666 page PDF file* (see the link to “exhibits” at the Friday, April 16 hearing, and enter at your own risk), a file that would be a more valuable exhibit for a hearing on slow broadband speeds or making government information available in usable formats. *UPDATE: If, like me, you’re having trouble opening the monster PDF and would like to get the flavor of what you’re missing, see this testy email exchange between former OTS Executive Director John Reich and FDIC Chair Sheila Bair, in which Reich rips Bair and FDIC for “behaving as some sort of super-regulator.”