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Option ARMs Killed WAMU, But Why? What did Mortgage Brokers Contribute to the Failure?

By
Real Estate Broker/Owner with Straightline Group, Inc.
Good Afternoon!

I write you for two reasons today.  First, to share some insights with you about WaMu and Option ARMs and second, to share with you our teams views on how traditional Loan Officers failed to guide your clients with this type of loan. 

Why is what I'm about to share with you important? Because is will affect YOUR business moving forward! Working with the right planner is crucial to your success!

The option adjustable-rate mortgage (ARM) will be the loan that will be blamed for Washington Mutual's demise. The bank believed the loan was a creative mortgage that would help a variety of borrowers in various stages of their lives. The loan gave borrowers more choices over monthly payments each month, thus providing an opportunity to "flip-flop" payments according to household cash flow. Because of its flexibility and versatility, it was promoted as "the only loan you'll ever need."

We at Silverstar Finance have done Option ARM loans and we have had hardly any complaints because of what we do after a loan is funded. Yes, after a loan is funded! We understand the complexities of the loan, we studied the forecasts and the history of the loan, we explained the loan in great detail to each and every client, gave them choices and advice, and most importantly, we continue to conduct FREE Annual Check Ups for everyone that has an Option ARM loan and we also do a Monthly "Rate Watch" for all clients as well. What is "Rate Watch" and why should your trusted mortgage advisor have this service for your clients? See here for an actual sample rate watch email, which you just may love!:

http://www.screencast.com/users/kjkooiman/folders/Jing/media/ba6df2b5-4041-4c57-adcf-13c04c8ae4e5

You and your customers can sign up for this service too if you like.

Did you know that a typical Option ARM loan is forecasted to be in the mid to high 4% range by early next year? 

First, the history of the MTA index, which was WAMU's primary index of choice:

http://www.moneycafe.com/library/mta.htm

And the forecast:

http://mortgage-x.com/general/indexes/mta_rate_forecast.asp

Most of our clients had a margin in the 2.65% range. Simply add 2.65% to the number in the forecast chart and you'll be able to estimate what rates for Option ARM customers will have. That means that the majority of our Option ARM clients will have fully amortized rates in the 4.50% range in less than a year and very little negative amortization. If the Loan Officer that you sent your clients to was doing Option ARM loans and gave your clients 3 year prepayment penalties coupled with margins higher than about 2.85%,  you and your clients may have a problem, especially if you are still working with this person. It's time to hire another mortgage planner.  If you don't think so, I beg of you to do some research into the amount of money that was made by the Loan Officer by their failure to do ethical and honest work. It's because of these high margins that Option ARM loans began to re-cast early, which ultimately put unprepared clients into foreclosure, putting WAMU out of business. We feel that it was the Loan Officers duty to conduct reviews at least once a year to give advice on which payment to make, forecast the re-cast point, prepare their client for the new payment, and do their best to give strategic advice that can delay the re-cast for the customer. All of this should've been done and it wasn't.

Customers got lulled into making minimum payments for far too long (A simple "Annual Check Up" from a Certified Mortgage Planner would've been enough to avoid this problem), compiling substantially more debt than the original loan amount. Others knowingly used the loan to get into homes they realistically could not afford. Once again, working with a Certified Mortgage Planner would've prevented this problem as well.  More importantly, the bank accepted option ARMs from many brokers who did a rotten job of explaining how the loan really worked. Seeing a pattern here? Working with a CMP is essential, especially when dealing with complex and life changing circumstances such as explaining this type of product. 

Many consumers and brokers simply didn't "get" all of WaMu's options. We did.  Others clearly understood but were motivated by attractive commission fees or the possibility of living in a home they could not truly afford. The bank kept accepting the loans from just about all who wanted to opt in. Now, many consumers simply can't opt out.

To sum it up, Loan Officers that were selling the Option ARM loan should have been doing more than being just good salespeople.  They should've explained the product to their clients in person, conducted annual check ups, advised clients to sell or refinance if they saw mismanagement or overspending, provided rate watch reports, and should've put the clients needs before their own. They should've cared about their clients and their well-being, and most did not. Even if the Loan Officer did care about their client, it was also their duty to do more than care...they should've created systems to manage their loans and they should've done more due diligence before selling the product, which would've helped gauge whether or not their customer belonged in this type of loan. Many did including myself and many did not. Being nice or a good salesperson is simply not enough.

So while the Option ARM loan is now a thing of the past, doing the right thing for our customers is not.  This is the time to give sound planning advice. This is the time to give our clients and prospects the information and education they need so desperately so that they will make good decisions. The smarter your client is, the better decisions they will make, the more successful we will be, and the more referrals we will share. Sounds like a great recipe for success to me!

Hope you enjoyed the commentary and article.  Please, forward this to all of your peers, as I'm sure they will appreciate it as well.

Thank you!

To Your Success,

Kurtis Kooiman on Behalf of
Team Silverstar Finance
Certified Mortgage Planners
(p) 714-892-1002
(f) 714-892-1092


P.S. Interested in partnering up to put on some educational workshops for your clients? Whether you're a Realtor, a Financial Planner, Divorce Attorney, CPA, Family Therapist, or any other service provider, workshops are very important and profitable!

We have the systems and tools to make this happen in an efficient and very inexpensive way. Most workshops cost anywhere from $100.00 to a max of $1000.00 depending on event location. Just think, one new transaction pays for the entire event and then some!  Your clients will thank you for caring, this I promise you!
Michael A. Caruso
Surterre Properties - Laguna Niguel, CA

Mortgage brokers were criminal in their applications using "stated income" methodology.  It was a set up for failure.

Please remember me if you learn of anyone moving to "The OC".

Best regards.

Michael Caruso, Broker ABR ABRM CRB CRS GRI

2007 President, Orange County Association of Realtors

Oct 16, 2008 04:35 AM
Angelia Garcia
Pure Realtors - Dallas, TX

Was it the VP, I can't really remember, that interviewed with one of those news shows disclosing what really happened.  He knew they were doing wrong, he was fired and now he is suing. He said WAMU took a risk on subprime loans and that is why they are failing now.

Oct 16, 2008 04:41 AM
Anonymous
Kurtis Kooiman

Angelia,

Actually, it was Kerry Killinger, WAMU's former strategist, if we're talking about the same person.  A lot of large banks (greed) invested in some subprime mortgage backed securities but, in WAMU's case, it was mostly the Option ARM loan, which is NOT a subprime loan by definition.  My so called "subprime" Option ARM loan with WAMU is currently at 5% so, that's hardly subprime.  What could make it look like a subprime loan is some of the deceptive behavior that I noted in my BLOG, such as increasing the margin and prepay on the loan so that the Loan Officer would make more money, causing the loan to re-cast early due to a higher rate.

 

=)

 

Thanks for reading Angelia!

Kurtis

Oct 16, 2008 04:48 AM
#3
Pat Champion
John Roberts Realty - Eustis, FL
Call the "CHAMPION" for all your real estate needs

We as agents need to make sure our customers have the right loan.  I feel we need to try and educate ourselves more.

Oct 16, 2008 04:50 AM
Kurtis Kooiman
Straightline Group, Inc. - Tustin, CA

Pat,

Being a mortgage planner and having seen what I have seen which goes as far as trying to clean up a mess that another mortgage planner left behind, I completely agree. 

Trusting that the person that you are working with as a mortgage partner will do the "right thing" by you and your client while using common sense and intelligence is a must.

Unfortunately, the Loan Officers of yesterday rarely had either trait.

Thank you for reading.

Kurtis Kooiman

Oct 16, 2008 04:54 AM
Bill Ladewig
LoanOfficerSchool.com - Escondido, CA
Experience Is Your Advantage

The Option ARM was the most outrageously abusive loan in the history of lending... PERIOD.

Kuris, this is not intended to be a slam against you or your company but the Option ARM was an accident waiting to happen and it was doubly insidious because it allowed unscrupulous mortgage brokers to collect 3 to 5 points rebate without affecting the borrower's START RATE.  In fact some of the wholesalers were promoting 6 point commissions which jacked adjusted rates through the roof. 

Borrowers never knew what hit them.  The high commissions only raised margins, which later caused huge increases to the adjusted rate which, in turn, caused a huge number of foreclosures and... 99.9% of the borrowers did not understand their loan much that less LOs were gouging them for $20,000-$30,000 and more a loan.

And, yeah, everything about every loan was disclosed by the lender prior to the borrower signing docs but we all know that about 1 in 1000 read their disclosures and if they did they would not understand what they were reading without and attorney present.

Sorry to come down on your blog but we disagree hugely on the OA... it truly sucked.

 

 

 

 

Oct 16, 2008 05:05 AM
Kurtis Kooiman
Straightline Group, Inc. - Tustin, CA

Bill,

Hey, I agree with you 100% but, not about the loan itself.  The loan itself was good, it was the way it was put together by way of higher margins that I disagree with.

I have never made more than a 1% YSP on any loan, let alone an OA. It's unfortunate that lenders allowed Loan Officers to do that to people. I have an Option Arm loan and I love it, as do 99% of my clients.

However, if I made 20K to 30K on a loan, certainly my clients would hate it.  It's like putting lipstick on a pig, a common term used these days it seems. An option arm loan is an "A" paper loan that can be made to look like a horrible sub-prime loan by a Loan Officer just like that!

 

Thank you for your comments Bill.

Kurtis Kooiman, President, Silverstar Finance, Inc.

Oct 16, 2008 05:13 AM
Anthony Kirlew
Group 46:10 Network @ eXp Realty - Gilbert, AZ
Helping You Make Fiscally Sound Real Estate Deals!

Kurtis, Kudos to you for trying to educate your customers.  That is huge as many people did not really know what they were getting. Granted, one of the biggest problems was alsthat these loans paid higher commissions (YSP), so greedy, ethically challenged brokers just pushed them on people.  I refinanced a retired couple in their seventies out of one of these.  The lender that put them in that loan should be in jail as she clearly took advantage of them. They said they had no idea their payments would go up the way they did as they were on fixed income.

Overall, GREED drove these loans. The companies were too greedy to actually use real underwriting criteria (i.e. stated income test - can a teacher really afford a $700k loan? - yes, I got that call too).

 

Oct 16, 2008 05:32 AM
Bill Ladewig
LoanOfficerSchool.com - Escondido, CA
Experience Is Your Advantage

Kurtis, I agree that in the hands of a competent loan officer the OA could be good tool for a sophisticated borrower.

The OA had been around for years and there really were not any issues with it until lenders began promoting higher and higher rebates.  And, rebate was easy to sell because most borrowers had no idea of its long term affect.

So, it was like taking candy from a baby; borrowers being human just looked at the 1% start rate; Most LOs just being human just looked at their potential commission... a match made in hell.

Then, there was the dirty little RECAST secret which hardly anyone discussed.  In five years or sooner the OA would recast into a FIXED adjustable (no optional payment) for the remaing term of the loan.  The combination of higher rate, higher loan balance and lower term was a bullet in the head for most borrowers.  The only solution was to refinance and we know what happened there.

Admittedly my first response was over the top... but not by much.

 

Oct 16, 2008 05:38 AM