Now that the bailout has gone down in flames, and the nation's soup kettles are starting to heat up, it is worth taking a moment to wonder why so many people seem to be wondering how this all came about. What could possibly explain this meltdown?
Here's one piece of evidence: the Orange County Register reported on Monday that, during just the last year, a single family in California bought 43 different properties, which they were able to do with the help of 43 different mortgages, totaling $24.5 million, provided by helpful Washington Mutual. You remember good old WaMu -- the nation's biggest savings-and-loan until it became the nation's biggest failure (so far)?
I remember having to jump through at least a few hoops when I got my first and so far only mortgage a while back. I did not then go ahead and ask for another 42 mortgages, partly because of a feeling that, had I done so, they might ask some awkward questions about whether I could pay all that money back. But I guess I was just being naive.
Not only did Washington Mutual not raise any particular concerns about mortgage 2, 3, 4, or 5 through 43, it also somehow missed the fact that it was making these loans to felons. The Sonis were convicted in 2003 of "numerous felonies," all unsurprisingly involving real-estate fraud. Well, I guess that would be a surprise to Washington Mutual.
The family sold 22 of the properties it bought with this money, earning $3.7 million. The average profit was 48 percent, and the average time between purchase and sale was only 92 days. Authorities say they sometimes sold to other family members at inflated prices, with the sales then being used by appraisers to justify high prices for other properties. In July 2007, they bought a house for $440,000 in Santa Ana, then resold it 38 days later for $660,000 to Javier Hernandez, who was, coincidentally, their gardener. He later defaulted, making Washington Mutual the proud owner of a house that is now worth only $377,000. But the bank kept loaning them money. I'm not an economist, but this sort of thing might explain what's going on.
"This is a quality-control problem," said Paul Leonard of the Center for Responsible Lending and Ridiculous Understatement. "It certainly is curious WaMu's fraud-detection system didn't pick this up." Yes, it certainly is. Especially since, as an investigator put it, "any idiot can see these sale prices are excessive." Well, that's not strictly true, because we know these idiots didn't. So let's say that most idiots can see the prices were excessive, although there may well be a subset of idiots, such as possibly bank managers, who suffer from Hyper-Price Vision Impairment Syndrome.
Washington Mutual, or whatever is left of it, may lose as much as $2.7 million just on these transactions, and that's if no more of them go bad. Luckily, though, Washington Mutual is hard at work, or at least its spokespeople are. "We have extensive controls in place to protect the integrity of our portfolio and loan processes," said one, apparently referring to controls that were put in place during the last 15 minutes.