WaMu has stake in risky, sub-prime arena
Seattle Times staff reporters
For anyone who thinks of Washington Mutual as a buttoned-down bank dishing up only plain-vanilla loans, meet Long Beach Mortgage.
The WaMu subsidiary is one of the country's largest lenders to people with damaged credit.
That's not the kind of business most folks associate with WaMu, a conservative institution with roots in the meat-and-potatoes thrift industry. By dipping into subprime lending — a term that refers to borrowers who can't get the best, or prime, rate — WaMu has moved into an area that was once dominated by specialty lenders, such as Household Finance and The Money Store.
Subprime lending sparks controversy among some analysts and community activists, who worry about the risks it poses for lenders and borrowers. Some industry players have earned a reputation as predatory lenders for using unscrupulous sales tactics, charging onerous fees and interest rates, and often targeting minorities.
WaMu Chief Executive Kerry Killinger knows about the abuses.
"Part of the reason we wanted to become a major player there was to make sure subprime borrowers are handled in a fair and appropriate way," Killinger said.
Long Beach made more than a quarter of all WaMu home-purchase loans last year, and Killinger wants that business to grow faster than WaMu's traditional mortgage lending.
For one thing, it's more profitable.
"We earn better margins in the subprime business because we're very efficient and have an advantage over some competitors," he said.
That does not appease analysts who worry about what will happen when interest rates go up and borrowers have a harder time making payments.
"I hate the business," said Richard Bove, an analyst with Punk, Ziegel & Co. "Asking people who can't afford to buy something to pay up to buy that product is a concept that, for me, doesn't work."
Long Beach is one of the top 10 subprime mortgage lenders in the country and growing fast. It made loans of $8.4 billion in the third quarter, more than twice its volume a year earlier. And it has added about 900 of its 2,500 employees in the past year.
WaMu sells many of Long Beach's loans to investors, and it buys subprime mortgages from other lenders as investments. About 10 percent of the loans in its portfolio at the end of the quarter were subprime.
Robert Napoli, an analyst at Piper Jaffray, asked executives on a recent conference call why they want to expand the subprime area.
"It seems that margins in the industry are, for the most part, at record lows, so it seems that maybe this isn't the best time to be aggressively growing that business," Napoli said.
Chief Operating Officer Stephen Rotella agreed that there is competitive pressure.
"We're in this business for the long term," Rotella said. "We're trying to position ourselves in the marketplace to balance growth with profitability."
WaMu does not report Long Beach's profit or loan quality, but Killinger said both are in good shape. The bank recently decided to sell some of the riskiest loans Long Beach made in 2004 and 2005, partly to reduce its exposure to future losses.
When WaMu bought it in 1999, Long Beach was a publicly traded company based in Orange, Calif., with $346 million in assets. It had been part of California billionaire Roland Arnall's lending empire, but he spun it off in 1997 and kept the retail part of the business, which he renamed Ameriquest.
Long Beach keeps a low profile. It does not advertise to consumers and sells its loans through nearly 8,500 mortgage brokers who are not employees of Washington Mutual. Long Beach employees work in 60 sales offices and 12 loan-fulfillment centers across the country, handling sales, loan processing and administration.
The unit lends in every state but Mississippi, with the most loans by far made in California. Its next biggest markets are Texas and Florida. In 2004, Washington ranked sixth by number of loans, according to data gathered by regulators.
Craig Chapman, head of WaMu's commercial group, which oversees Long Beach, said the company wants to expand subprime lending along the East Coast.
WaMu also wants to take subprime mortgages directly to consumers, probably through its retail branches and home-loan offices, he said.
WaMu left the direct subprime lending business in 2003, when it sold Washington Mutual Finance — which had about 400 offices in 25 states — to Citigroup. Chapman said it was inefficient to have subprime offices overlapping WaMu's network of branches and home-loan offices.
Target of criticism
Like many subprime lenders, Long Beach receives its share of criticism from consumer advocates.
Last year, it paid $800,000 to settle a complaint from the California Department of Corporations, which said it was charging interest on some mortgages for an extra day before the loans closed. Long Beach refunded the money and noted that the law had been changed to permit lenders to charge interest one day before closing.
WaMu's lending patterns prompted one activist group to oppose its acquisition this year of credit-card issuer Providian Financial.
"They disproportionately serve minorities through [Long Beach], saying it's not their fault if the broker screws the consumer," said Matthew Lee, executive director of New York-based Inner City Press/Fair Finance Watch.
Killinger said the company monitors brokers and stops doing business with anyone who violates its responsible-lending principles.
Still, Long Beach made 63 percent of its home-purchase loans last year to minorities. WaMu's prime-lending business made 31 percent of its loans to minorities. WaMu officials say that for societal reasons, minority borrowers tend to use subprime lending more often than nonminority borrowers.
To encourage more prime borrowing in urban neighborhoods and among minorities, WaMu has partnered with Earvin "Magic" Johnson and his Johnson Development to promote 26 home-loan centers for underserved communities.
Long Beach also has a "Best Price Offer" program to identify people who apply for subprime mortgages but qualify for better rates.
About 5 percent of applicants belonged to that group in the 12 months ended April 2005, WaMu spokeswoman Sheri Pollock said.
The company sends those applicants a letter telling them they're eligible for prime loans, but few accept the offers, Pollock said.
That could be because more documentation is required for prime loans or because the applicants want adjustable-rate mortgages, which are not part of the Best Price Offer program, she said.
Kevin Stein, associate director of the California Reinvestment Coalition, said his group protested WaMu's 2002 acquisition of Dime Bancorp largely because WaMu was making too few prime loans and too many subprime loans to African Americans and Latinos.
But the coalition did not oppose the Providian acquisition, partly because WaMu made certain promises for the California market, including increasing the number of branches in low- and moderate-income and minority neighborhoods.
The coalition views the Best Price Program as a good-faith effort on WaMu's part.
"It's not an ideal situation, but I think it's representative of the whole industry," Stein said.
Melissa Allison: 206-464-3312 or firstname.lastname@example.org
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