Washington Mutual Mortgage Analysis

Washington Mutual Mortgage is the mortgage lending branch of the nation’s largest savings and loan association, Washington Mutual, headquartered in Seattle, Washington.

The third largest mortgage lender in the United States, Washington Mutual offers fixed and variable rate conventional mortgages, interest-only mortgages, equity lines, and a number of ARM creative financing options.

In December of 2007, Washington Mutual Mortgage closed 160 of its 336 home loan offices across the country, and eliminated 2600 positions, constituting 22% of its entire staff. Hit hard by the subprime lending crisis, in March of 2008 Washington Mutual also reduced the 2007 compensation package of its CEO Kerry Killinger from $14.2 million to $5.25 million after its stock price dropped 70% due to huge losses in the mortgage division.

WaMu (as it is now called in its ad campaigns) has set aside $2 billion for losses in 2008 which it expects to continue into at least the third quarter.

In December of 2007 Washington Mutual Mortgage was also investigated by the Securities and Exchange Commission due to allegations that it had based some of its mortgage loans on intentionally inflated home appraisals. Though formally cleared of these allegations, the chief legal officer for Washington Mutual Mortgage, Fay L. Chapman, retired immediately after the investigation ended. Ms Chapman, then 61, insisted that no connection existed between the company’s legal troubles and her sudden departure.

Washington Mutual does offer very competitive rates on conventional fixed rate mortgages, but its terms on ARMs vary widely and should be carefully read and understood before signing. For example, a one-month ARM option is can be hit with increases of up to 7.5% annually with no lifetime cap, and with negative amortization over the life of the loan a real possibility.

Negative amortization means that the amount owed on the home increases even though payments are made regularly and on time. Buyers who choose this option betting on mortgage rates staying low and their property rapidly gaining equity can end up owing more than their house is worth very quickly if they are wrong.

Five, seven, and ten year ARMs are also offered that carry a more reasonable 5% cap for the life of the loan, but even this can cause problems if buyers don’t realistically consider all possible outcomes. Many people only consider the best case scenario, a bad idea especially considering the real estate mess of the past year.

An even more slippery multi-pay option allows WaMu buyers to choose one of four different payment types for the first ten years of their ARM. The first payment option allows a minimum payment that does not even cover accrued interest and can result in negative amortization.

The second option is an interest-only option.

The third is for a normal principal and interest payment.

The fourth is for a 15-year principal and interest payment.

In the worst-case scenario, buyers could choose option one for ten years, owe more on their property each year than they did the year before, and then after ten years get hit with an unaffordable payment on an upside down mortgage. That might be worth doing if refinancing was an option and property values kept pace with the negative amortization, but that is a lot of ifs to be considering at the beginning of a property purchase.

People who need (or think they need) this kind of flexible payment option unfortunately tend to be the very same people who should never, ever be offered this kind of flexible payment option. It’s hard to say whether Washington Mutual is still making this kind of creative loan given the current chilly lending climate, but they do still offer it on their website: http://www.wamu.com/personal/loans/home_loan/multipay/default.asp

Washington Mutual Mortgage is likely to be around for awhile, having merged with or acquired Homeside Lending, Fleet Mortgage Corporation, PNC Mortgage, and Alta Residential Mortgage, all in the past eight years.

Given the deep cuts, huge losses, and radical changes to the mortgage division in 2008, it is almost certain they will eventually emerge a more conservative, more cautious lender.