Remember 2008, when banking moguls Herb and Marion Sandler of Lafayette were being publicly castigated for allegedly helping to fuel the nation’s fiscal crisis by having sold option ARM home financing for decades through their Oakland-based Golden West Savings?
It seems the Sandlers, who tried to defend themselves at the time, are somewhat vindicated by the final report of the Financial Crisis Inquiry Commission, the bipartisan panel charged with investigating and explaining the causes of the economic crisis that precipitated our recent recession.
The report, issued last week, discusses the Sandlers’ sale of option ARMs but notes that the real troubles began after Wachovia bought Golden West Financial Corp. in 2006 for about $25.5 billion. It seems to lay blame instead at the feet of other lenders who sold option ARMs less scrupulously, in high-pressure sales to people who couldn’t afford them.
Herb Sandler, now 79, and Marion Sandler, now 80, have been best known in recent years as prolific philanthropists, particularly in public policy and the media; their money in 2003 helped launch the left-leaning Center for American Progress, now perhaps the pre-eminent think tank supporting the Obama Administration’s policies, and in 2007 helped launch ProPublica, a nonprofit news outfit that won the 2010 Pulitzer Prize for investigative reporting.
Read the FCIC’s finding on the Sandlers’ mortgage activities, after the jump…
From pages 106-107 of the report:
When they were originally introduced in the 1980s, option ARMs were niche products, too, but by 2004 they too became loans of choice because their payments were lower than more traditional mortgages. During the housing boom, many borrowers repeatedly made only the minimum payments required, adding to the principal balance of their loan every month.
An early seller of option ARMs was Golden West Savings, an Oakland, California–based thrift founded in 1929 and acquired in 1963 by Marion and Herbert Sandler. In 1975, the Sandlers merged Golden West with World Savings; Golden West Financial Corp., the parent company, operated branches under the name World Savings Bank. The thrift issued about $274 billion in option ARMs between 1981 and 2005. Unlike other mortgage companies, Golden West held onto them.
Sandler told the FCIC that Golden West’s option ARMs – marketed as “Pick-a-Pay” loans – had the lowest losses in the industry for that product. Even in 2005 – the last year prior to its acquisition by Wachovia – when its portfolio was almost entirely in option ARMs, Golden West’s losses were low by industry standards. Sandler attributed Golden West’s performance to its diligence in running simulations about what would happen to its loans under various scenarios – for example, if interest rates went up or down or if house prices dropped 5%, even 10%. “For a quarter of a century, it worked exactly as the simulations showed that it would,” Sandler said. “And we have never been able to identify a single loan that was delinquent because of the structure of the loan, much less a loss or foreclosure.” But after Wachovia acquired Golden West in 2006 and the housing market soured, charge-offs on the Pick-a-Pay portfolio would suddenly jump from 0.04% to 2.69% by September 2008. And foreclosures would climb.
Early in the decade, banks and thrifts such as Countrywide and Washington Mutual increased their origination of option ARM loans, changing the product in ways that made payment shocks more likely. At Golden West, after 10 years, or if the principal balance grew to 125% of its original size, the Pick-a-Pay mortgage would recast into a new fixed-rate mortgage. At Countrywide and Washington Mutual, the new loans would recast in as little as five years, or when the balance hit just 110% of the original size. They also offered lower teaser rates – as low as 1% – and loan-to-value ratios as high as 100%. All of these features raised the chances that the borrower’s required payment could rise more sharply, more quickly, and with less cushion.