Updated/Corrected: WaMu Eliminates Jumbo Option ARM, Other Changes

Note: I incorrectly surmized that WaMu was eliminating the Option ARM while according to an official statement from the company “the company will continue to do purchase and refinance Option ARM products – jumbo and conforming. Product availability will vary by channel.” I apologize for the incorrect analysis.

The below communication was internal to Washington Mutual originators outlining the changes the bank is making to help improve the quality of loans in Washington Mutual’s portfolio and those that are pooled for sale. Of primary import is the elimination of the Edit: Jumbo Option ARM; the Option ARM and jumbo option ARM products will be available depending on business channel – thanks for the clarification everyone. ~~Option ARM~~ which WaMu originated relentlessly over the past several years. In fact, while Countrywide rightfully catches the brunt of the Option ARM ire, WaMu was no saint either, with a massive amount of their quarterly “non-cash” profit booked from deferred interest associated with their Option ARM holdings.

For them to go away from the edit: Jumbo Option ARM is an admission that the profits booked are not likely to be recognized and that they need to begin unwinding their profit and earnings from deferred interest originated by Option ARMs. Needless to say quality is a big issue with WaMu since they continue to have one of the lowest loan loss reserves out of all the major banks.

As I’ve said before – lots of non-cash profit from deferred interest plus low loan loss levels put WaMu in a tenuous position when compared to the rest of the major depositories.

Here’s the communication:

To: Retail Channel Employees
Subject: Products and Lending Policies
Today, the channel is making a number of important changes regarding our products and lending policies. As these changes will affect your production, I anted to take a moment to explain the reasons for our actions.

Credit costs continue to rise and we expect today’s challenging housing market conditions to continue throughout 2008. This means we expect home prices to ontinue to fall and for certain markets like California, Florida. Arizona, and Nevada, coming off extended periods of price appreciation, to experience above average pressure until inventories stabilize.

In addition, the complexity of an illiquid market for jumbo loans requires all of us to take a fresh look at the kind of production we choose to originate. We are taking some significant steps to realign our production volume to drive the highest quality possible in our portfolio by changing or eliminating some aspects of our lending policy.

Here is a high level review of the changes:

Option ARMs and MuitiPay-we are eliminating all Jumbo Option ARM refinances, as well as all Conforming and Jumbo WaMu MultiPay refinance loans in the Retail channel. We will follow up with more information and instructions on how to refer customers who want an Option ARM or MultiPay refinance to the Consumer Direct
channel. We believe these are appropriate steps to manage the inflow of new Option ARMs in our portfolio and to direct our focus on the purchase market.

Retail Broker-we are eliminating the Retail Broker program in its entirety. As you know, we recently reduced the number of Loan Consultants that offer this program. While we have been successful in driving significant volume through the Retail Broker program, with credit quality as a key initiative for the channel, we want to stay as close to our customer as possible. Having this direct contact with our customers will ensure we know as much about them as we can during the application process.

Overages-We are eliminating the Overages for Home Loans Retail.

Lot Loans–This product represents a very small percentage of our overall production and coupled with the extensive processing time required, we have decided to exit this product.

Please carefully review the HLPA when it’s released later today to get the details and other guideline announcements pertaining to these policies.

I know that these policy changes will affect the amount and manner in which you originate–at least in the short term. It’s critical you quickly absorb the changes and re-focus on the tools we have to serve our customers; substantial pricing discounts for purchases, banking relationships and high FlCO customers, the great pricing and flexibility of our WaMu Mortgage Plus offer, numerous lead generation tools through your dashboard and many others.

Thank you for your continued commitment and flexibility as we work to achieve our production and quality objectives.