washington mutual

Two of the most abusive practices that helped inflate the housing bubble -- stated income loans and broker bonuses for steering people to more expensive loan programs -- were harpooned by the U.S. Senate on Wednesday.

The Senate passed an amendment to the financial reform legislation by a vote of 63 to 36. The amendment was introduced by Senators Jeff Merkley (D-Ore.) and Amy Klobuchar (D-Minn.). Sen. Carl Levin (D-Mich.), pictured at left, was one of its co-sponsors.

Senate investigations of Washington Mutual show how these types of compensation packages rewarded loan officers and processors on volume and not on the quality of the loans they were writing. Brokers were "paid more for issuing higher risk loans." They also got paid more "when they got borrowers to pay higher interest rates, even if the borrower qualified for a lower rate." This practice enriched Washington Mutual, but "made defaults more likely down the road."

While it's great that these "liar loans" might no longer pollute our financial system, some people could be hard hit by a ban.

Want to be considered for a loan modification? Stop making your mortgage payments. That's the advice that Washington Mutual gave some homeowners who called looking for help with their mortgage payments. Their reward for complying with that advice? Foreclosure.

Some homeowners are now suing JPMorgan Chase, which swallowed up WaMu in a government-brokered deal in September, 2008. The case comes in the wake of Senate hearings on WaMu's unscrupulous practices and bolsters the view that some banks have run roughshod over consumers. Similar scenarios also unfolded at other banks, including Countrywide Financial, now owned by Bank of America, which are also the targets of lawsuits.

"The majority of the banks are requiring people to fall behind before they can get a loan mod," attorney Piotr Reysner of Reysner Law Office in Sacramento, told HousingWatch. "It puts people in a very difficult position."

Of all the wing-tipped execs that have been paraded before government officials investigating the roots of the financial crisis, the former Washington Mutual executives are surely among the most shameful.

Tuesday's all-day Senate hearing, conducted by Sen. Carl Levin, aired enough dirty laundry to stink up all of Capital Hill. WaMu, according to the Senate investigation, pursued a deliberate strategy of peddling high-risk, often fraudulent loans, and selling them off to investors. Employees were compensated on quantity, not quality, and even some accused of fraud were lavished with trips to Hawaii. All the while, officials ignored warnings. In fact, when the housing market started to deteriorate, the bank ratcheted up its efforts to push the ill-fated loans in a final push for profits. WaMu was seized by federal regulators in September 2008 and later acquired by JPMorgan Chase in a fire sale, but not before handing its departing CEO a $15 million gift.

"Washington Mutual built a conveyor belt that dumped toxic mortgage assets into the financial system like a polluter dumping poison into a river," said an outraged Levin (pictured). In its wake, WaMu and its peers have left the financial equivalent of a Superfund site that will take years and billions of dollars to clean up.

Greedy appraisers, who put lofty valuations on properties to please lenders and line their pockets, played a large role in the housing bubble. And the fallout continues: On Jan. 29, a former Beverly Hills real estate appraiser was sentenced to three years in federal prison for her role in a multimillion-dollar scheme to profit from inflated property values. That came on the heels of the arrest of a father and son appraiser team in Laguna Beach, CA charged with altering appraisals to inflate home values by up to $40,000.

In fact, a closer look at the industry and its scandals reveals a "Godfather"-like underbelly, complete with death threats on public officials and sting operations.

The conflicts have led to the increasing use of appraisal management companies -- middlemen that are supposed to act as a firewall between lenders and appraisers. But for millions of homeowners, the issues still linger.