It was announced Thursday evening that Washington Mutual was closed by the U.S government in what is the largest U.S. bank failure in history. The Federal Deposit Insurance Corp was named receiver and stated that “customers should expect business as usual on Friday, and all depositors are fully protected.”

I am not writing this post to discuss the details of the post-failure workings (please read this Yahoo News article), and I do understand that WaMu’s failure is complicated.  I just want to express my lack of surprise that WaMu failed from a loan officer’s standpoint.

WaMu was a leader in subprime originations and they were fortunate enough to weather the subprime storm of February, 2007, as long as they did.  They had a separate subprime division with a separate name (Long Beach Mortgage) which probably helped protect them a little.

But WaMu’s real niche over the last several years was the negative amortization loan, aka, the Option Arm, which allows a borrower to make a minimum payment that might not cover the mortgage interest that is actually accruing thereby causing the mortgage balance to increase.

WaMu was obviously not the only lender offering these loans, but they were known for underwriting guidelines that were further outside of the box than most other lenders.  They also loved very large option arm loans and were one of the last option arm lenders to offer stated income.  Even though they seemed to have a fairly stringent appraisal review process, many bad underwriting decisions were made.

WaMu was not alone in the big option arm mess.  Here are some other lenders that offered, and even pushed, the option arm loan:

· Bear Stearns had an appetite for very large, stated income option arms loans as well.  They also offered No-Documentation option arms up to 90% loan to value.  Bear merged with EMC, a subprime lender, in 2007.  We all know what happened to Bear Stearns.

· World Savings built their business on the “Pick-a-Pay” loan, which was their name for the option arm.  If the loan to value was 70% or less, then no income or assets were verified, not even the source.  They referred to this as their Quick Qualifier.  World Savings also allowed significantly lower credit scores than other lenders and more marginal credit.  World Savings was purchased by Wachovia in 2007 and the poor performance of the Pick-A-Pay has since caused the closure of that division.

· IndyMac was recently taken over by the FDIC.  They too had a large subprime division, but they also originated many stated income option arms.

· Countrywide was perhaps the largest originator of the option arm, especially stated income.  At the time they were “saved” by BofA, 89% of the loans Countrywide originated in the previous year were no longer within their guidelines.  Although many of these loans were considered subprime, many were stated income option arms.  Little tidbit that is frequently overlooked…BofA actually offered an option arm for a brief time, but wisely chose to discontinue the program.

· Downey Savings has been rumored to be in trouble.  They recently discontinued their Lite-Doc program and yesterday discontinued the last of their option arm products.  They were always loose on income, but tough on property values.

What do these lenders have in common?  Stated income option arms.  Is anyone else left that offered these?  Homecomings is gone.  Greenpoint is gone.  Bank United stopped lending in California.  SouthStar allowed 100% financing, stated income, with an option arm 1st mortgage, no surprise they are gone.  American Home Mortgage, the tenth largest lender in the nation at the time it folded in August of 2008, specialized in easy to qualify option arms, with minimum pay rates of 1% and note rates of 10%…how does that work?

Looks like the option arm really was too good to be true.  And WaMu found out the hard way.