At the height of the real-estate bubble, Bob Houk, like many homeowners, kept getting unsolicited mailings offering refinancing. He didn’t pay much attention–until he got one from a mortgage broker that had Washington Mutual’s name at the top. He and his wife, Mary Kay La Russa, wanted to lower the monthly payments on their Bainbridge Island home. La Russa, a nurse at the University of Washington, had been diagnosed with a brain tumor that, though it ultimately proved benign, forced her to stop working. He had cut back on his job as a physician’s assistant at Group Health. The letter proposing a WaMu loan seemed both timely and safe. “I just figured ‘Oh, if it’s Washington Mutual, it must be good,'” Houk says.
But in the end, he says, he and his wife wound up with a mortgage that had a much higher interest rate than they had been told—and one in which the amount that they owed the bank grew rather than shrunk over time.
“I feel like I totally got scammed,” he says.
Whether they can do anything about it now is doubtful. In May, Houk and La Russa filed suit in King County Superior Court against WaMu and the mortgage company, Smart Money Mortgage, alleging violations of the Consumer Protection and Truth in Lending Acts. The suit is one of a handful pending against WaMu locally. The problem, for Houk and others, is who to go after now. Rob Williamson, an attorney who filed a class-action suit against WaMu over what he claims were hidden and excessive fees, puts it this way: “The defendant no longer exists.”
On September 25, the federal government seized the company’s banking operation and put it into receivership of the Federal Deposit Insurance Corporation (FDIC). While the parent company went into bankruptcy, the FDIC sold the bank to JPMorgan Chase, which took only the good stuff, and, in a purchase agreement, left claims by borrowers with the FDIC.
“This is all new territory,” says Melissa Huelsman, the attorney representing Houk and one of the few local lawyers who specialize in predatory lending suits. Last week, she received a letter from Ken Williams, a private attorney in Oregon representing the FDIC, who told her that he was going to ask for a stay of the court proceeding. He said there was an “administrative proceeding” she would have to go through to have Houk’s claims heard. “I have no flipping idea what that really means,” she says. “My guess is that my client is going to get screwed.”
Williams said he is not at liberty to discuss the proceeding publicly. FDIC spokespeople could not provide an explanation. “We’re just getting our arms around the lawsuits,” says spokesperson David Barr. Another attorney handling a suit against WaMu, Fred Corbit of the Northwest Justice Project, says he believes the proceeding will entail a review by the FDIC as to whether a claim has merit. If the feds assess that it does, they may offer to pay a settlement. If they do not, plaintiffs have the option of returning to court.
But the search for redress is made even tougher by the amount of money left in the receivership—”almost nothing,” according to Andrew Gray, another FDIC spokesperson.
Some lawyers, like Huelsman, are pushing on regardless, waiting to see what happens. Others are dropping their claims. “We’re probably not going to go ahead in light of how treacherous and difficult that’s going to be,” says Williamson.
Whether or not they proceed, the suits by borrowers offer a perspective on the WaMu fiasco not found elsewhere. Several class-action suits filed in federal court offer glimpses of the company through the eyes of shareholders and employees upset about the fate of their investments in the company. (The outcome of those suits is also in doubt, given WaMu’s collapse.) In hundreds of pages of documents, these complaints describe pressure put on WaMu loan officers to close more and more subprime loans. The suits by borrowers look at those transactions from the receiving side. They suggest not just that people were put into loans they couldn’t afford, but that deceit was sometimes used to do so.
Houk, for instance, claims he was told by Smart Money Mortgage that the interest rate on his WaMu adjustable-rate loan would be one percent for several years. In reality, there was a one percent “teaser rate” for just one month. The next month his rate went up to 7.4 percent—three percentage points higher than his old mortgage. He didn’t realize it for a few months, though, because he was given the option of a “minimum payment,” credit card–style, which he thought was his full payment. By unwittingly paying only the minimum, he was accumulating more debt.
“If I had known what I was getting, I would never have done it,” he says.
The details were, of course, in the paperwork he signed at closing. “It’s 50 pages of paperwork you have to sign in 20 minutes,” says Huelsman, his attorney.
In legal papers filed before the collapse of the bank, WaMu attributes any losses of Houk and La Russa to “third parties over whom WMB has no control.” Smart Money was one of numerous independent mortgage brokers that WaMu paid to bring it clients and package its loans. Smart Money has not filed a legal response, and it has since gone out of business. Houk, however, says he blames mainly WaMu since it was the one buying these mortgage packages. Indeed, cited in his loan documents, but veiled by ambiguous language, is reference to a $9,500 “yield spread premium.” According to Huelsman and other attorneys, that’s the fee that a lender pays a broker for putting someone into a loan with terms that are onerous for the borrower—such as a higher-than-necessary interest rate—and profitable for the bank.
But the bank no longer has to defend its actions, in this or any other such case. The feds’ takeover, says Huelsman, “allows WaMu essentially to escape any liability.”
Similarly, Leanna and Sary Mao allege they were lied to about their WaMu loan, this time by an employee of the bank. According to their lawsuit and their attorney, John Long, the couple refinanced an apartment complex they owned in Lakewood. They were intending to sell the complex soon, so the details of a “prepayment penalty,” which would require them to pay an extra fee when they settled the loan at the time of sale, were important to them. They claim the loan officer assured them that the penalty would only be one percent of the $3 million loan. In fact, it was 18 percent, and when the Maos sold the building the following year, they received a bill for nearly $600,000. “Knowing they were going to sell, there’s no way anyone with a conscience would have recommended this loan,” Long says.
WaMu’s legal papers say that closing documents signed by the Maos “indicate that the plaintiffs had knowledge of, and acquiesced to, the terms.” It’s up to the feds now to decide if they agree.
