WaMu caught in a wringer

Here's quite a tale. In July 2007, just as home prices were beginning to plunge, Vijay and Supriti Soni of Corona del Mar paid $440,000 for a modest home in Santa Ana. Five weeks later, they resold the house to the family gardener for $660,000. In March of this year Hernandez's loan went into default and in July the bank foreclosed. But here's the topper: Washington Mutual financed the mortgages for both the Sonis and their gardener. Actually, WaMu financed at least 43 mortgages on properties bought and sold by members of the Soni family since early 2007. Of the 22 homes sold in that period, four were foreclosed, one received a notice of default and another was listed for sale at a $260,000 loss. Total value of WaMu's mortgages on the troubled properties: $2.7 million. OC Register reporter John Gittelsohn, who has done some terrific reporting on various real estate misdeeds, has the details. There are investigations all over the place.

WaMu said it is investigating the Soni family's transactions as part of a fraud scheme, and maintained that those loans are not a symptom of larger problems. "We have extensive controls in place to protect the integrity of our portfolio and loan processes," WaMu spokeswoman Sara Gaugl said. "We are continually enhancing our efforts to identify and prevent any potential illegal activity." But lending analysts said the Soni family's transactions raise troubling questions about standards at the Seattle-based thrift, which could face a federal takeover if it can not find a new source of credit. The distressed WaMu properties would then belong to the taxpayers.

Gittelsohn reports that WaMu allowed financing of property flips that occur less than 90 days after purchase, even though the Federal Housing Administration banned such flipping in 2006. He also notes that the thrift relied on imperfect fraud detection software, and did not check criminal backgrounds. That's right, the Sonis had been convicted in 2003 of numerous felonies for a real estate fraud scheme. WaMu checks criminal backgrounds of loan originators but not borrowers. We're going to be hearing a bunch of stories like this for years to come.