Washington Mutual Bank and REO Foreclosures

In September 2008, federal regulators took over the beleaguered lender as depositors depleted the bank’s cash reserves. Then Washington Mutual was sold for $1.9 billion to JPMorgan Chase, which also bought Bear Stearns for about $1.4 billion after it collapsed in March 2008. The deal ended WaMu’s 119-year run as an independent company and give JPMorgan Chase branches in California and other western markets where it does not have a big presence. The deal creates the largest bank in the nation.

The government seizure and forced sale of the nation’s largest savings and loan came in the shadow of the passage of a $700 billion bailout designed to help ailing banks and remove one of America’s most troubled banks from the financial landscape.

Over the last few years, WaMu plunged into the subprime mortgage market and credit card business and has been ravaged by borrowers who are unable — or unwilling — to pay their loans and credit cards.

Washington Mutual, with $307 billion in assets, was at the time by far the biggest bank failure in U.S. history, overshadowing the 1984 collapse of Continental Illinois National Bank and Trust in Chicago, which had $40 billion in assets. For example, California-based IndyMac, which was seized in July 2008, was one-tenth the size of Washington Mutual. By the time Washington Mutual collapsed, it was the sixth-largest bank in the United States.

When the housing market began to crumble, WaMu’s business started to sour. Like so many other financial institutions that made bad bets on mortgages, Washington Mutual began to fail as ballooning losses on mortgage loans started mounting. WaMu could not defuse the time bombs of interest-only and pay-option mortgages.

As WaMu’s mortgage debt mounted, depositors lost confidence in Washington Mutual, and began emptying their savings and checking accounts. That sent federal regulators scrambling to find a buyer. Washington Mutual also began racking up huge losses in its credit card business, as borrowers began defaulting on their credit cards.

For real estate and foreclosure investors, Washington Mutual has thousands of REOs for sale. Washington Mutual REOs are predominantly found in California and Florida, where WaMu originated thousands of subprime loans. Investors can contact Washington Mutual’s REO department, and Washington Mutual bank REOs are easily found on RealtyTrac.

REO investors can purchase a wide variety of bank owned foreclosures from Washington Mutual. REO seekers on RealtyTrac can choose Bank Owned under Property Type on the search page, and then simply select a state and a county and click the search button — and a list of bank-owned properties appears — including WaMu REO assets. Buying a WaMu repo is similar to a traditional real estate transaction. Offers are submitted to the listing agent. WaMu reviews the offers from the listing agent and either accepts the offer, submits a counteroffer or rejects the offer in writing. The listing agent will inform the buyer’s agent as to the status of the offer. Generally, WaMu repos are priced in accordance with the local market, but remember that banks tend to be more motivated than traditional sellers — especially if they are saddled with a large REO inventory. Buyers should speak with the listing agent to understand the terms of the listing. Generally, all bank-owned repos are sold “as-is,” meaning the buyer is responsible to inspect the property and factor in any and all repairs.

By purchasing Washington Mutual, JPMorgan Chase is now the second-largest bank in the United States after Bank of America, which recently bought Merrill Lynch in a flurry of events that included Lehman Brothers Holding Inc. going bankrupt and American International Group, the largest insurance company, getting taken over by the government.

Now, Washington Mutual bank symbolizes all the excess of the mortgage meltdown and the foreclosure crisis that followed. The Washington Mutual-JPMorgan Chase merger averted another potentially huge taxpayer bill for the rescue of the failing institution. While WaMu customers are unlikely to be affected by the shotgun deal, shareholders and bondholders will be wiped out.

WaMu’s seizure marks another chapter in the busts, bailouts and shotgun sales that are redrawing the banking landscape. But the deal carries risks. JPMorgan paid $1.9 billion for WaMu’s loans, branches and deposit, but it will certainly write down more than $30 billion in bad loans. While JPMorgan saved WaMu from certain death, some lenders are too ill to be saved.