Our Real Estate Blog

JPMorgan Chase buys WaMu assets after FDIC seizure

September 26th, 2008 8:24 AM by Lehel Szucs

JPMorgan Chase buys WaMu assets after FDIC seizure

JPMorgan Chase & Co. Inc. came to the rescue of Washington Mutual Inc. Thursday, buying the thrift's banking assets after WaMu was seized by the Federal Deposit Insurance Corp. in the largest failure ever of a U.S. bank. This is the second time in six months that JPMorgan Chase has taken over a major financial institution crippled by bad bets in the mortgage market.
The deal will cost JPMorgan Chase $1.9 billion, and the bank said in a statement it planned to write down WaMu's loan portfolio by approximately $31 billion. JPMorgan Chase, which acquired Bear Stearns Cos. last March, also said it would sell $8 billion in common stock to raise its capital position.
The FDIC, which insures bank deposits, said it would not have to dip into the insurance fund as a result of the seizure. There had been concerns that the fund, which took a big hit after the seizure of IndyMac Bank, could be depleted by a WaMu seizure.
WaMu "was under severe liquidity pressure," FDIC Chairman Sheila Bair told reporters in a conference call.
"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," Bair said in a statement. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."
The government measures bank failures by an institutions's assets; Seattle-based WaMu has roughly $310 billion in assets. The previous record was the failure of Continental Illinois National Bank in 1984, with $40 billion in assets when it closed. IndyMac, seized in July, had $32 billion.
WaMu was searching for a lifeline after piling up billions of dollars in losses due to failed mortgages; it has seen its stock price plummet 95 percent from a 52-week high of $36.47 to its close of $1.69 Thursday. On Wednesday, it suffered a ratings downgrade by Standard & Poor's that put it in danger of collapse.
The Bush administration's proposal for a $700 billion bailout for distressed financial institutions was believed to have given fresh impetus to a buyout and new allure to WaMu. However, it was not immediately known how the bailout, which was still being negotiated in Washington late Thursday, would affect the JPMorgan Chase-WaMu deal.
JPMorgan Chase's chief executive, Jamie Dimon, said in a conference call, said the "only negative" related to the deal was "how to handle some of these bad assets." He did not elaborate.
Besides JPMorgan Chase, Wells Fargo & Co., Citigroup Inc., HSBC, Spain's Banco Santander and Toronto-Dominion Bank of Canada were all mentioned as possible suitors. WaMu was also believed to be talking to private equity firms.
The FDIC was seeking a buyer will to bear a large burden of WaMu's losses to lessen the impact on the insurance fund.
In a statement, JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of Washington Mutual's banks, or any assets or liabilities of the holding company, Washington Mutual Inc.
JPMorgan Chase said the acquisition will give it 5,400 branches in 23 states. JPMorgan Chase said it plans to close less than 10 percent of the two companies' branches; the bank has not yet decided which to close.
In March, the bank acquired the failing Bear Stearns in a deal brokered by the government. It paid $2.3 billion for the company and its stock, bringing its expenditure on both Bear Stearns and WaMu to a total of $4.2 billion.
In the wake of Wall Street's overhaul, Bank of America Corp. is on track be the nation's largest bank by assets once its acquisition of brokerage Merrill Lynch & Co. is completed.
And What's the Future for Mortgage Brokers?
As the year comes to a close, the mortgage crisis is taking on a different spin. Slowly, yet steadily, banks are closing their wholesale divisions. When this happens, a borrower must go into a bank and deal directly with a bank employee to get a mortgage. He will have no option to use his mortgage broker to get a loan from that lender. THE LENDER ELIMINATED MORTGAGE BROKERS, and more and more lenders are heading in this direction.
When a major player such as Bank of America decides to drop their entire wholesale division, they are sending a message: "See, investors? Now we have gotten rid of the risky part of doing mortgages. We have gotten rid of mortgage brokers."
Expect other banks to follow suit, leaving the future of mortgage brokers questionable. Everywhere, the writing seems to be on the wall, as mortgage companies fall by the wayside, banks close their door to doing business with mortgage brokers, and our legislators attempt to throw some huge hurdles in the path of operating as a mortgage broker.
The truth? Banks could put mortgage brokers out of business overnight. The whole model of mortgage brokers originating loans to send to lenders, could become a thing of the past.
If this seems just too far fetched, think how much the entire landscape of the industry has changed in less than a year. People continue to leave the business in droves, and those that remain? Well, let's just say they aren't having as much fun.
Rather than rant about the unfairness of blaming mortgage brokers for the mortgage crisis (which would be easy enough to do), I would rather ask a more important question: Does eliminating mortgage brokers help or hurt the consumer?
Easy answer: it hurts.
Imagine a world where shopping for the best mortgage means going from bank to bank. Gosh, that sounds like fun...not! That's like eliminating multiple listing and going from real estate office to real estate office to buy a house. 
With less competition, do you think consumers will get a better rate, or a worse rate?
Do you think a bank employee will give better service than someone in business for themselves?
Do you think the ability to sell one bank program vs 100 different ones is a benefit to a borrower? How about the ability to mix and match first and second loans?
Do you think borrowers LIKE showing their private information to multiple bankers? Will they like having their credit run over and over?
The thing is, when it comes to mortgage brokers, the banks can have a glass half full, or a glass half empty philosophy. Banks can consider mortgage brokers their best customers (for sending so many loans their way). Banks can consider mortgage brokers their worst enemy (for causing the mortgage crisis...what other scapegoat is there?) But one thing is certain: without lender affiliations, there can be no mortgage brokers, so mortgage brokers are at the mercy of banks.
Okay, you can't have it both ways. With no mortgage brokers, banks have control, but very few loans. With mortgage brokers, banks have more exposure for things going wrong, but far more loans. Which way do they want it? Right now, they want more control
Instead of placing blame and over-reacting, could someone please consider what is best for those who actually need a mortgage, instead of how to fix a crisis that is clearly the result of factors that far transcend the mortgage brokers (who simply sold the loans)?
What's your oppinion?

Posted in:General
Posted by Lehel Szucs on September 26th, 2008 8:24 AM



My Favorite Blogs:

Sites That Link to This Blog: