Mortgage Lenders
Since 2000 the amount of mortgage-related assets held by banks has been on the rise. The growth followed closely the burst of the dot com bubble. After the economy went into a recession, interest rates fell to very low rates. With these new low interest rates came many new mortgages, as well as, many refinances of existing mortgages. This was very good news for banks, especially those that worked largely with mortgage-related assets. Banks started making large sums of money by simply taking short-term deposits and lending them to others over longer terms for a higher rate. During these periods of low interest rates the gap between short and long-term rates was large, and therefore the banks made lots of money. But recently the economy has started to recover, and the Federal Reserve has announced an increase in interest rates. In general and increase in interest rates is good for a bank, but with the spread between short and long-term interest rates shrinking, the profits for mortgage-related assets has been shrinking. One of the companies that had done extremely well during the boom period on the early 2000’s was Washington Mutual. In the past seven years Washington Mutual went from a small thrift in Seattle to the seventh largest bank in the whole United States. Much of their success came from making money in mortgage banking, and using the profits from mortgage banking to buy smaller banks to expand their operations. Washington Mutual had worked out a plan for their individual branch banks, and they even went as far as to patent the idea of how their branches looked. However, their booming success was to be short lived. In June of this year they announced a projected decrease in profits of twenty percent, and in July they announced that their second quarter earnings were half those of the previous year. The bank blamed the rising interest rates
for both of these problems, but wouldn’t a large bank like Washington Mutual have anticipated such an event as a rise in interest rates? Also over this period of time, other comparable banks have not suffered nearly as much as Washington Mutual. This shows that there must have been some other problem. The other problem facing Washington Mutual was poor management. The first instance of this was a huge mistake made in hedging that generated a huge loss. Profits from the first quarter of the year had been $531 million, following the mistake second quarter profits fell to zero. This was just one mistake; many experts believe that Washington Mutual has fundamental strategy errors that are helping to bring it down as well. One of these strategy mistakes occurred during the massive expansion stage at Washington Mutual, in which they did not bother to integrate the many new branch banks with the central office systems. This in turn caused high operating costs. While trying to cut costs Washington Mutual also cut the jobs of 10,000 sales force employees, while leaving in tact worthless senior management. Over the same period of time Washington Mutual’s competitors were increase sales forces to combat the decrease in mortgage asset profits. These problems don’t even consider the possibility of increased default on Washington Mutual’s new mortgages. This may occur due to the acceptance rate of applicants during the boom period. People who could not get any loans before were granted loans with no problem. What is in store for Washington Mutual’s future is unknown. Some analysts now believe that Washington Mutual may be ripe for a takeover.