Nearly all of the large banking institutions have a wholesale lending division.  Wholesale lenders work directly with mortgage brokers.  The broker originates and underwrites the loans.  Then the loans are packaged into blocks and sold to the wholesale lender.

Quite often, many of these brokers specialize in subprime or alt A lending.  Subprime lending, which is being touted as the cause of the mortgage crisis, is when loans are given to those with poor credit.  Alt A lending is when loans are made to those with less than good credit, but better than poor credit. 

The wholesale lenders that buy these loans are completely dependant on the brokers to verify and qualify borrowers for the loans.  With some brokers this verification and qualification process is thorough and with other brokers… well, the process is not as thorough. 

However, when lending to the subprime and alt A markets, it is vital to make sure that borrowers have the ability to repay.  When brokers aren’t absolutely sure, situations like those with Indy Mac are bound to occur.

Wholesale mortgage lending in the subprime and alt A markets has attributed to most of the financial troubles that banks are currently experiencing.  For this reason, banks have begun straying away from the wholesale lending business.  They have begun to refocus their mortgage loan strategy towards direct retail lending.   This way, there is no need to depend on brokers to verify and qualify borrowers. 

WaMu is no exception.  They too are dumping their wholesale lending business.

In 1999, Washington Mutual purchased one of the largest subprime mortgage lenders, Long Beach Mortgage Company which operated out of Anaheim, CA.  After the acquisition, Long Beach continued in its objective of originating loans with those with unfavorable financial circumstances.  And they remained a leader at it.  In 2005, its nearly 1,000 employees managed to originate over $30 billion in mortgage loans. At that time, WaMu was steadfast about expanding Long Beach Mortgage Company.

However, today, as a part of its refocusing efforts, WaMu put the brakes on Long Beach Mortgage Company as well as all of its other wholesale lending subsidiaries.   As of April 10^th, the wholesale sales centers stopped accepting applications.  As of May 31^st, the doors of the wholesale sales centers were locked forever.  And on June 30^th, the wholesale loan fulfillments centers were closed as well. 

And this, folks, sums up WaMu’s exodus from the wholesale lending business.

For over 100 years, WaMu had been a première lender in the direct retail home loan business.  But I am sure the decision to move into the wholesale subprime market is one the big wigs have come to regret.  Over the past year, WaMu’s market value has plummeted.  Its shares are trading at 30% less than the company’s book value.  Obviously WaMu execs did not forecast it at the time, but WaMu’s eventual ill-fated downturn would be wholly attributed to their little snafu… the decision to enter wholesale subprime lending.

However things are looking promising for WaMu.  They are positioning themselves for a bounce back.  First… they decided to cut their losses with this wholesale lending thing.  Second… they secured a $7 billion dollar bailout from TPG. Third… Kerry Killinger resigned from his post as chairman of the board, though he still remains as CEO. However, some say he is the reason WaMu is in this mess and that he should be relieved of his CEO responsibilities.  Maybe so, but since he is no longer chairman of the board, he is also no longer the be all, end all.  Now, the opportunity exists to bring in a new chairman that can help Killinger move WaMu in a positive direction.  I’m optimistic that WaMu will survive.