Last week marked the passing of an icon of the Savings and Loan Industry. Herb Sandler was the co-founder of Golden West Financial and died at the age of 87. His wife and co-founder Marion died in 2012.
The Sandlers were a power couple – philanthropists who gave generously following the sale of Golden West Financial to Wachovia in 2006 for $24 billion. They helped create ProPublica, winner of five Pulitzers and known for its investigative journalism. They gave generously to a variety of charities, especially in the medical research field, and non-profits through their foundation – one of which was the Center for Responsible Lending, led by affordable housing advocate Martin Eakes.
For years, the timing of the Sandlers’ sale of GDW was a point of debate and reflection – often by accusers who knew little of the institution they created, aided with the strong leadership of Jim Judd and Russ Kettel who rounded out the ‘Office of the Chairman’.
With the onset of Great Recession beginning in 2007, Wachovia (whose core going concern was World Savings), failed along with countless other financial institutions. The Sandlers were falsely accused of being culpable for the bad activities of their purchaser that led to the housing collapse. This is something I take issue with.
Yes, World was a lender of the monthly adjustable rate mortgage tied to the 11th District Cost of Funds Index. But the problems associated with mortgage lending risks were not caused by the product. It was due to the excesses of some who used this product, and similar products, without focusing on risk management and compensating factors in making good loan decisions. Risk layering and excess led to the collapse – not the structure of this product.
When I started my mortgage career as a loan officer in 1983 at World Savings in Denver, that was basically the only product we offered.
We did not have deeply-discounted teaser rates back then. Most loans were offered at the fully indexed rate, which was based on the 11th District Cost of Funds, and we offered a 2% margin (on average). Our first no income verification was offered at 70% LTV with no secondary financing allowed. The waiver for income verification was based on ensuring a healthy down payment, a strong credit history derived from reading credit reports versus relying on a score, and intense focus on collateral quality of the home being financed. In fact, we would often go through exaggerated reviews to ensure the income stated. And we trained all employees intensely on everything from how to read tax returns and more. I remember going to a restaurant and having lunch where a borrower worked to determine if her income stated seemed reasonable.
World was very focused on the property. We had a reputation for being “tight” on appraisals. We frustrated many realtors and mortgage brokers with counter offers or denials based on the appraisal, only conducted by our own in-house appraisal staffs.
As a portfolio lender we learned a key rule: it’s the home that cannot sell that ultimately results in default when a borrower has personal financial challenges. If you cannot sell your home when you get in trouble, then there is only one other option. Equity was king. Every LO was provided a camera, and could not submit the file without photos of the home. In my years there, we would spend countless days per month in vans across the country with the heads of appraisal, underwriting, and origination, touring homes that we had originated and discussing the value, the comps, other risk factors that may have been missed. The culture on risk was extraordinary.
The loan was originally created for one purpose; to avoid basis risk for the bank. Lending long on fixed rates and borrowing short on deposit rates was the basis for the S&L crisis that resulted in over $350 billion in collective failures. Herb and Marion developed a product that had an almost perfect match in asset to liability timing, which significantly reduced risk to the bank. Their performance was unmatched by any thrift in its class.
The monthly adjustable rate was not the enemy to consumers. As a matter of fact, consumers who took this loan beginning in the early 1980s saw their rates steadily decline over time for decades, as did rates in general. When appropriate risk factors are considered and with a healthy equity position to allow for resale should economic hardship occur, the portfolio was extremely high-performing for decades, and World produced consecutive 20%+ ROEs for generations.
It was risk layering (such as deeply-discounted teaser rates, 100% LTVs, and laxer collateral standards) that drove defaults on this and other products.
After Wachovia purchased GDW, many of the veteran World Savings employees watched the results of a new and very aggressive posture to lending using this product. Appraisals were no longer done in-house, losing the culture of quality that had been developed over decades. Underwriting became more lax. Piggybacks were permitted on the no income verification loan. Adherence to credit quality simply deteriorated while Wachovia’s leadership set outrageous growth targets for loan volume following the acquisition. It wasn’t World Savings that failed, nor was it the monthly adjustable rate mortgage. It was Wachovia and others who failed to follow the relationship of risk management with this loan product that ultimately led to the collapse.
I recognize that this sounds like a prejudiced defense of World and the Sandlers. If it is, it’s because I was there. When I left to join Freddie Mac in 1999, I did so to expand my knowledge and learn about the secondary market. But World had laid my foundation for how to manage, how to understand and evaluate risk, and how not to yield to loss leaders who will try to compete by price or risk taking. Herb, Marion, Russ, and Jim taught me that along with countless others.
The culture was so unique that some outsiders accused us of being a cult-like company. Whatever it was, it led to decades of steady and strong returns with extraordinarily low default rates.
For more about their contributions, I encourage all to read this SF Chronicle story about their philanthropy.
Herb never really got over the attacks against the company after the Wachovia collapse. I hope people remember the real legacy left by this power team.
Photo by Michael Maloney / The San Francisco Chronicle
David H. Stevens, CMB, is an Advisor to Mortgage Media. He has held various positions in real estate finance, including serving as SVP of Single Family at Freddie Mac, EVP at Wells Fargo Home Mortgage, President and COO of the Long and Foster Realty Companies, Assistant Secretary of Housing and FHA Commissioner, CEO of the Mortgage Bankers Association.