In the case of the salesman who wouldn’t sell, the two sides have starkly different tales to tell.
Greg Saffer says conscience and common sense prevented him from pushing the product his bosses wanted him to sell — “Option ARM” home loans that, he says, put homeowners at risk.
“I’m not going to steer people into a loan program that might not be good for them just because it’s more profitable for the company,” he says.
JP Morgan Chase Bank counters that Saffer didn’t sell because he didn’t have the chops to close deals.
“Rather than a paragon of virtue, Saffer was simply a guy who could not sell loans in an increasingly tough market,” the bank’s lawyers say in legal papers.
JP Morgan is matched against Saffer because it bought Saffer’s ex-employer, Seattle-based Washington Mutual Bank, in September 2008, after regulators seized WaMu in what was the largest bank failure in U.S. history.
Saffer charged in a lawsuit filed in 2009 in Los Angeles Superior Court that he was forced out of his job for refusing to take part in “fraudulent schemes.” In testimony in the lawsuit and in documents in arbitration proceedings, he claims WaMu retaliated against him because he refused to push “toxic” Option ARMs and mislead borrowers about how the loans worked and how much they would cost.
A judge ordered the case into arbitration last year. It could be months before an arbitrator rules on whether Saffer’s claims are valid.
Saffer’s case is notable because, as a salesman, his job description was different from most of the ex-employees who’ve made whistleblower claims against mortgage lenders. Many were fraud investigators or loan underwriters who claim they were punished for uncovering fraud by sales reps and sales executives.
Saffer’s legal claims paint him as one of what may have been a distinct minority among the mortgage industry’s sales corps during the nation’s home-loan frenzy – a salesman who said no to the dirty tactics that became pervasive during the boom. Former industry insiders say salespeople who refused to go along were often weeded out, to make way for others who had a more pliable sense of right and wrong.
Saffer’s attorney, Carney Shegerian, represents two other former WaMu sales reps who, like Saffer, claim that WaMu fired them because they resisted pressure to engage in improper lending tactics. Their case has also been ordered into arbitration.
Shegerian says his clients not only lost their jobs because they refused to go along with the practices at the bank, “their good names were totally soiled for having been employed by WaMu.”
Greg Saffer put in several years as a high-earning salesman at a smaller lender in Los Angeles, Citizens Mortgage, before he took a job in mid-2007 as a mortgage sales rep at a Washington Mutual office in Ladera Ranch, Calif.
WaMu, the nation’s largest savings and loan, was putting up big numbers peddling exotic home-loan products that, just a few years before, had been on the margins of the mortgage industry.
These included subprime mortgages designed for borrowers with weak credit as well as “payment-option” adjustable-rate mortgages generally targeted at borrowers with good credit.
Option ARMs allowed borrowers to make minimum payments that didn’t keep pace with interest charges on their loans. In other words, loan balances would grow rather than drop as each month ticked by. It’s known as a negative amortization loan, or “NegAm” in industry parlance.
Option ARMs accounted for roughly half of Washington Mutual’s home-loan production during the mortgage boom years, according to federal regulators.
WaMu chief executive Kerry Killinger touted Option ARMs as the bank’s “flagship product.”
It was no wonder.
WaMu earned more than five times as much on Option ARMs as it did on fixed-rate home loans, according to internal company documents. Mortgage investors on Wall Street loved them because their growing loan balances and escalating interest rates translated into big returns.
Whether they were good for borrowers was another question.
As early as 2006, BusinessWeek had called them “Nightmare Mortgages,” declaring they “might be the riskiest and most complicated home loan product ever created.”
Saffer says he thought Option ARMs were dangerous for most customers. That’s because once negative amortization pushed loan balances too high, the loans would automatically readjust and monthly payments would soar.
This “payment shock,” he knew, was likely to drive many into default.
Borrowers had the option of making larger monthly payments that would cover interest and pay down their balances, but Saffer says not many could afford to do that, because their loans had been underwritten based only on whether they could afford the minimum payment.
He refused to put together NegAm loans for borrowers, he says.
That didn’t leave him many other products he could sell. Washington Mutual purposely priced traditional 30-year fixed-rate mortgages higher than what other lenders were charging, Saffer testified.
His boss, a WaMu vice president named Mark Stockton, told him it was because fixed-rate loans weren’t profitable enough and WaMu wanted to steer borrowers into NegAm loans, according to Saffer’s testimony during the L.A. Superior Court proceedings, before the case was moved to arbitration.
Stockton, Saffer testified, told him Option ARMs were the way to go “if you want to make some serious money....This is the loan that I want you to pitch.”
In his testimony in the case, Stockton denied ever talking to Saffer about which loan programs were most profitable and which weren’t.
Saffer also testified that Stockton instructed him not to give borrowers the full story on how Option ARMs worked, to emphasize the low minimum payments but not to mention that their loan balances would increase if they paid only the minimum option. And to make sure borrowers qualified for these loans, Saffer testified, Stockton encouraged him to help them overstate their incomes on their mortgage applications.
When he expressed qualms about the ethics of pushing Option ARMs, Saffer testified, Stockton told him: “Greg, we’re about profit and profit only.” Stockton told him to “get with the program” and start selling Option ARMs, or he might be out of a job, Saffer testified.
In an interview, Saffer softened his assertions about Stockton by noting that higher-ups set the agenda and chose Option ARMs as WaMu’s flagship loan.
“I believe he was getting pressure from his upper management. The pressure just trickled down from the top,” Saffer says. “Mark Stockton didn’t invent this loan. I believe he was getting it probably as bad as I was getting it.”
In response to questions from iWatch News, Stockton said he would have “no comment regarding these unfounded accusations.”
Stockton testified that Saffer and other loan officers were never told to coach borrowers about how much income they should state on their loan applications. He added that loan officers were “thoroughly trained” on how to explain to borrowers what negative amortization was and how Option ARMs worked.
Option ARMs weren’t the only loan product that Saffer says concerned him.
Even as the subprime loan defaults were spiking and subprime lenders were going out of business in late 2007, WaMu was pushing its sales force to peddle subprime mortgages, Saffer claims in a written declaration in the arbitration proceedings. An in-house trainer instructed salespeople to target “lower income areas” with “less sophisticated” borrowers for deals that would strip the equity out of their homes, the declaration says.
“Do not feel sorry for these people,” the trainer said, according to Saffer’s declaration.
Stockton testified that Saffer and other loan officers working under him were never encouraged to sell subprime loans.
Staying clear of subprime and payment-option loans, Saffer says he focused on marketing home equity lines of credit. He says he thought they made sense for many borrowers; they carried no closing costs, the interest rates tracked the prime rate and borrowers wouldn’t have to refinance their existing mortgages to get a little more cash out of their homes.
He understood equity lines didn’t make a lot of money for the bank, but he says he was trying to operate as he had at his previous stops in the mortgage business, building a clientele for the long haul rather than making a quick score.
“I’m not a flash in the pan, make-all-your-money-now kind of guy,” he says. “To me, business is a long-term thing.”
His refusal to push riskier home loans soured his relationship with Stockton, Saffer testified.
They had gotten along well at first, but eventually Stockton did “a complete 180,” Saffer testified, either ignoring him in the office and not returning his calls or, when they did talk, showing him “nothing but animosity.”
Stockton testified that this wasn’t so. While he did raise concerns about Saffer’s production, he said, their relationship was never strained.
Saffer resigned Jan. 4, 2008. Given all that had happened, Saffer says in legal documents, he “had no other option” but to leave.
Saffer’s legal adversary, JP Morgan, has worked to portray itself as less culpable than other big banks in the questionable practices that helped crash the U.S. economy.
Its purchase of WaMu has put JP Morgan, however, in a position of having to decide whether to stand behind the practices of a bank that’s been harshly criticized by investigators, regulators and investors.
In Saffer’s case, JP Morgan has heartily defended WaMu’s practices. Its lawyers write that the WaMu’s Option ARMs weren’t toxic products. They “complied with all disclosure laws and regulations” and provided “very flexible” terms that allowed borrowers to change their payment levels from month to month, the lawyers say.
Others hold a darker view of WaMu’s Option ARMs.
Federal regulators say the consequences of WaMu executives’ drive to sell Option ARMs include huge numbers of homeowners facing foreclosure and ruin. One $600 million pool of Option ARMs that WaMu created in 2007, for example, had a 60 percent delinquency rate by the start of last year.
In a lawsuit against former CEO Killinger and two other former senior executives, the FDIC charged that WaMu sold Option ARMs “widely and indiscriminately,” using sales tactics that enticed marginal borrowers into deals they often couldn’t afford. The executives have admitted no wrongdoing.
‘Nice conservative bank’
Along with defending WaMu’s Option ARMs, JP Morgan’s lawyers also take issue with Saffer’s assertion that working conditions had become so intolerable he had to resign.
Things weren’t so bad for him, they say, noting, for example, that “Saffer admits that no physical altercations ever took place between him and Stockton.”
Saffer replies that a lack of physical violence hardly qualifies a workplace as model employer.
Saffer is now his own boss. His company arranges “reverse mortgages” for elderly homeowners who want to tap their equity without putting their homes at risk.
He says he’s glad to be working at a job where he can follow his principles, not the dictates of Washington Mutual executives who were, in his view, intent on peddling unsafe products.
“I never would have thought this nice conservative bank from Washington State would have this boiler room, mill mentality,” Saffer says. “I never would have thought that in a million years."