BREAKINGVIEWS-Pick-a-pay creator follows dodgy product to grave

Mon Jun 4, 2012 10:05pm BST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Martin Hutchinson

NEW YORK, June 4 (Reuters Breakingviews) - Marion Sandler has died at the age of 81. She was already a rare female success story on Wall Street when she bought Golden West Financial in 1963 with her husband Herb. The couple then built the thrift into one of America’s most efficient mortgage lenders and sold to Wachovia for $24 billion at the top of the market in 2006. But it’s as the architects of the pick-a-pay loan that she and her husband will be remembered.

Golden West was a pioneer in adjustable-rate mortgages after they were legalized in 1982. It was near-perfect timing: with interest rates about to start a quarter-century decline, ARMs proved both popular and safe. That, along with the Sandlers’ drive and ability, allowed the bank to build market share while keeping costs pared to the bone and loan losses at miniscule levels.

It was great news for Golden West shareholders. The stock grew at an annual compounded rate of 19 percent between 1963 and Wachovia's takeover. And it was a boon for the Sandlers and their philanthropic ambitions. They put $1.3 billion of their sale proceeds into the family foundation, and have so far donated half of that, tax free, to fund both medical research and more politicized organizations.

But to get to that point the Sandlers, along with rivals, became more aggressive after 2000, buying an increasing share of mortgages from brokers and inventing the option ARM pick-a-pay home loan. That allowed a borrower to select from a number of payment options each month, some of which were low enough that they actually increased the amount of principal owed.

By 2008, the product had gone from darling to devil, contributing to Wachovia’s fire sale to Wells Fargo (WFC.N). Granted, Wachovia’s own book of pick-a-pays was probably far worse. The Sandlers usually demanded down payments of at least 20 percent and kept the mortgages on their books rather than offloading them in the securitization market. But as the progenitors of what became one of the most egregious products in the crisis, they cannot escape their share of the blame.

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CONTEXT NEWS

- Marion Sandler died on June 1 at the age of 81. Along with her husband Herb she built Golden West Financial, a California-based mortgage lender the couple ran from 1963 until selling it to Wachovia for around $24 billion in 2006.

- The Sandlers created the option adjustable-rate mortgage product in the early 1980s. One variant allowed borrowers to choose how much to repay each month, earning such loans the title of pick-a-pay mortgages.

- Mortgage losses on both Golden West’s and its own portfolios forced Wachovia to sell on the cheap to Wells Fargo (WFC.N) in 2008. In 2010 Time magazine put the Sandlers on its list of the 25 people to blame for the financial crisis. The Sandlers responded with a letter outlining how their option ARMs were less risky than those originated by rivals. The couple was also lampooned on Saturday Night Live.

- The Sandlers pocketed around $2.4 billion from selling to Wachovia. They donated $1.3 billion of it to their foundation, which has so far distributed around $550 million. The University of California San Francisco has received more than $100 million and $80 million has gone to funding asthma research. The foundation also helped found the Center for American Progress and news and analysis site ProPublica, and donated money to the Center on Budget Priorities, Human Rights Watch and other causes.

- Marion Sandler’s website: link.reuters.com/fux58s

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(Editing by Antony Currie and Martin Langfield)

((martin.hutchinson@thomsonreuters.com)) Keywords: BREAKINGVIEWS SANDLER/

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