Washington Mutual, one of the nation’s largest banks finally collapsed under the weight of its enormous bad loans that have been sinking the mortgage market. Home loan lenders holding notes for risky home loans like negative amortization and high rate adjustable rate mortgages continue to report a huge wave of loan defaults have eroded the liquidity for banking institutes like Aurora, Indy Mac and WAMU. With Bush, Congress and the Senate still debating the$700 billion bank bailout continues in Washington, the FDIC seized WAMU on Thursday and then quickly sold the thrift and loan’s banking assets to JPMorgan Chase & Co. for $1.9 billion. Seattle-based WAMU.  Washington Mutual founded in 1889, is the largest bank to fail in our country’s history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.  But that detail is likely to give only marginal solace to Americans facing tighter mortgage lending and watching their stock portfolios plunge in the wake of the nation’s most momentous financial crisis since the Great Depression.

Because of WaMu’s souring home loans and other risky debt, JPMorgan plans to write down WAMU’s loan portfolio by about $31 billion — a figure that could change if the government goes through with its bailout plan and JPMorgan decides to take advantage of it.  Problems in WAMU’s mortgage loan business began to surface in 2006, when the bank reported that the division lost $48 million, compared with net income of about $1 billion in 2005.  As more homeowners became delinquent on their mortgages, WAMU worked to help troubled borrowers refinance and modify their home mortgages as a way to prevent foreclosure, committing $2 billion to the effort last April. But that proved to be too little, too late.  Many borrowers have turned to government specialists like FHA Mortgage Lenders.

At the same time, fears of growing credit problems kept investors from purchasing debt backed by those loans, drying up a source of cash flow for banks that made subprime loans.  According to mortgage lender, Jeff Moran, “Bottom line, WAMU took on too risky home loans from 2003 – 2006.”   Moran continued, “Banks like WAMU offered 100% financing to borrowers with limited or poor credit.”  Most of these home loans featured adjustable rates on the 1st and 2nd mortgages and when the payments started to increase when the teaser rates expired, people could not afford their monthly payments.  For the next two years people stood around watching the foreclosures mount.”  Not until this year did the mortgage lending giants like WAMU provide loan modifications that enable homeowners to avoid foreclosures.