An Insider’s View of Golden West and the Sandlers, by Dave Stevens

January 11th, 2009 · 11 Comments

In a recent post, Joe Garrett asked for opinions about the Sandlers and World Savings.

MortgageNewsClips reader and guest contributor, Dave Stevens, spent 16 years at World Savings and has an inside perspective.  Thanks Dave for sharing your thoughts. - BC

I spent 16 years at World Savings from 1983 – 1999 until I was recruited to Freddie Mac to be their SVP in charge of the Single Family Business. I started with the Sandler’s as a Loan Officer and ended as Group Senior Vice President in a senior role in the loan organization.

There  are a few comments I would make about Herb and Marion’s company and legacy:

1.    The Sandler’s had a business model than was far more that simply a flash in the pan as were other much younger victims of this housing correction. Their company model was hugely successful for more than 3 decades and provided ongoing high investor returns and outstanding credit quality. The model was very simple. They were a long term deposit focused thrift that offset their variable interest rate liability with variable interest rate income from primarily single family monthly adjustable rate arms. This model insured that the company had virtually no basis risk other than the delay/lag between COFI and short term debt costs which, even in major moves, would be limited to a few months.

2.    The adjustable rate product served World Savings extremely well during the S&L crash of the late 1980’s/early 1990’s and insured that they were a survivor, as this crash that caught long lender/short borrower models and exposed them to their underwater portfolios. In addition their very conservative credit exposure was due to three things: controlling the collateral value through their own in-house appraisal process, keeping LTV’s low (average LTV’s were in the mid 70’s), and maintaining a cultural management discipline on credit quality. GDW abstained from GSE credit models and remained consistent and dedicated to manual underwriting by in house underwriters only. In addition the entire management team participated actively in ongoing pre and post funding QC including management caravans where we would regularly load managers in vans, complete with loan files, and tour properties that were financed and review the entire transaction while sitting in front of the house. This process was absolutely unique to GDW and created a credit conscious management culture that I have not seen elsewhere in the industry.

3.    The “Option Arm” was a relatively safe product when managed correctly. GDW held almost all loans on their balance sheet and even the few securitizations they did were swap and holds with full recourse. Unlike most other large option arm originators of this decade, GDW retained the credit risk on their books. This is the foundation for creating that credit culture throughout the management team.

4.    In the GSE world, we used to look at arm portfolios with an eye for performance at the “spike”; that moment when the arm went through its periodic adjustment from its initial discounted period. The World Savings Option Arm actually had less adverse credit performance than a standard agency arm at the spike primarily because of two things. First, the LTV’s were traditionally lower which improved borrower commitment. Second, the Option Arm had an annual payment cap of 7.5% which equated to about ½ the payment increase requirement compared to a 2% rate cap. A 2% annual rate cap equated to about a 15% increase in payment and it was felt that this would create a higher level of delinquency. While the option arm offset the lower payment with the negative amortization, it was felt that payment protection through this lower payment  capping structure was more of a variable in loan performance then the impact of negative amortization over time.

The fact is that GDW had a reputation for being conservative on property and used compensating factors aggressively to offset any credit capacity variable to insure the protection of their portfolio. This is why they returned such strong shareholder returns for decades while other companies came and went through economic cycles.

So, what went wrong? First, for option arms in general, the creation of a tradable security was the first big mistake to proliferate the product while eliminating the focus on credit quality. Countrywide, Wamu, and others got into the business and were able to trade the asset through private label shelves through the street and through Freddie and Fannie. Know as “T” deals, these transactions were often wrapped by the agencies and sold with a guarantee. This is where the product really swelled and grew to as much as 18% of the market in parts of 2004 – 2006. But GDW was not the company that really drove this growth. As  matter of fact, the Sandler’s often complained about the way the product was being proliferated. Unfortunately, the basis match and the credit performance of the decade caused many players to finance all sorts of risk that included Option Arms, Sub Prime, IO, and more. At its peak, one could get an 80/20 (100%) stated income option arm from several major lenders in the market.

So what about GDW? Once sold to Wachovia, at the top of the market, a goal was set to originate approximately $80 billion in product by the senior management. Many thought that this was to prove the value of the GDW acquisition now that the market was shrinking. It was this drive for volume that may (and I repeat “may”) have caused the new ownership to back away slightly from the very tight and focused credit culture that the Sandler’s had created.
Look, we all know timing is everything. Anyone who sold their company in 2005 to early 2006, sold at the peak. Hindsight is 20/20, but the company the Sandler’s built was not the result of some shell game. Anyone who was in the market these past decades, going back to the 1970’s when Herb and Marion bought their first branches in California, knows that they ran the golden child of the S&L industry and managed this tightly run, almost cult like, management team focused on collateral and equity. Their loans always performed back then.

This property depression that we now face is taking all sorts of victims. 10% of all loans are at least one payment delinquent. The downward spiral will be hard on any upside down portfolio. I will tell you this though. The fully indexed rate on an option Arm right now is in the mid 5% range. The core of that product is still better in real interest rate terms right now than almost any other loan unless you refinance. Blaming the Sandler’s is just part of this current “blame game” when really the circumstances of this economy have taken enormous tools on virtually every business model. Let’s look back in a few years and see if the World portfolio actually is as bad as some are suggesting. My bet is that it will outperform the estimates.

Just one view.

David H. Stevens
President - COO
Long & Foster Companies

       Dave’s Blog :

Tags: Commentary · Mortgage Market

11 responses so far ↓

  • 1 Karma // Jan 12, 2009 at 10:42 am

    This is well written, dave. Thanks for your insight. Hopefully this will hit the major media outlets.

  • 2 Kevin Mott // Jan 12, 2009 at 11:20 am

    First Republic Bank in San Francisco also did management drive-by’s of properties they financed and their clientele was of the private client variety. I’m pretty sure they also charged back commissions to loan officers if the loans they originated went delinquent in the first few years and required the loan officer ot participate in the collection process.

  • 3 An Insider’s View of Golden West and the Sandlers « David H. Stevens: News You Can Use // Jan 12, 2009 at 2:50 pm

    […] An Insider’s View of Golden West and the Sandlers […]

  • 4 Brad // Jan 17, 2009 at 6:55 am

    Being another alumn. of Golden West, I can say the Dave is ’spot on’. There are many other more worthy witches to burn at the stake than the Sandlers. I hope the press starts looking elsewhere.

  • 5 Ryan Schnoke // Jan 27, 2009 at 7:38 am

    Great information to share Dave. Golden West just happened to be the convenient scapegoat for a Wachovia senior management team that was in place for several other costly mistakes during the last few years. The Sandlers created and maintained a superb organization that I am confident would still be standing if it had remained independent. It has always been sad that they never received the recognition that they deserved for creating such a well run and respected company. Lumping the organization with WAMU and Countrywide just because of the Option ARM shows anyone that knows what went on at Golden West that the person making this comparison did not do their homework.

  • 6 Marion Wagner // Feb 2, 2009 at 11:41 am

    Thanks Dave, for saying what all of us who worked within the superb organization at Golden West know to be true. The GDW model was sound and unique in the recent history of the industry. Broad brush analysis that lumps GDW in with organizations that misused the concept is an over simplification.

  • 7 admin // Feb 19, 2009 at 9:18 am

    Fudging and Distortions at 60 Minutes - The show’s attack on Herb and Marion Sandler is both factually incorrect and unfair - has many good points and responses - post by Tom Brown at

  • 8 Burney // Feb 19, 2009 at 9:51 am

    Having competed with GDW thru the years, I can attest to Dave’s facts from that perspective. I always respected the Sandlers/GDW amd followed their performance closely via sec filings, news releases, etc. It is a shame, though not surprising, that 60 minutes did such a poor job on their recent story.

  • 9 allan bortel // Feb 19, 2009 at 10:16 am

    Well said, Dave. Sixty Min. should have interviewed you. allan

  • 10 Dave Stevens has been selected to be head of FHA // Mar 22, 2009 at 3:56 pm

    […] is a MortgageNewsClips  contributor.  Dave’s post about his experience working at World Savings, and the Sandlers was one of the most heavily read posts ever on this […]

  • 11 Deb K // Mar 23, 2009 at 5:23 am

    As a former employee in loan production at World Savings, I felt personally attacked by the recent portrayal in the media. Dave’s response is accurate. As part of the management team, we were trained (and yes, almost in a cult like manner) to understand and comply with the conservative policies and procedures that made Golden West the Most Admired Lending Institution by Forbes year after year. If not for competitors flooding the market with option arms, combining risky underwriting with misguided business practices, we might be praising these loans for keeping payments affordable, in spite of real estate values. Thank you Dave for articulating the essence of this issue.

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