Westsound Bank’s troubles with federal and state regulators may stem from high-end residential construction loans one or two former bank employees oversaw, according to the transcript of a conversation with the bank’s president, Dave Johnson.
The discussion was the third-quarter conference call Johnson made as CEO of WSB Financial Group, the bank’s holding company. The conversation took place on Oct. 29.
I tried to listen to the call live that day, but was denied access.
The short story is that Westsound gave out construction loans intended for people who planned to live in the homes they’re building. The loans, though, required only that the borrower state an income, not provide any proof. Westsound offered the loans because Countrywide Financial Group was there as a secondary market, so Westsound could sell the loans.
State regulators got nervous about the lack of income proof, then Countrywide pulled the program. Westsound looked closer at the loans, met with borrowers and looked at the projects and determined the borrowers’ ability to get permanent financing was less certain than the borrowers had said.
“While the borrowers indicated that their intentions were to live in the homes once they were completed, on closer review, we felt that it was unlikely, in many cases, that the borrowers could service the long-term loans on the properties and that these loans were really more of a speculative situation where they would sell the home as quickly as possible.”
He said there were about 135 borrowers given 146 loans (so at least 11 of those loans were the second or third loans), averaging about $616,000 per home for a total of $90 million.
As for fraud, Johnson said the investigation centers on one or two former bank employees and third parties.
You can read the conference transcript (a PDF file) by clicking here.