Loans Were Bad and Everyone Knew Except Investors and Homeowners

From creditslips.org

They Really Did Know the Loans Were Bad…

posted by Ethan Cohen-Cole

A firm which few know of – Clayton holdings—will likely soon be at the center of a wide variety of lawsuits and individual complaints. Clayton’s job was to validate the innards of mortgage backed securities (MBS) when made available for sale. The typical setup would have an issuer of a MBS call Clayton and ask them to take a 10 percent sample of the loans, and evaluate whether the loans met the portfolio criteria (had documents been filed, credit scores as reported, etc.). If the loans were incorrect, they could either be taken from the pool and replaced with a good one, an exception made, or a substitute placed into the sample and evaluated instead.

Clayton holdings staff testified last month that 255,802 mortgages out of 911,000 evaluated did not meet portfolio screening criteria. The bank underwriters waived more than 100,000 of them (>39%); that is, even though the mortgages failed the criteria, the banks included them in the MBS pools anyway.

So much for the idea that the issuers didn’t know the loans were bad…

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