Wall Street Knew 28% of the Loans Behind Mortgage Backed Securities (MBS) Failed to Meet Basic Underwriting Standards

Testimony and documentation provided to the Financial Crisis Inquiry Commission (FCIC) by Clayton Holdings, a due diligence company, revealed that as much as 28% of the loans failed to meet basic underwriting guidelines. According to the testimony given to the FCIC, only 54% of the loans met the lender’s underwriting guidelines and 28% were outright failures.

Unfortunately, about 40% of these bad loans went into securitized pools sold to investors. This information, provided to Wall Street banks, was ignored when they purchased these loans, then bundled into mortgage backed securities and sold to others. Furthermore, rating agencies Moody’s, Standard & Poor’s and Fitch, all charged with assessing the risks of securitized pools, ignored conclusive evidence that many of the loans failed to meet underwriting standards.

Loan originators profited, as did unscrupulous appraisers, then Wall Street firms and the rating agencies shared in the greed by packaging the overrated risky pools. The victims were unsuspecting investors, including individual investors, pension funds, municipalities and U.S. housing agencies, as well as overseas countries, banks and other foreign investors.

In the wake of this subprime mortgage fraud process and the collapse of the housing market, accusations of the chain of greed concerning mortgage backed securities (MBS) has now been confirmed: The toxic nature of the securities was known by Wall Street but simply ignored for the sake of profits.

In a related matter, Morgan Stanley accused of deceptive practices by the Massachusetts Attorney General by knowingly placing dubious mortgages into securitized pools. The facts in that case relied on Clayton reports of loan quality commissioned by Morgan Stanley. The firm settled for $102 million.

References:

Financial Crisis Inquiry Commission, www.fcic.gov
Raters Ignored Proof of Unsafe Loans, New York Times, Gretchen Morgenson; September 26, 2010
New Proof Wall Street Knew Its Mortgage Securities Were Subpar, Huffington Post, September 25, 2010
Attorney General of Massachusetts, www.mass.gov
The Shepherd Smith Edwards & Kantas LTD LLP law firm represents investors in claims for losses in securities, including Mortgage Backed Securities (MBS). We are currently handling cases for institutional and individual investors, both nationwide and abroad, with claims from $100,000 to $200 million. Call or e-mail us today for a free consultation to determine whether we may be able to assist you.