Subprime Mortgage Loan "Autopsies"?

When big Wall Street firms in the business of pooling real estate loans into mortgage-backed securities end up getting stiffed on loans that go sour, did you ever wonder who gets called in to do the "autopsy" on the bad mortgage?

Did you ever wonder who these big firms call in to perform a "physical" on the mortgage loans they're buying before actually buying them in the first place?

A recent Fortune Magazine article, appearing at CNNMoney.com features Clayton Holdings, described as "a tiny $240 million Shelton, Conn., company that performs an important service: reducing subprime risk for such clients as Bear Sterns, Goldman Sachs, and Morgan Stanley."

When a loan goes bad, the article reports:

• Clayton's forensic analysts get to work, looking for fraud and other slip-ups that can get its clients off the hook for big investment losses.
  

(Presumably, only for the loans that go bad after the early payment default / buy-back period expires. After expiration of this period, the Wall Street firm can still generally demand that the mortgage lender buy back the bad loan if there was fraud or underwriting errors involved in originating the loan.)

Before buying a pool of mortgages from a mortgage lender in the first place, the article reports:

• [W]all Street firms use Clayton to visit lenders and pore through a sampling of the loans they're buying before pooling them into mortgage-backed securities and selling them off to investors.

.....

• Generally, Clayton tests between 15 percent and 25 percent of the mortgages for sale. (Considering the industry's current mess, Wall Street firms will probably be asking for bigger samples in future securitizations.)

To read more, see CSI: Subprime (Before big Wall Street firms sell off bundles of mortgages, they turn to tiny Clayton Holdings to investigate.)
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