Mortgage Underwriting Red Flags Met With Indifference, Say Quality Control Loan Reviewers

The Los Angeles Times reports:

• They could see the meltdown coming. Freelance financial watchdogs who examined the paperwork on sub-prime home loans being sold to Wall Street had an inside view of the boom in easy-money lending this decade. The reviewers say they raised plenty of red flags about flaws so serious that mortgages should have been rejected outright, [...] but the problems were glossed over, ignored or stricken from reports.

• The loan reviewers' role was just one of several safeguards -- including home appraisals, lending standards and ratings on mortgage-backed bonds -- that were built into the country's complex mortgage-financing system. But in the chain of brokers, lenders and investment banks that transformed mortgages into securities sold worldwide, no one seemed to care about loans that looked bad from the start.

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• Executives at the two main firms that hired the freelancers -- Shelton, Conn.-based Clayton Holdings Inc. and San Francisco-based Bohan Group -- say the reviewers weren't there to find every potential problem with a sub-prime loan.

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• New York Atty. Gen. Andrew Cuomo, who is investigating some aspects of the mortgage debacle, has given Clayton immunity from prosecution in return for help in learning whether debt-rating firms and investors got enough information about the loans being sold.

For more, see Sub-prime mortgage watchdogs kept on leash (Loan checkers say their warnings of risk were met with indifference) (if link expires, try here). Cuomo OFHEO Fannie Mae Freddie Mac