CT Blue

From the LA Times:

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 — such as borrowers’ incomes that seemed inflated or documents that looked fake — but the problems were glossed over, ignored or stricken from reports.

…

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. Rather, the executives say, the job was to perform specific tests to help buyers determine how much to pay for a pool of loans. In some cases, the investors wanted only minimal testing, said Frank P. Filipps, Clayton’s chairman and CEO.

As always its hard to tell where gross negligence ended and criminality began. I can personally testify that some of these lenders had a fairly lax attitude toward fraud. Years ago I represented several people who had purchased “flipped” houses. In one case my clients were on SSI because they were mentally retarded. The house they bought for over $70,000.00 in New London had sold to the flipper a year before for less than $10,000.00 and it was worth every penny of that. According to the loan application provided to the nationally known subprime lender my client was making $5,000.00 a month working at the seller’s used car dealership, an obvious fraud of which my client was unaware. The appraisal came in at, if I recall correctly, over $80,000.00, and never mentioned the $10,000.00 sale price. Everyone involved was crooked.

In my naivete I contacted the lender before I brought suit, because, at first blush, it was as much a victim as my clients. It held $75,000.00 in paper that was bound to default on a house worth $20,000.00 at the very most. I figured that we could join forces to go after the folks who had defrauded us both. Much to my surprise, they were surprisingly unruffled by the situation. Later I concluded that the guy I spoke to (the head of the local branch) was in on the scam, but now I’m not so sure. Maybe they just didn’t really care, since they didn’t expect to be holding the paper by the time the loans went South.