Who checks the loan checkers?

According to an intriguing piece of legwork by the L.A. Times' E. Scott Reckard, loan checkers hired to review sub-prime loans during the peak of the housing bubble often raised questions about the loans -- only to be ignored by their supervisors.

"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."

The story focuses on two firms that dominated the business of reviewing loans before they were packaged into securities: Clayton Holdings and the Bohan Group.

Freelance loan reviewers who worked for the firms tell Reckard of supervisors who would throw away documents to salvage loans, or change the description of fees so that mortgages would not be red-flagged as potentially predatory and thus unsalable.  Representatives of both firms said they had not heard of such activities.

Thoughts? Comments? Email story tips to peter.viles@latimes.com.

Comments

[mike]

you all know that real estate could drop another 30-50 percent or it could start to spike again with the antics of the fed. the government is doing everything it can to prop up real estate. you could lose by waiting to buy just as well as you could gain by trying to buy. i would love to buy something right now, my problem is that the deadbeats have screwed up the liquidity. i am a long term investor(meaning i buy real estate for life and hold it) so i dont care if it goes up or down. someday it's going back up. i can't buy anything right now. there is no money to lend unless you are a first time buyer with good down payment and excellent credit. i only meet two of those criteria. can you guess which ones they are???

[Uncle Billy]

Clayton is traded on Nasdaq. CEO came from Radian, the mortgage insurer. Per their website: "Radian is a leading provider of credit enhancement for the global financial and capital markets"

Gotta love that "Credit Enhancement."

One of the directors of Clayton: "managed the Residential Mortgage Ratings Group and was responsible for ratings production, marketing and business development for single family mortgages, bond ratings and related products. [He] also managed the design, development and marketing of analytical ratings products utilized by Standard and Poor's"

Best of all: He "served as the Assistant Director, Office of Securities Transactions, of the Resolution Trust Corporation"

Bohan has a CFO that came from Standard and Poor's as well. (S&P... one of the big rating agencies that gave those toxic securities AAA ratings?) Notably, Bohan has a fulfillment center in Bangalore, India. So... what exactly do they do in India? Due diligence on american loans? Good lord, there's a south park episode in there somewhere. Bohan also has one of the prettiest websites I've ever seen.

Lesson learned? To make the big bucks, you build yourself up as an expert on risk, and then ya hide the risk. Everyone got their cocktail napkins handy? More to come.

Go Reckard, Go.

[kat]

Is this a joke?

Some peice of cracker jack investigative reporting.

I would put this under the category of . . . Duh.

The way I understand it, those slime ball greed mongers who put the loans through got a peice of the action. Sort of like letting a used car salesman approve car loans. Am I right?

So let me guess. The loan "checkers" - who didn't get a piece of the action - would look at an application where two illiterate laborers with household incomes of around $400.00 a week were applying for a loan of say, $500,000 or so. The top notch loan checkers might say something like this . . . "excuse me sir, but these people don't make enough in six months to pay one month's mortgage. . . ." (this after a brilliant financial analysis of the applicant's finances) . The loan officer, who was on commission, would then say "oh, don't worry about it. . . these stupid fill-in-the-blank (probably ethnic slur) can refinance when the property goes up 30% in the next three months. . . then they will have enough to pay the mortgage and buy all the big screen TVs they want!"

Then the illiterate, itenerate would have his house, the loan officer would have his big fat commission and everybody's happy. Only, everything went to sh*t.

How do I get one of 'em air investigative reporters' jobs anyway? And, do they have common sense out there in California?

Just wondering.

[anonymous]

Of course they are denying these activities took place. If you are guilty of fraud, you are subject to prosecution, not a nice bailout with you keeping your job and your nice fat salary.
Are they going to get away with it? I think they already did. It don't take a weatherman to tell which way the wind blows.

[Uncle Billy]

kat: love your over the top indignance, but you misunderstood what the article was about. This wasn't about the underwriters at the brokers and lenders, it is about what happens at the next level, where the good housekeeping seal of approval is applied before being sold on Wall Street. The point being that wall street didn't care how much junk was in the bundles of loans... they made money by selling them. Right idea though -- the guys selling the junk are the ones that play golf with the guys that rate the junk.

[jb]

Why should they bother to check such things? If things go south, Bernanke (aka "Kristen" - The bank's top dollar whore) will rescue them with your tax dollars.

[Anonymous]

I used to work at Clayton HQ, it used to have integrity... after it went public, it all went down the toilet.

It was all about how fast they could push the 'machine' of production, which took about an hour to go through a inch thick loan file, but the first day on the job, the new president wanted to do 8 in an hour... try looking through any stack of paper, an inch thick, in under an hour... and logging information into a computer system, remember intricate details, and having a watchful eye for fraud... good luck with that...

Corporate greed killed their reviewing system.

[anonymous]

Good point, Anonymous. But I still think they are guilty of fraud. And our government is looking the other way.

[tew]

Let's just consolidate all these types of articles into a simple chart. Draw a detailed diagram of the home purchase "value chain" starting with the home "buyer" (I mean "borrower") and ending with the investor (I mean idiot or speculator) who buys the derivatives based on combinations of tranches of CDOs on CDOs built on MBSs. Then note the word "fraud" next to each step. Footnote the word fraud with "Any kind of fraud you can think of and lots of things you can't imagine".

That's it. Fraud and stupidity everywhere.

[tew]

kat guesses that the tyipcal loan officer would say "...these stupid fill-in-the-blank (probably ethnic slur)...".

Implicit in this view is that the process is dominated by racists. kat - Do you think these folks were all of one type (*)? If so, state your assumption. The fact is that many of the worst abuses were committed with a member of a given type ripping off a member of their own type. Lots of plain ole greedy white folks ripping off other white folk. Smooth Latinos taking advantage of Latino immigrants. Slick black folks pulling the wool over their black neighbor's eyes.

You can try to make yourself feel better and think otherwise, but that won't make it so.

* "Type" meaning however folks identify themselves: by "race", ethnicity, etc.

[wha]

kat, please take your drivel elsewhere... your comments don't add anything to this discussion. And your constant slamming against Californians is getting old. Oh look at me, I'm not from California, I'm soooo special...

[kat]

Billy,

My scenario was more abstract than literal.

It is unfathonomable to me that somewhere, somebody along the line didn't notice that fast food workers and laborers who may or may not have been able to speak English were being qualified for loans they could not possibly pay back. When greedmongers are swimming in a river of money are they going to let someone put the damn on it? No. And through all of this there wasn't one person with enough gumption to pick up on the fact that people were taking on mortgages that exceeded thier incomes? Of course they did. They had to have.

So spare me the top-notch-investigative-reporter crap.

Most Californians would tell me to stay out of this because it's none of my business, but it is. It is people like me who will take the hits financially both now and in the long run (either by taxes or investments or whatever) because the people in California have calculators that run on blotter acid.

[ray]

Oh don't worry about it. Our government rewards good business practice like this by giving them a bailout.

Privatize the profits, nationalize the losses.

[anonymous]

kat,
I'm not in California and this isuue effects me too. I keep watching LA Land because there are some really intelligent posts (your racist slurs excluded, obviously).