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Report: Subprime probe gets cooperation

A company that analyzed the quality of subprime mortgages for investment banks has agreed to provide the New York attorney general with information for an investigation, a newspaper reported Saturday.
/ Source: The Associated Press

A company that analyzed the quality of subprime mortgages for investment banks has agreed to provide the New York attorney general with information for an investigation, a newspaper reported Saturday.

The agreement involves Clayton Holdings, of Shelton, Conn., a publicly held company that is a major provider of mortgage due diligence services to investment banks, The New York Times reported. Clayton was provided immunity from civil and criminal prosecution although there was no evidence of its wrongdoing, according to the newspaper.

Calls to New York Attorney General Andrew Cuomo's office and Clayton by The Associated Press were not immediately returned Saturday.

Both Cuomo and Connecticut Attorney General Richard Blumenthal are investigating whether Wall Street banks hid crucial information about high-risk loans bundled into securities sold to investors.

Quarter in default
About a quarter of all subprime mortgages are in default, resulting in billions of dollars in losses for buyers of securities backed by them. Investment banks have said that they provided adequate disclosures, while also taking more than $100 billion in their own write-downs.

In a statement Saturday, Clayton chairman and chief executive Frank Filipps acknowledged a cooperation agreement.

"We have complied with a subpoena to produce due diligence reports on various pools of loans that we had reviewed for clients and on loans that had exceptions to lenders/seller guidelines and were eventually purchased," he said.

"This information that we provided to the attorney general is the same information that we provided to our clients."

The mortgage business boomed from 2002 to 2006, generating lucrative fees for mortgage brokers, lenders, credit rating firms, investment banks and many investors. Investment banks hired companies like Clayton to evaluate samples of loans to determine whether they complied with the law and met the lending standards that mortgage companies said they were using. Loans that did not were classified as exceptions.

Banks pooled the mortgages into securities, often by blending loans from different lenders. Information on those mixed pools was then delivered to the rating agencies, which assigned the securities a score. Pension funds and other big investors bought them because they had triple-A ratings.

Clayton has told the prosecutors that starting in 2005 it saw a significant deterioration of lending standards and a parallel jump in lending exceptions. At issue is what information about the quality and risk of the loans was given to the investment banks and what was given to the rating agencies.