Isolating A Culprit in the Mortgage Fiasco

A 'Smoking Gun' is reported on by NPR (with transcript and audio):

...A big unanswered question is whether the Wall Street investment banks that were packaging these mortgages knew they were selling garbage loans to investors. A wave of litigation is starting against these firms. One former worker whose job was to catch bad loans says her supervisors covered them up.

Mortgage Quality Control

Tracy Warren is not surprised by the foreclosure crisis. She saw the roots of it firsthand every day. She worked for a quality-control contractor that reviewed subprime loans for investment banks before they were sold off on Wall Street.

It was her job to dig into the loans and ferret out problems. By 2006, they were easy to find.

"I'd see people who were hotel workers saying that they made, in California, making $15,000 a month so that they could qualify for a $500,000 home," Warren says. "If a hotel worker is making $15,000 a month changing sheets at the Days Inn, everybody would want to do it. It just really made no sense."...

...'A Smoking Gun'

Some legal experts say it's a pretty big deal that people like Warren are willing to talk.

"This is a smoking gun," says Christopher Peterson, a law professor at the University of Utah who has been studying the subprime mess and meeting with regulators. "It suggests that auditors working for Wall Street investment bankers knew how preposterous these loans were, and that could mean Wall Street liability for aiding and abetting fraud."...

...Other evidence is emerging.

A bankruptcy examiner in the case of the collapsed subprime lender New Century recently released a 500-page report, and buried inside it is a pretty interesting detail. According to the report, some investment banks agreed to reject only 2.5 percent ofthe loans that New Century sent them to package up and sell to investors. If that's true, it would be like saying no matter how many bad apples are in thebarrel, only a tiny fraction of them will be rejected...