Reply #7: Wall Street often shelved damaging subprime reports [View All]

[UpInArms]

http://news.yahoo.com/s/nm/20070727/bs_nm/usa_subprime_diligence_dc

WASHINGTON (Reuters) - Investment banks that bundle and sell home mortgages often commissioned reports showing growing risks in subprime loans to less creditworthy borrowers but did not pass much of the information to credit rating agencies or investors, Wall Street sources said.

The mortgage consultants, known as "due-diligence firms," were hired by investment banks to make sure blocks of mortgages conform to the mortgage seller's own standards. The studies provided a first glimpse of loan quality for ratings agencies and investors who do not normally see the full reports.

As the U.S. housing boom reached its crescendo in 2006 and investors showed a strong appetite for mortgages, lenders relaxed their underwriting standards, and millions of borrowers with poor credit records were able to obtain subprime mortgages as a result.

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As lenders relaxed their underwriting standards during the recent housing boom, Wall Street firms followed suit by easing the guidelines that due diligence companies followed, several executives said.

"We got away from where we were in the late 90s," Clayton's Johnson said, referring to a time that due diligence firms were expected to give full-throated opinions on the safety of mortgage loans.

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