Rating Agencies Ignored the Fact that Loans were Bad in Mortgage Backed Securities (MBS)

The information was given to Wall Street banks that ignored the red flags, purchased the loans anyway and bundled them into mortgage backed securities to be sold to investors. Clayton Holdings, a firm that analyzes home mortgages for banks, insurance companies and governmental agencies, provided testimony and data to the Financial Crisis Inquiry Commission (FCIC), a panel established by Congress to investigate the worst financial crisis since the Great Depression. It revealed that as much as 28% of the loans failed to meet basic underwriting guidelines. In fact, rating agencies charged with assessing risk in the mortgage pools ignored this conclusive evidence that many of the loans failed to meet underwriting standards.

Now all investors, from pension funds to individual investors, have evidence that a massive fraud was perpetrated upon them. According to the testimony given to the FCIC, only 54% of the loans met the lender’s underwriting guidelines and 28% of the loans were outright failures. Unfortunately, 39% of these bad loans went into securitized pools and sold to investors. None of this was shared with investors and after reviewing a lot of prospectuses, Clayton was unable to find any disclosure to investors, other than some brief warning insufficient to disclose that huge portions of the loans in the pools were bad. In a related matter, Morgan Stanley was accused of deceptive practices by knowingly placing dubious mortgages into securitized pools by the Massachusetts attorney general. The facts in that case relied on the Clayton reports of loan quality commissioned by Morgan Stanley. They settled for $102 million.

If you suffered losses in Mortgage Backed Securities (MBS), contact our securities law firm for a free consultation. Cases are handled on a contingency basis.

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