Get your news from a source that’s not owned and controlled by oligarchs. Sign up for the free Mother Jones Daily.

Felix Salmon has a fascinating post today on the ever expanding mortgage foreclosure scandal. His take goes beyond the foreclosure problems themselves, though. The background is this: back in the glory days, when banks bought up mortgages by the millions to repackage into MBS and CDOs, they’d hire a firm (usually Clayton Holdings) to do a spot check of the quality of the mortgages. Typically, Felix says, the spot check would show that upwards of half the mortgages had underwriting problems, but instead of rejecting the entire pool the bank would just reject the mortgages that had been spot checked and then negotiate a lower price for all the rest of them:

This is where things get positively evil. The investment banks didn’t mind buying up loans they knew were bad, because they considered themselves to be in the moving business rather than the storage business. They weren’t going to hold on to the loans: they were just going to package them up and sell them on to some buy-side sucker.

….Now here’s the scandal: the investors were never informed of the results of Clayton’s test. The investment banks were perfectly happy to ask for a discount on the loans when they found out how badly-underwritten the loan pool was. But they didn’t pass that discount on to investors, who were kept in the dark about that fact.

So in addition to investment banks being at risk because they screwed the pooch on title transfer paperwork, which might mean that bondholders can force them to repurchase the mortgages, they might also be at risk because they knew the mortgages were crappy and failed to disclose that to the bondholders. Result: lots of lawsuits and, potentially, lots more crappy mortgages on the books of our biggest banks. Stay tuned.

BEFORE YOU CLICK AWAY!

Mother Jones was founded to do journalism differently. We stand for justice and democracy. We reject false equivalence. We go after stories others don’t. We’re a nonprofit newsroom, because the kind of truth-telling investigations we do doesn’t happen under corporate ownership.

And the essential ingredient that makes all this possible? Readers like you.

It’s reader support that enables Mother Jones to devote the time and resources to report the facts that are too difficult, expensive, or inconvenient for other news outlets to uncover. Please help with a donation today if you can—even a few bucks will make a real difference. A monthly gift would be incredible.

payment methods

BEFORE YOU CLICK AWAY!

Mother Jones was founded to do journalism differently. We stand for justice and democracy. We reject false equivalence. We go after stories others don’t. We’re a nonprofit newsroom, because the kind of truth-telling investigations we do doesn’t happen under corporate ownership.

And the essential ingredient that makes all this possible? Readers like you.

It’s reader support that enables Mother Jones to devote the time and resources to report the facts that are too difficult, expensive, or inconvenient for other news outlets to uncover. Please help with a donation today if you can—even a few bucks will make a real difference. A monthly gift would be incredible.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate