Are ALL Mortgage Backed Securities a Scam?
by George Washington
Pensions and other large investors may sue the banks which sold them mortgage backed securities (mbs)based upon fraudulent misrepresentation.
Indeed, as William D. Cohen and Felix Salmon point out in must-read stories, the big banks hired a company called Clayton Holdings to sample the quality of mortgages being purchased.
Clayton found very high percentages of mortgages which did not meet minimal underwriting standards.
However, instead of disclosing to the investors purchasing mbs that many of the mortgages were bad – or even that there were samples and statistical analyzes performed by Clayton and the banks – the banks simply kept it to themselves, and used that inside information about poor mortgage quality to negotiate a discount of the price that the banks paid when purchasing the loan portfolios from the folks who originated the loans.
This is like buying a used car, but having a mechanic look it over first. Once the mechanic discovered a cracked engine block, the buyer negotiates the purchase price way down, but then turns around and sells the car for a higher price without ever disclosing that there was a cracked engine
(Be sure and read the “Comments” section…Paul)