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And I'm Renee Montagne.

Now that millions of people are facing foreclosures because they got into loans that never should have been approved, everybody's looking for someone to blame. There are borrowers, or their brokers who lied on loan applications, plus those who got high interest rates they couldn't afford.

One big still-unanswered question is whether the Wall Street investment banks that were packaging these mortgages knew that they were selling garbage loans to investors. There's a wave of litigation starting against these firms. NPR found one former worker whose job it is catch bad loans. She says her supervisors covered them up.

NPR's Chris Arnold reports.

CHRIS ARNOLD: 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 these loans and ferret out problems, and by 2006 they were easy to find.

Ms. TRACY WARREN: 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. And you know, 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.

ARNOLD: Warren's worked in the mortgage business for 25 years - the last five in quality control. Most recently she was a contract worker for a company called Watterson Prime, which did these loan audits for investment banks. She says their biggest client was Bear Stearns, which recently all but collapsed because of its exposure to bad loans. Warren thinks her supervisors didn't want her to do her job. She says when she'd reject or kick out a loan, they'd usually overrule her and approve it.

Ms. WARREN: The QC reviewer who reviewed our kicks would say, well, I felt it had merit. And it was, like, well, you know, what? Their credit score was below 580 and, you know, if it was an income verification, a lot of times they weren't making the income. It's like, well, what kind of merit could you have determined? And they were like, oh, it's fine, don't worry about it.

ARNOLD: After a while, Warren says her supervisors stopped telling her when she'd been overruled. She says she figured that out by going back later and pulling the loans up on her computer.

Ms. WARREN: I would look every couple of days and just see if it was a loan that, you know, that I really thought was a bad loan and go back and see if it was pulled or if it was turned over, and most of the time, I'd say 75 percent of the time they just - it was still put into the pool and sold.

ARNOLD: Those loans should have been rejected.

Ms. WARREN: Yes, they should have been rejected.

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

Professor CHRISTOPHER PETERSON (University of Utah): This is a smoking gun.

ARNOLD: Christopher Peterson is a law professor at the University of Utah who's been studying the subprime mess and meeting with regulators.

Prof. PETERSON: 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.

ARNOLD: Bear Stearns had no comment. The loan auditing firm Watterson Prime's parent company, Fidelity National Information Services, provided a statement. It says the company has no incentive to give loans a passing review if they fail to meet underwriting criteria. Watterson also says it uses additional quality control measures to further check up on these loan reviews.

But Peterson says such breakdowns in quality control must have happened at lots of companies. How else did millions of people wind up in loans that they can't pay?

Prof. PETERSON: People have a tendency to think about economic trends as though they're an uncontrollable force that no one understands. This isn't the weather; these are people who are individually making decisions to approve and pass on fraudulent loans.

ARNOLD: Peterson says basically auditors like Tracy Warren were hired to find the bad apples in the barrel and pull them out - borrowers with payments that they couldn't afford and houses with inflated appraisals, people lying about their income. But Warren says her bosses were taking a lot of those bad apples and putting them back in. And Peterson says the investment banks had a strong financial incentive to do that. So he thinks...

Prof. PETERSON: They put the bad apples back in the barrel because they knew that they could sell the bad apples along with the good apples and at least in the short term nobody would know the difference. That's why they put them back in because they made more money that way.

Mr. DAVID GRACE (Attorney): There's a name for this. It's called passing the trash.

ARNOLD: David Grace is an attorney getting ready to sue Wall Street firms on behalf of investors, big pension funds and others who bought those bad loans.

Mr. GRACE: These were immensely profitable deals. One study showed that the investment banks were making a 40 percent return on equity every two months on these securitizations, which is an eye-popping number.

ARNOLD: Grace says many people on Wall Street make huge bonuses when their business unit is making big money. So he says the faster they could package up loans - good, bad or ugly ones - and sell them to investors, the more money that they made. Tracy Warren thinks her managers got bonuses for how quickly they reviewed loans, not on how many bad loans that they caught.

Ms. WARREN: There was so much money involved and bonus involved.

ARNOLD: Watterson Prime disputes that. It says its managers, staff and contractors are compensated on an hourly or salary basis and never by the number of loans reviewed. There is other evidence 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 that so far hasn't gotten attention.

According to the report, some investment banks agreed to only reject 2.5 percent of the loans that New Century sent them to package up and sell to investors. So if that's true, it would be like saying no matter how many bad apples are in the barrel, we'll only reject a tiny fraction of them.

Kurt Eggert is a law professor at Chapman University.

Professor KURT EGGERT (Chapman University): It's amazing if any investment bank agreed to a maximum number of loans that they would kick back for defects. That means that they're willing to accept junk. There's no other way to put it.

ARNOLD: Meanwhile, the attorney general in New York and other prosecutors are taking a look at all this. They too want to know if Wall Street firms were covering up bad loans and selling them to investors.

Chris Arnold, NPR News.

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