Who checks the loan checkers?

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According to an intriguing piece of legwork by the L.A. Times’ E. Scott Reckard, loan checkers hired to review sub-prime loans during the peak of the housing bubble often raised questions about the loans -- only to be ignored by their supervisors.

‘Freelance financial watchdogs who examined the paperwork on sub-prime home loans being sold to Wall Street had an inside view of the boom in easy-money lending this decade. The reviewers say they raised plenty of red flags about flaws so serious that mortgages should have been rejected outright -- such as borrowers’ incomes that seemed inflated or documents that looked fake -- but the problems were glossed over, ignored or stricken from reports.’

The story focuses on two firms that dominated the business of reviewing loans before they were packaged into securities: Clayton Holdings and the Bohan Group.

Freelance loan reviewers who worked for the firms tell Reckard of supervisors who would throw away documents to salvage loans, or change the description of fees so that mortgages would not be red-flagged as potentially predatory and thus unsalable. Representatives of both firms said they had not heard of such activities.

Thoughts? Comments? Email story tips to peter.viles@latimes.com.