Feds Probe Countrywide; Find Sewage

From the WSJ:

Federal investigators probing the business practices of Countrywide Financial Corp. are trying to figure out what Countrywide knew -- or in some cases didn't know -- about the incomes and assets of thousands of its borrowers.

The investigators are finding that Countrywide's loan documents often were marked by dubious or erroneous information about its mortgage clients, according to people involved in the matter. The company packaged many of those mortgages into securities and sold them to investors, raising the additional question of whether Countrywide understated the risks such investments carried.

Countrywide, long the No. 1 mortgage company in the U.S. in terms of dollar value of loan originations, also was considered among the most aggressive in finding ways to make home loans to consumers whose qualifications couldn't be proved or seemed questionable, mortgage industry executives and analysts said. The Federal Bureau of Investigation has begun looking into its practices in pursuing such business, according to people close to the matter.

.....

The FBI has said its investigations of the subprime industry are focusing on securitizations -- the process of bundling mortgages into pools and selling tranches to investors. "There are many disclosure issues" in a mortgage securitization, said Joshua Hochberg, former chief of the Justice Department's fraud section who now works at law firm McKenna Long & Aldridge LLP in Washington. "You have to disclose what percentage of the loans are performing and the adequacy of how the loans are underwritten. So there could be fraud if there are knowing and intentional lies in those financial statements." Mr. Hochberg said prosecutors and the Securities and Exchange Commission will examine "whether as things started going south anybody made an effort to keep the problems hidden."

Considering the rate at which these securities are blowing up right now this revelation should not surprise anyone. The problem is the damage has been done by Countrywide's malfeasance -- the entire financial system is a wreck right now.