Fraud and incompetence led to subprime crisis, Fitch says

Falling house prices might have triggered the crisis in residential mortgage-backed securities (RMBS) based on US subprime mortgages, but analysts at US rating agency Fitch say the root of the problem was widespread fraud and incompetence in the mortgage industry.

In a research note published yesterday, New York-based analyst Diane Pendley wrote: "In addition to the inherent risk of these products ... risks were not controlled through sound underwriting practices ... 'no money down' and 'stated income' mortgages appear to have become vehicles for misrepresentation or fraud."

Pendley and her colleagues looked at 45 loans that, in theory and according to credit ratings, should have had a low risk of default and found "the appearance of fraud or misrepresentation in almost every file".

Poor underwriting was more common than outright deception, Pendley found. She said Fitch would use the results of the research to improve its own RMBS rating system, including more direct examination of underlying loans and underwriting standards.

See also: Fitch: crisis hit 31% of 2006 subprime RMBS
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