NEW YORK - A company that analyzed the quality of thousands of home loans for investment banks has agreed to provide evidence to New York State prosecutors that the banks had detailed information about the risks posed by subprime mortgages - information that prosecutors believe was not disclosed to investors.
Clayton Holdings, a company based in Connecticut that vetted home loans for many investment banks, has agreed to provide important documents and the testimony of its officials to the New York attorney general, Andrew M. Cuomo, in exchange for immunity from civil and criminal prosecution in the state.
The agreement, which was confirmed by Cuomo's office and Clayton, could advance an investigation that the attorney general started almost a year ago. It could provide evidence against investment banks that profited handsomely during the housing boom by buying mortgages from lenders and packaging the loans into securities bought by pension funds, insurance companies, and other investors.
At issue is whether the banks had information about the riskiness of mortgages that they withheld from investors.
In a statement yesterday, Clayton's chairman and chief executive, Frank P. Filipps, said, "We have complied with a subpoena to produce due diligence reports on various pools of loans that we had reviewed for clients and on loans that had exceptions to lenders/seller guidelines and were eventually purchased" by securities issuers. "This information that we provided to the attorney general is the same information that we provided to our clients."
About a quarter of all subprime mortgages are in default, resulting in billions of dollars in losses for buyers of securities backed by these mortgages. Many of these loans were made with low teaser rates that would later increase.
Critics of these practices say many of these mortgages should never have been made because the borrowers did not have the means to repay them.
Legal specialists say building a fraud case involving these securities will be harder than the cases brought after the technology bubble burst because mortgage investments are more complex than stocks. Clayton, which in industry terminology conducts due diligence for the investment banks, could help Cuomo identify salient details about the problems it uncovered.
Prosecutors have obtained some evidence through subpoenas. But the cooperation of Clayton could help Cuomo's office build a case by showing how risky mortgages were packaged as safe investments.
"The cooperation of compliance officers or due diligence firms is the best cooperation you can get," said Tamar Frankel, a professor of securities law at Boston University.
Cuomo has not made public any information about potential wrongdoing among the investment banks, and no charges have been brought.
Major investment banks on Wall Street, for their part, have said that they provided adequate disclosures, and they retained some of the securities on their own books. Indeed, they have taken more than $100 billion in write-downs as a result.
Without an immunity deal, officials at Clayton could have refused to testify under their Fifth Amendment right to protect themselves against self-incrimination.
