By Carrie Johnson
Washington Post Staff Writer
Monday, January 28, 2008

A company that advises Wall Street bankers who packaged and sold risky mortgages has agreed to cooperate with New York state investigators, advancing a months-long probe of the subprime home loan debacle.

New York Attorney General Andrew M. Cuomo and Clayton Holdings officials yesterday confirmed the deal, which affords the Connecticut information services company immunity from prosecution and was signed late Thursday after intense negotiation.

The agreement could provide state prosecutors with substantial new information on what major banks knew about the quality of thousands of questionable home loans -- and whether such concerns were properly disclosed to investors and credit-rating agencies, according to two people following the investigation. The sources spoke on the condition of anonymity because the inquiry is ongoing.

Clayton has already produced written evaluations that it gave large banking clients and has answered investigators' questions about particularly risky loans that fell outside of mortgage guidelines, known as exception loans, Clayton chief executive Frank Filipps said in a statement. As part of its work for customers, which include the nation's biggest banks, Clayton reviews pools of loans and tests whether they adhere to industry-imposed standards.

Federal and state law enforcement authorities have begun dozens of investigations in an effort to determine whether mortgage lenders, investment banks, brokers and appraisers broke laws when they approved dicey home loans, grouped them together and sold them to investors around the world.

Major banks have reported more than $90 billion in losses, and U.S. home prices have plunged as housing difficulties seeped into the broader economy, spurring the Bush administration and congressional leaders last week to propose a stimulus package.

The cooperation pact with Clayton, reported by the New York Times in its Sunday editions, offers investigators a guide through the complex world of mortgage investments. Uncovering what Wall Street executives knew about problems that accompanied the mortgage loans before the bankers unloaded them has become a substantial focus of the New York authorities.

Cuomo already has sued an appraisal company owned by title insurer First American for overvaluing properties under pressure from Washington Mutual. The companies have denied wrongdoing and are challenging the state prosecutors' authority.

In another important avenue of investigation, the attorney general last year directed mortgage financiers Fannie Mae and Freddie Mac to hire an independent auditor to review their dealings with WaMu, the country's largest thrift.