During a little-noticed hearing this week in Sacramento, Calif., a firm hired by Wall Street to analyze mortgages given to borrowers with poor credit, which were then packaged and sold to investors during the boom years, revealed that as much as 28 percent of those loans failed to meet basic underwriting standards -- and Wall Street knew all along.

Worse, when the firm flagged those loans for potential issues, Wall Street banks ignored its recommendation nearly half the time and likely purchased those loans anyway -- selling them to unwitting investors who were never told that the biggest home loan due diligence firm in the country had found potential defects in these mortgages...

...About 35 percent of the 66,400 loans Deutsche wanted to buy were marked for having some kind of deficiency; the bank waived half of them. Morgan's 63,000 loans had a rejection rate of 37 percent; 56 percent of them were waived in. Clayton rejected 35 percent of the loans government-owned Freddie Mac wanted to buy. The firm, one half of the mortgage duo now owned by taxpayers and costing the Treasury hundreds of billions of dollars, waived 60 percent of those loans.