Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Nye Lavalle
Ratings Firms' Practices Get Rated
SEC Probes if Conflicts
Fueled Subprime Troubles
September 7, 2007; Page C1
In the wake of mortgage-market turmoil, regulators plan to probe how the big credit-rating companies are paid and whether they are independent enough of the Wall Street firms that issue bonds.

The Securities and Exchange Commission and state attorneys general in New York and Ohio have begun to examine how the ratings firms evaluated subprime-mortgage-backed securities that grew into a trillion-dollar market. The ratings firms include McGraw-Hill Cos.' Standard & Poor's; the Moody's Investors Service unit of Moody's Corp., whose stock has soared in recent years; and Fitch Ratings, a unit of Fimalac SA of Paris.

Wall Street bankers churned out profits in recent years by bundling mortgages into securities and selling them to investors. Ratings firms played an important role because they gave investment-grade ratings to many of those securities, making it easier for Wall Street firms to sell the bonds.

Hundreds of those securities have since been downgraded by the ratings companies.

Though that is a small portion of all the securities graded by the ratings firms, the reversal contributed to a rout in credit markets last month and has sparked criticism of the ratings firms.

Critics point out that ratings firms' financial fortunes are closely tied to the volume of securities deals -- and that higher ratings often spur deals on by making securities easier to sell. In recent years, mortgage-backed securities have become a major profit driver at Moody's.

From 2003 to 2006, the growth in the mortgage market helped Moody's stock price triple, while its profit climbed 27% a year on average. The firm's CEO, Raymond McDaniel, received a compensation package of $8.2 million last year, about double his pay package in 2005 and triple what his predecessor made in 2000. S&P, as a unit of a larger public company, isn't required to release compensation figures.

This type of financial information is likely to be scrutinized by the various state and federal regulators. While ratings firms generally disclose the amount they collect to rate different kinds of bonds, the SEC wants to see whether clients that sell more deals -- and thus generate more revenue for ratings firms, tend to get better ratings. While there is no evidence so far of this kind of preferential treatment, regulators are interested in examining the question given the lucrative nature of the mortgage market, one person familiar with the matter said.

"We're going in to look at the conflicts of interest, both in how they are paid and in their standards for rating," said Erik Sirri, director of the SEC's division of market regulation, after testifying on Capitol Hill on Wednesday.

In New York state, Attorney General Andrew Cuomo has subpoenaed documents from S&P and Fitch as part of a broader probe into the mortgage market. In Ohio, Attorney General Marc Dann is looking into the ways that rating firms interacted with Wall Street underwriters. "The more we look at it, the more we realize that these firms are important," said Mr. Dann.

Ratings firms, which say they did nothing improper, contend they remained independent evaluators of the securities even as their ratings business grew with the exploding mortgage-backed security market.

S&P and Fitch spokesmen said their firms are cooperating with the investigations and they look forward to discussions about how the ratings process works. S&P's spokesman added that the firm's ratings criteria are "publicly available, non-negotiable and consistently applied." A Moody's spokesman said: "We have received various government inquiries and we will fully assist with each of these."

The ratings firms are only one piece of the vast mortgage market. But they are an important cog at a time when the business is under scrutiny. The Senate Banking Committee and the House Financial Services Committee are planning hearings about the role of ratings firms in subprime mortgages (or those made to less-creditworthy borrowers), which have been hit by the recent decline in housing prices. Investors have lost billions of dollars and many homeowners face foreclosures, prompting ratings firms to lower ratings on hundreds of mortgage-backed bonds.

Ratings firms publish bond ratings that express an opinion about the likelihood of default. Firms like Moody's and S&P have been rating corporate bonds for generations, using ratings from safer triple-A bonds down to junk-bond levels. Recently, one of the fastest-growing segments of their business has been rating complicated pools of mortgages and other consumer-backed debt.

Their role can be tricky because the firms are paid by the companies that issue the bonds and not the buyers. Making things tougher is the desire by bond issuers to have their bonds evaluated by the firm willing to give the highest rating.

Issuers often work with the rating firms to restructure the securities that are deemed high-risk, or even attempt to get another firm to rate the bonds. Earlier this summer, Moody's said its market share dropped to 25% from 75% in rating commercial mortgage deals after it increased standards, making it harder for Wall Street firms to get high ratings on the bonds they sold.

Ratings firms employ both analysts and committees to evaluate securities in a kind of checks-and-balances system to minimize conflicts of interest. The analysts don't participate in fee negotiations and their pay doesn't depend on the fees garnered from deals they rate.

While overall compensation at Moody's rose about 17% a year from 2003 to 2006, much of that was the result of additional staff. Since 2002, Moody's spending on compensation and benefits roughly doubled, to about $650 million last year from about $330 million in 2002.

According to the Moody's data, the average compensation package at the firm, including benefits, rose about 24% from 2002 to 2006, to about $194,000 from $157,000. The Moody's spokesman said the firm's "compensation practices are in line with the industry."

Those salaries are low by the standards of Wall Street, where many analysts find jobs after working for the ratings firms. That has led some critics to question whether analysts might go easy on bond ratings so they don't alienate issuers who might be prospective employers down the road.

Sylvain Raynes, a former Moody's analyst who is now a principal at valuation advisory firm R&R Consulting, argues that such direct moves should be prohibited unless the analyst takes at least two years away from the ratings business.

Julia Whitehead, a senior adviser at boutique investment bank Miller Mathis, says it would be hard to change the model of bond issuers paying ratings firms, but she argues ratings firms should be held more accountable when they do a poor job rating bonds.
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Under Dog

I knew this was coming. When it Rains it Poors!
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Under Dog

The next Probe should be, The Senate Banking Committee and the House Financial Services Committee... And All the States Attorney Generals.

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I have been waiting a long time to tell the right person or person's about my experience with Fitch Ratings very own Kathleen Tilwitz and two other people working at this bogus rating company.
Now I have my chance to bring to light the collusion that goes on between Fitch Ratings and the companies they rate.
I saved everything Katie!!!!(as some people like to call you)
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Radian Asks Fitch to Withdraw Ratings Over Credit Downgrade

Radian Group Inc. recently asked Fitch ratings to “immediately” withdraw all of its ratings of the company after the rating agency downgraded the mortgage insurer’s financial strength last week.

Radian characterized the ratings drop as “inconsistent” and said the downgrades by Fitch created “unmerited uncertainty” regarding the insurer’s capital strength. The company said it intended to operate using the ratings provided by Standard and Poor’s and Moody’s Investors Service — neither of which downgraded the company and both of which Radian said it was “pleased” with.

Radian also said that Fitch’s ratings model was different than the other two rating agencies, a difference that it felt led to an uneccessary downgrade.

Fitch fired back its own missive in the press late last week, saying that while Radian has a right to request withdrawal, such a decision is “ultimately left to Fitch.”

From Fitch’s press release:

Fitch believes the rating actions it has taken on Radian Asset are based on its independent views of Radian Asset’s financial condition, including not only Radian Asset’s performance on Fitch’s capital model Matrix, but also numerous qualitative factors with respect to Radian Asset’s business profile and franchise value.

Further, based on the high level of investor interest in both the mortgage insurance and financial guaranty industries, Fitch does not plan to withdraw the ratings at the present time, but will instead monitor investor interest and make a decision with respect to Radian’s request at a further date, based on market feedback. That said, at some point if Fitch believes it no longer has access to adequate public and non-public information to credibly maintain the ratings, Fitch will withdraw the ratings of the company regardless of investor interest.

It’s clear that Radian has no intention of working with Fitch — at least from what I’ve read in the company’s own press statement — so it seems likely at this point that Fitch will have no choice but to withdraw the rating at some point.

The row between rating agency and rating subject here highlights the conflict of interest that often exists in the ratings game; outfits like Radian can choose to work with the agency it feels has the “more consistent” model for its own business interests. (Mainly, that interest is making money.)

Whether or not Radian’s assertions have merit — they may or may not — isn’t the point. And if Fitch’s scoring model is dramatically more conservative than any other rating agency’s, then Fitch’s ratings across the entire mortgage insurance universe should also be characterisitically and uniformly more conservative. It shouldn’t matter as much as Radian seems to think it does.

What’s taking place here is, in my eyes, no different than what Moody’s claims it has been facing in the CMBS market, where its comparatively more conservative rating criteria has had everyone running elsewhere to avoid eating up margins with overcollateralization that other agencies didn’t require.

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Moody’s: Housing Slump to Last into 2009

Moody’s issued a report today (sub req’d) on U.S. homebuilders that noted the rating agency now expects the housing and associated mortgage downturn to last into 2009.

From the press release:

“Our current thinking is that the downturn, currently two years in the making, will last until 2009, with any sector recovery likely to be sluggish for some time after that,” says Moody’s Vice President/Senior Credit Officer Joseph Snider. “We are looking ahead 12-18 months to evaluate issuers’ potential credit profiles, well before any recovery might reasonably be expected, and transition ratings to reflect each company’s projected financial condition.”

… Recent negative developments for the industry include the dramatic shift in the credit and lending environment, and the residential mortgage market exhibiting some elements of a credit crunch. Snider says home sales are likely to take a “substantial hit” in the next few months as subprime and most alt-A lending has ground to a halt and even prime-qualified borrowers have found it harder to get a mortgage.

Looks like Moody’s analysts arrived in line with where I’ve already been at, for those that read my recent interview last week.

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