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June 06, 2008 at 06:34 AM
New York Attorney General Andrew Cuomo says the 3 major rating agencies have promised to change the way they review residential mortgage-backed securities.
The agreements – with Fitch Ratings, New York; Moody’s Investors Service, New York; and Standard & Poor’s Ratings Services, New York – call for the rating agencies to revise their investment bank compensation contracts and to require that investment banks provide detailed information about loan pools before the rating agencies issue ratings.
The agreements will “increase transparency in the RMBS market,” according to officials in Cuomo’s office.
Now that the New York attorney general’s office has negotiated the agreements, it says it has ended an inquiry into MBS rating practices at the major rating agencies, Fitch says. The inquiry began in August 2007.
Many life insurers allocate a portion of their general account investment portfolios to residential MBS, or pools of individual residential mortgage-backed securities.
The recent turmoil in the MBS market has raised questions about high ratings assigned to some MBS pools that have performed poorly.
Provisions in the agreements the rating agencies have negotiated with Cuomo’s office include:
- A shift to a fee-for-service compensation structure, to ensure that agencies will be compensated whether or not they are selected to rate a residential MBS.
- Disclosure reforms, to ensure that rating agency analysts get detailed information about all securitizations submitted for initial review.
