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.
- New criteria for reviewing individual mortgage lenders, or originators, and new criteria for reviewing the lenders’ origination processes.
- New standards for the residential MBS information that the investment banks must provide for the rating agencies.
- A new system of credit agency annual reviews, to identify practices that could compromise the independence of agencies’ ratings.
- A promise from the rating agencies to get representations and warranties from investment banks about the loans underlying the residential MBS.
In a statement, Fitch says the agreement includes specific, constructive steps to strengthen the non-prime residential MBS market.
Fitch notes that the agreements will run for 42 months in total, and that it will have 6 months to implement the terms of its agreement.
Representatives from Moody’s were not immediately available for comment, but the New York attorney general’s office quotes the firm as saying its agreement with the New York attorney general’s office will “improve the independence, transparency and quality of our ratings.”
S&P reports that it has been taking 27 steps to improve its ratings process on top of the steps listed in its agreement with the New York attorney general’s office.