How The Credit Crunch Rates In The Mortgate Meltdown
Monday, September 10, 2007PAUL KANGAS: When mortgage loan defaults began to rise last year, some Wall Street analysts raised red flags. But the credit rating agencies, Standard & Poor's, Moody's and Fitch, kept investment grade ratings on most residential mortgage backed securities for months. Now lawmakers, regulators and state attorneys general are asking why. Stephanie Dhue reports.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: There's a lot of finger pointing these days at just what caused the meltdown in the mortgage market. Ohio Attorney General Marc Dann says the credit rating agencies deserve a fair share of the blame.
VOICE OF MARC DANN, OHIO ATTORNEY GENERAL: If there was no market for fraudulent, mortgages, mortgages where the appraisal of the house far exceeded its value or mortgages where the homeowner had no hope of ever repaying the loan, that it was their willingness to buy those loans that caused Ohioans to be defrauded out of their houses.
DHUE: Along with state attorneys general, the Securities and Exchange Commission and state security regulators are asking questions. At issue, whether the agencies have a conflict of interest since they are paid by the companies whose deals they rate. Standard & Poor's Vickie Tillman says her firm is cooperating with investigators.
VICKIE TILLMAN, VP, CREDIT MARKET SERVICES, STANDARD & POOR'S: We are going to, again, have a continual dialog and basically show that, in fact, we do manage the perceived conflicts of interest, both from internal processes and procedures that we have in place.
DHUE: Housing economist Tom Lawler says the rating agencies did a fundamentally bad job of rating mortgage risk. He says they failed to consider how risky loans would perform when the housing boom ended and he says the agencies are still dragging their feet.
THOMAS LAWLER, ECONOMIST, LAWLER ECONOMIC & HOUSING CONSULTING: Even though they have downgraded a lot of securities, there are still lots more securities that have not been not downgraded that are trading like junk and people expect them to have losses. They are still lagging the market.
DHUE: Credit rating agencies were also slow to lower ratings before Enron collapsed. Michael Oxley chaired the House Financial Services committee at that time. In response to Enron, lawmakers gave the SEC authority to set standards for the rating agencies and opened the market to future competition. Oxley says that should go a long way to fix the problems.
MICHAEL OXLEY, FORMER CHAIRMAN, HOUSE FINANCIAL SERVICES COMMITTEE: And if you get some inaccurate information, you're probably going to go to somebody else the next time and I think that's how the market, using some reasonable standards, can solve that problem long-term.
DHUE: In the meantime, regulators and prosecutors will be holding the agencies accountable. Ohio's attorney general says he's prepared to sue the ratings firms to recover damages for people in his state who lost their homes. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
