How Do reputation Rating Agencies Serve the Secondary Mortgage Market?

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Credit rating and determination of collateralized debt obligations and all structured finance products are integral to the plane function of the secondary store for mortgage loans. A prestige rating group is a enterprise that analyzes issuers of debt and debt-like securities and gives them an ample prestige rating which measures the issuer's ability to satisfy its debt obligations.

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There are more than 100 major rating agencies nearby the world, and three of the largest and most leading ones in the United States are Fitch Ratings, Moody's and standard & Poor's. A debt issuer's prestige rating is very similar to the Fico score of an individual rated by the Fair Isaac Corporation widely used in the United States by institutional lenders. Of greater significance to the housing market, the prestige rating agencies also analyze and rate the creditworthiness of the various tranches of collateralized debt obligations traded in the secondary mortgage market.

Credit ratings are widely used by investors because they contribute a suitable tool for comparing the prestige risk among various investment alternatives. The determination of risk is crucial in determining the interest rate a syndicator will need to offer to attract enough investment capital. From the other side of the transaction, it is leading to the investor who is comparing the interest rates being offered by various investments. The ratings agencies contribute this critical, third-party determination both sides of the transaction can rely upon for unbiased, precise information. When the ratings agencies are doing their job well, there is greater efficiency in capital markets as syndicators of securities are obtaining maximum store values, and investors are minimizing their risks. This efficiency in the capital markets leads to best resource utilization and stronger economic growth.

Unfortunately for many investors in collateralized debt obligations during the Great Housing Bubble, the ratings agencies did not contribute an precise or credible rating of many Cdo tranches. When the housing store pricing declined, many Cdo tranches were subsequently downgraded. In defense of the agencies, they were providing an determination of risk based on existing store conditions. Their reports contained caveats concerning downside risks in the event store conditions changed, but this list of risks is standard in any determination and widely ignored by investors who are counting on the rating to be a store forecasting tool rather than the store reporting tool it surely is. prestige rating agencies are not in the enterprise of store forecasting or evaluating systemic risks.

There is a deeper problem with the ratings agencies that began to surface in the Great Housing Bubble. Ratings agencies used to payment investors for their risk analysis, but there was a transition to charging the issuers instead. As one might imagine, there are reports that ratings agencies were concerned if they gave Cdos poor ratings, their customary source of revenue would go elsewhere. This put pressure on the agencies to overlook unavoidable problems or merely list them as footnotes to their reports rather than lower a rating due to a foreseeable contingency such as a decline in house prices.

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