Post by unlawflcombatnt on Jun 21, 2007 15:07:28 GMT -6
Below are excerpts from a Bloomberg article explaining how bond quality has been overstated by the agencies that officially rate them, resulting in an understatement of the actual risks. The title of the article is
Moody's, S&P Understate Subprime Risk, Study Says
By Mark Pittman
"May 3 (Bloomberg) -- Moody's Investors Service, Standard & Poor's and Fitch Ratings understate the risks of subprime mortgage bonds, putting funding for the U.S. housing industry at risk, according to a study to be released today.
The ratings companies can't evaluate the probability of losses because home loans that back the debt have constantly changing underwriting standards, according to the study by Joshua Rosner, a managing director of investment research firm Graham Fisher & Co. in New York, and Joseph R. Mason, an associate finance professor at Drexel University in Philadelphia.
S&P, Moody's and Fitch are also not impartial examiners of credit because they help design the securities, according to Rosner and Mason....
``The senior levels of these structures are probably not as safe and secure as the ratings companies have said, as investors would assume, or as regulators are counting on,'' Rosner said in an interview. Whether top-rated classes of such securities are downgraded ``depends on home price appreciation. It's a strong possibility that there could be downgrades.''....
Mason said today the worst thing for the mortgage market would be for the government to bail out investors. ``This is the Street and that's the risk,'' he said. ``Investors will wise up when they take losses.''....
Subprime mortgage bond prices are falling as late payment by borrowers with poor credit, reached a four-year high of 13.3 in the fourth quarter, according to the Mortgage Bankers Association trade group in Washington. Losses may exceed a record set in 2000 of about 6 percent, according to New York-based Moody's....
Some of the $450 billion in subprime mortgage-backed debt sold last year has lost more than a third of its value, according to Merrill Lynch & Co. Bond investors may lose as much as $75 billion on securities made up of millions of mortgages to people with poor credit, Newport Beach, California-based Pacific Investment Management Co., manager of the world's biggest bond fund, said last month.
Moody's rated 96.7 percent of all new subprime mortgage bonds created last year, according to industry newsletter Inside B&C Lending. S&P provided ratings on 97.6 percent, while Fitch assessed 51.3 percent and Dominion Bond Rating Service Ltd. rated 14.1 percent....
In addition, mortgage bonds are traded ``over the counter,'' the report said, so there's no transparency for bond prices, making ``the rating the chief mechanism of monitoring and evaluating risk.''
Residential mortgage-backed securities ``structured upon a static capital structure, a static investment strategy, fixed- income investment assets, and no market price signals require dynamic ratings in order to adequately reflect risk,'' they said. ``The main point is therefore that, in the case of RMBS, bond ratings are being used for something they were not initially intended.''
S&P, Moody's and Fitch are beginning to cut ratings. On April 30, S&P either cut credit ranks or put on watch for downgrade a record 253 of bonds backed by U.S. mortgages in the first quarter. Thirty-five of those with ratings actions were from 2006.
U.S. foreclosure filings in the first quarter of 2007 surged by more than a third over the same period last year as late payments on subprime mortgages climbed, research company RealtyTrac Inc. said. Almost 437,500 filings were reported, up 35 percent from the first three months of 2006....
``The expectations for losses and delinquencies when the deals were structured seemed to indicate that'' low losses and home price appreciation ``would go on forever,'' said Barry Weiss, a vice president at Harbourview Asset Management, an OppenheimerFunds Inc. unit in Denver that managed about $40 billion. Weiss made the comments this week at an industry conference in Miami.
S&P said in March that subprime mortgage-backed securities from 2006 may be the ``worst-performing in recent history.''....
(The entire article can be found at Moody's, S&P Understate Subprime Risk, Study Says )
In summary, the rapid expansion of credit has been assisted by systematic underestimation of the risk of bonds. Much of this underestimation is due to overrating (or understating risk) by the bond-rating agencies themselves.
Moody's, S&P Understate Subprime Risk, Study Says
By Mark Pittman
"May 3 (Bloomberg) -- Moody's Investors Service, Standard & Poor's and Fitch Ratings understate the risks of subprime mortgage bonds, putting funding for the U.S. housing industry at risk, according to a study to be released today.
The ratings companies can't evaluate the probability of losses because home loans that back the debt have constantly changing underwriting standards, according to the study by Joshua Rosner, a managing director of investment research firm Graham Fisher & Co. in New York, and Joseph R. Mason, an associate finance professor at Drexel University in Philadelphia.
S&P, Moody's and Fitch are also not impartial examiners of credit because they help design the securities, according to Rosner and Mason....
``The senior levels of these structures are probably not as safe and secure as the ratings companies have said, as investors would assume, or as regulators are counting on,'' Rosner said in an interview. Whether top-rated classes of such securities are downgraded ``depends on home price appreciation. It's a strong possibility that there could be downgrades.''....
Mason said today the worst thing for the mortgage market would be for the government to bail out investors. ``This is the Street and that's the risk,'' he said. ``Investors will wise up when they take losses.''....
Subprime mortgage bond prices are falling as late payment by borrowers with poor credit, reached a four-year high of 13.3 in the fourth quarter, according to the Mortgage Bankers Association trade group in Washington. Losses may exceed a record set in 2000 of about 6 percent, according to New York-based Moody's....
Some of the $450 billion in subprime mortgage-backed debt sold last year has lost more than a third of its value, according to Merrill Lynch & Co. Bond investors may lose as much as $75 billion on securities made up of millions of mortgages to people with poor credit, Newport Beach, California-based Pacific Investment Management Co., manager of the world's biggest bond fund, said last month.
Moody's rated 96.7 percent of all new subprime mortgage bonds created last year, according to industry newsletter Inside B&C Lending. S&P provided ratings on 97.6 percent, while Fitch assessed 51.3 percent and Dominion Bond Rating Service Ltd. rated 14.1 percent....
In addition, mortgage bonds are traded ``over the counter,'' the report said, so there's no transparency for bond prices, making ``the rating the chief mechanism of monitoring and evaluating risk.''
Residential mortgage-backed securities ``structured upon a static capital structure, a static investment strategy, fixed- income investment assets, and no market price signals require dynamic ratings in order to adequately reflect risk,'' they said. ``The main point is therefore that, in the case of RMBS, bond ratings are being used for something they were not initially intended.''
S&P, Moody's and Fitch are beginning to cut ratings. On April 30, S&P either cut credit ranks or put on watch for downgrade a record 253 of bonds backed by U.S. mortgages in the first quarter. Thirty-five of those with ratings actions were from 2006.
U.S. foreclosure filings in the first quarter of 2007 surged by more than a third over the same period last year as late payments on subprime mortgages climbed, research company RealtyTrac Inc. said. Almost 437,500 filings were reported, up 35 percent from the first three months of 2006....
``The expectations for losses and delinquencies when the deals were structured seemed to indicate that'' low losses and home price appreciation ``would go on forever,'' said Barry Weiss, a vice president at Harbourview Asset Management, an OppenheimerFunds Inc. unit in Denver that managed about $40 billion. Weiss made the comments this week at an industry conference in Miami.
S&P said in March that subprime mortgage-backed securities from 2006 may be the ``worst-performing in recent history.''....
(The entire article can be found at Moody's, S&P Understate Subprime Risk, Study Says )
In summary, the rapid expansion of credit has been assisted by systematic underestimation of the risk of bonds. Much of this underestimation is due to overrating (or understating risk) by the bond-rating agencies themselves.