July 18 (Bloomberg) -- Moody's Investors Service has been excluded from rating 70 percent of new commercial mortgage-backed securities after toughening its guidelines.

Moody's has been shut out of nine of the past 13 deals as underwriters sought better ratings from rival companies, Tad Philipp, a managing director at Moody's said today in a telephone interview. The securities had a face value of more than $25 billion.

``There's no doubt in my mind that it's because of the change'' said Philipp, who included a chapter titled ``Rating Shopping is Alive and Well'' in a report released today. ``Normally, we'd rate 75 percent of the issues, not 30 percent. I guess this is sort of like, no good deed goes unpunished.''

Moody's, which was criticized by investors for being too slow to cut ratings on subprime residential bonds, in April increased its requirements for the level of protection carried by bonds backed by mortgages on apartment buildings, offices and other commercial property. To get a high rating for some pieces of the bond, Moody's now requires lower-rated pieces to be larger, reducing losses further up the chain. The changes add to the costs to create the securities.

The decision by Wall Street underwriters to snub Moody's highlights the relationship between credit ratings companies, the firms that pay for the ratings, and investors who rely on them to make decisions. Moody's charges fees for its credit ratings.

Tougher

Toughening criteria on commercial mortgage bonds, while serving investors, may hurt revenue. Moody's said June 5 that demand in the U.S. structured finance market will make its revenue rise faster than it had anticipated this year.

Moody's shares fell $1.22 to $59.56, after earlier touching a one-year low, in New York Stock Exchange composite trading. In May, James Chanos, president of a $4 billion hedge fund, Kynikos Associates Ltd., said he sold Moody's stock short, as he expects the company may face lawsuits for keeping its ratings on mortgage bonds too high.

Structured finance is the largest and fastest-growing source of credit rating revenue for ratings companies and accounted for 44 percent, or $667 million, of Moody's $1.52 billion in 2006 revenue from ratings. That rose to 46 percent in the first quarter of 2007.

U.S. sales of commercial mortgage-backed securities have risen 75 percent to $110.6 billion through May this year from the same period last year, according to RBS Greenwich Capital.

`The Right Thing'

``Our only product is our reputation and that's why it's really important to be getting the ratings right,'' Philipp said. Philipp said he'd received notes today from officials at Moody's, including Chief Executive Officer Raymond McDaniel, for ``doing the right thing and taking a stand in the market.''

The ratings companies have been criticized for months for being too slow to cut ratings on residential mortgage-backed securities. Default rates of more than 20 percent on home loans, the highest in a decade, have reduced prices of some bonds backed by mortgages to people with poor or limited credit by more than 50 cents on the dollar.

Last week, Moody's, Standard & Poor's and Fitch Ratings all began cutting credit ratings on hundreds of bonds and said they may cut hundreds more. S&P cut credit ratings on $6.39 billion of securities backed by subprime residential mortgages and Fitch said it may cut $7.1 billion.

`That's It'

The average yield premium for commercial mortgage-backed securities reached a three-year high of 0.88 percentage point over Treasuries on July 17 after Moody's said it would demand more protection for investors in the securities because of increasingly lax lending standards.

``You reach a point where you have to say, `That's it,'' said Philipp.

Moody's rival S&P is taking into account underwriting standards in its ratings day to day, spokesman Chris Atkins said.

``We have been out in the marketplace since 2004 with our concerns about underwriting and we've factored those standards into our ratings,'' Atkins said. ``We haven't felt the need, at this point, to alter our criteria.''

John Bonfiglio, Fitch's head of U.S. structured finance ratings, said his firm toughened criteria on commercial mortgage pools in March and was cut out of rating a few deals for the next month.

``Ratings are opinions and it points out that it's important to have different opinions,'' Bonfiglio said in a telephone interview from his New York office. Fitch is a unit of Paris- based Fimalac AS.

Fitch ceded share in the Alt A mortgage market because it expects higher default rates than peers, Glenn Costello, the company's co-head of residential-mortgage bonds, said on a conference call today. The firm rates about a fifth of Alt A securities and less of bonds backed by Alt A adjustable-rate loans, he said.

Alt A mortgages are granted borrowers with generally good credit who receive lenient loan terms. Subprime loans are made to borrowers with poor credit histories or excessive debt burdens.

To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net.

Last Updated: July 18, 2007 16:38 EDT