Fitch Blasts S&P Ratings on Credit Suisse Mortgage Bonds
“While asked to provide feedback on the transaction, Fitch was ultimately not asked to rate the deal due to the agency’s more conservative credit stance,” the New York-based ratings firm said today in an e-mailed statement.
The so-called credit enhancement, or protection for investors against defaults on the underlying loans, on top-rated classes totals 8 percent, compared with the 9.75 percent that Fitch would demand even when considering the “high quality mortgage collateral,” the firm said. Fitch also expressed concern about the “appraisal process” of MetLife Inc. (MET)’s home- loan unit, which it said made 82 percent of the mortgages.
Rating companies have stepped up their public criticism of competitors’ grades on securitized debt after investors and lawmakers accused them of lowering standards to win business as issuers practiced so-called ratings shopping during the credit boom. A report by a Senate panel last year, after the bubble began to burst in 2007, sparking a global financial crisis, described the industry as engaging in “a race to the bottom.”
“The market benefits from a diversity of opinions on credit risk,” Ed Sweeney, a spokesman for S&P, said in an e- mailed statement.
‘Seasoned’ Jumbo Mortgages
S&P is assigning AAA ratings to $682.6 million of the bonds being sold by Credit Suisse, which are backed mostly by “seasoned” so-called jumbo prime mortgages, according to a statement today by that New York-based rating company. Other portions of the transaction are also getting inflated rankings, Fitch said. The loans are eight months old on average, with balances averaging $880,756 each, Fitch said in a report.
DBRS Ltd. also graded the transaction, which settled today, according to data compiled by Bloomberg.
“DBRS rated the transaction in accordance with its published methodologies,” Catherine Chiarot, a spokeswoman for Toronto-based DBRS, said in an e-mail.
Fitch said its concern that the deal’s investor protections aren’t strong enough stemmed in part from the results of reviews of appraisals that suggested MetLife’s property valuations are unsound. Due diligence showed 8.4 percent of the pool was loans made by the insurer “whose original values could not be supported by secondary appraisal tools,” Fitch said.
MetLife said in January that it was shutting its home mortgage-origination operation, costing the company at least $90 million and most of the 4,300 employees at the unit their jobs.
Reviews of the insurer’s “underwriting guidelines and third-party due diligence resulted in more conservative assumptions being applied to loss rates on certain loans” by DBRS, according to a report today by that company.
Chimera Investment Corp. (CIM), the New York-based real estate investment trust, was expected to buy the junior classes of the transaction, according to the Fitch report. Credit Suisse wasn’t expected to retain any of the debt, Fitch said.
Chimera “took an active part in the asset selection process,” according to the report. A unit of Credit Suisse bought the mortgages not originated by MetLife from other lenders led by Quicken Loans Inc. and PHH Corp. under a program in which it acquires debt on a loan-by-loan basis, DBRS said.
Jay Diamond, a spokesman for Annaly Capital Management Inc., which manages Chimera, declined to immediately comment.
Notes backed by older loans or existing bonds have represented most of the new U.S. residential-mortgage securities without government backing since the market froze in 2008. Transactions last year totaled $20.6 billion, according to newsletter Asset-Backed Alert.
Issuance of so-called non-agency securities tied to new home loans, typically considered those less than a year old, totals approximately $1.6 billion since 2008, compared with a peak of about $1.2 trillion in both 2005 and 2006, according to data from Bloomberg and newsletter Inside Mortgage Finance.
Redwood Trust Inc., the sole issuer of new-loan bonds since the market seized, sold securities backed by about $325 million of mortgages on March 27. Fitch and Kroll Bond Rating Agency graded those notes, Bloomberg data show.
Moody’s Investors Service in a report this month described as “inappropriate” the rankings granted by S&P and DBRS to a subprime auto-debt securitization. In 2010, S&P said that it saw risks in jumbo home-loan bonds given top grades by Moody’s. Fitch criticized a mortgage-servicing deal ranked by S&P and DBRS last year.
After S&P stripped the U.S. of its AAA grade in August, borrowing costs for the government fell to record lows and billionaire investor Warren Buffett said S&P erred and the nation should be rated “quadruple-A.”
A survey of 1,031 Bloomberg subscribers last year found that 67 percent backed the downgrade, though 35 percent said the grades given by rating firms aren’t reliable.
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