The AAA ratings assigned by Standard & Poor’s in a mortgage-bond deal by Credit Suisse Group AG are too high, Fitch Ratings said for the second time this year.
The amount of protection for a top-rated slice of the $330 million transaction “is not sufficient in Fitch’s view to fully address the risks associated with the pool, including concentrations in geographies whose property prices remain well above what Fitch believes are sustainable values,” the New York-based ratings firm said today in an e-mailed statement.
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 described the industry as engaging in “a race to the bottom,” before the bubble began to burst in 2007 and sparked a global financial crisis.
“We believe the market benefits from a diversity of opinion on credit risk,” Ed Sweeney, a spokesman for New York-based S&P, said in an e-mailed statement. “Our ratings reflect our opinion of the creditworthiness of the securities in the transaction.”
Katherine Herring, a spokeswoman for Credit Suisse in New York, declined to immediately comment on the Fitch statement. The transaction priced Nov. 30, according to a person familiar with the offering who asked not to be identified, citing a lack of authorization to speak publicly.
Issuance of U.S. home-loan securities without government backing peaked at $1.2 trillion in each of 2005 and 2006, before freezing in late 2008 and 2009. Deals in 2010 and 2011 packaged $909 million of new loans, before sales accelerated this year to about $3.5 billion, according to data compiled by Bloomberg.
Credit Suisse joined Redwood Trust Inc. this year as the only issuers in the so-called non-agency market.
In the latest Credit Suisse deal, Fitch said that the 5.8 percent of so-called credit enhancement, or protection for investors against defaults on the underlying loans, on a slice granted AAA ratings was 15 percent lower than in any prime deal offered top grades by Fitch since 2008.
The rating company said that it applied “stresses” of more than 20 percent to home prices for loans in six of the top 10 metropolitan areas represented in the pool, including the one including Arlington and Alexandria, Virginia and Washington.
S&P assumes that AAA rated bonds backed by a typical pool of prime mortgages can withstand 45 percent declines in home prices without taking losses, according to its criteria published in 2009. “In many respects, this pool has characteristics that are, from a credit perspective, better than our archetypical pool,” S&P said in a Nov. 30 statement.
Fitch said the transaction also included “notable changes” related to obligations that require originators or Credit Suisse to repurchase soured debt that fails to match its promised quality. The deal allows the so-called representations and warranties to expire after 36 months, it said.
In March, Fitch blasted a $730 million mortgage-bond deal issued by Credit Suisse and graded by S&P and DBRS Ltd., saying the credit enhancement was too low and it was concerned about the appraisals of MetLife Inc., which made some of the loans.