Rating Firms Hold Back Mortgage-Bond Revival, Credit Suisse Says

Credit-rating companies damaged the revival in sales of U.S. home-loan bonds without government backing by issuing reports questioning a potential loosening of the debt’s contract terms, according to Peter Sack, a managing director at Credit Suisse Group AG.

The firms’ reports unnecessarily raised investor concerns that so-called representations and warranties about loan quality made by lenders and bond issuers might weaken, Sack said today. Investors were spooked as the ratings firms left murky which deals they were referencing and talked about contract changes that weren’t being widely considered, he said during a panel discussion at a Mortgage Bankers Association conference in New York.

“Just that commentary has produced an enormous amount of concern among AAA buyers,” Sack said

Ratings companies including Moody’s Investors Service and Fitch Ratings have released reports this year on the topic as issuance of so-called non-agency bonds soared to about $5 billion, from $3.5 billion in all of last year, according to data compiled by Bloomberg.

Kathryn Kelbaugh, a senior analyst at Moody’s, disagreed that ratings firms were causing difficulties in the market.

“Some of the big guns do want these things in these deals and it has nothing to do with the rating agencies,” Kelbaugh said during the panel.

Sack said that the firms, whose grades remain necessary to allow new issues to be sold at economic levels, have also been damaging the market by publicly questioning the rankings granted by rivals on specific transactions.

“If you buy a deal there’s a pretty good chance that next week whoever didn’t rate it is going to criticize it,” he said.

Moody’s said in March that the top ratings granted to a portion of a transaction by JPMorgan Chase & Co. exceeded the grades it probably would have assigned.

Moody’s is simply providing its opinions and helping improve transparency in the market, Kelbaugh said.

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