Treasury to Push for Clarity in Mortgage-Bond Ratings

The U.S. Treasury is seeking to stoke issuance in the mortgage-bond market by pushing credit-rating firms to offer more information on how they might grade securities tied to riskier loans.

Lenders won’t make a wider range of mortgages to package into bonds without government backing unless they know how much of the debt would receive AAA rankings, Michael Stegman, counselor to the Treasury secretary for housing finance, said today in a speech at a Washington conference. At the same time, credit graders don’t offer that information until seeing data on the actual loans, he said.

“The resulting stalemate means more diverse pools will not be brought to market,” Stegman said, according to the text of his prepared remarks.

The Treasury has been looking for ways to accelerate a tepid revival in issuance of so-called non-agency mortgage bonds to expand access to credit and prepare the U.S. housing market for a smaller role for taxpayer-backed lending, which now represents about 80 percent of new loans. Since the 2008 financial crisis, non-agency bonds have been backed by only “jumbo loans to borrowers of pristine credit quality,” Stegman said.

Mortgage-backed securities tied to risky loans helped fuel the crisis, partly because many wrongly received top credit ratings. Non-agency bonds sold this year have been tied to less than $4 billion of new loans, compared with about $1.2 trillion in both 2005 and 2006, according to data compiled by Bloomberg.

Chicken, Egg

Many of the causes of the depressed volumes represent “chicken and the egg paradoxes,” Stegman said. That also includes the Federal Housing Finance Agency failing to reduce the size of loans that U.S-backed Fannie Mae and Freddie Mac can guarantee until seeing signs private capital can fill the gap, he said.

While issuers say the companies’ outsized role is creating illiquidity in the non-agency market that’s “hampering both investor demand and issuer participation,” the Treasury agrees with the FHFA’s concerns, he said.

The department, which held a roundtable with institutional investors and is meeting with issuers, trustees, and due diligence firms, will work with credit raters in “the coming weeks to better understand their methodology for modeling loss expectations for a broader sample of MBS pools,” he said.

“Treasury believes that by increasing clarity,” the “credit rating agencies can stimulate a constructive market dialogue and foster greater confidence in the credit rating process,” Stegman said.