MBS, or mortgage-backed securities, rating agencies under renewed squeeze

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Services for Real Estate Pros

MBS rating agencies under renewed squeezeThe unprecedented real estate bubble the nation just experienced was partly created by the credit rating shops that were tasked to value mortgage-backed securities, or MBS. The three large agencies doing that are Fitch Ratings, Moody's Investors Service and Standard & Poor's. The ratings the three arrived at were then attached to MBS issued by Wall Street firms and subsequently offered to investors who were seeking to invest money based on their own risk preferences. Obviously what the large investors world over were seeing made them confident that MBS were sound and worth acquiring, so they bought boatloads of them, stoking the fire under the housing bubble even more.

Las Vegas mortgage recipients, like those in the other seriously mauled areas of Arizona, California and Florida, were caught up in this frenzy and are now paying dearly for it.

Ever since the home loan and real estate market implosion there has been talk about how these ratings actually were sugar-coated and inaccurate, giving investors false impressions on their true value. Naturally the three agencies under scrutiny are adamantly defending their business practices.

Ohio attorney general has now filed a lawsuit against these three agencies on behalf of five Ohio public employee pension and retirement funds, claiming that the MBS ratings were inflated, often giving triple-A scores to mortgage-backed securities that in fact were rather risky. Moreover, the issuers of these bonds themselves, the lovable Wall Street crowd, were paying hefty fees for the ratings, creating an apparent conflict of interest issue. Conceivably the more fees a Wall Street issuer paid, the better an MBS rating would be.

The lawsuit seems to have decent merit now that the housing market has largely tanked and those MBS have lost most of their value, showing that in fact they were not quite triple-A vehicles but rather the high-risk variety. The Ohio attorney general has already filed seven other lawsuits against financial and investment companies since the economy turned sour and has collected thus far $2 billion in damages. This then isn't his first rodeo, so evidently he's onto something everybody should be paying attention to.

It just makes people wonder why Washington mortgage industry regulators are still sitting on the sidelines. This appears to be what they should be keeping an eye on and taking corrective action when needed. Does Wall Street have too much influence there? Well, at least some of the states have taken the initiative seeking to make the marketplace more responsible for its greedy and deceptive actions.

 

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Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst 

www.BluefoxToday.com - syndicated mortgage, housing and property management blog

eskokiuru@gmail.com
My cell: 702-499-1006

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Re-Blogged 3 times:

Re-Blogged By Re-Blogged At
  1. Gabe Sanders 11/29/2009 01:09 AM
  2. Gene perez 11/29/2009 07:25 AM
  3. Eleanor Thorne 11/30/2009 11:07 PM
Topic:
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mbs

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Rainmaker
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Esko Kiuru
Bethesda, MD

Tony,

If nothing is done now, it'll happen real soon again.

Nov 30, 2009 01:58 PM #32
Rainmaker
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Esko Kiuru
Bethesda, MD

Fernando,

We need to invent a greed court.

Nov 30, 2009 01:59 PM #33
Rainmaker
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Esko Kiuru
Bethesda, MD

Brian,

Hopefully regulators will wake up and stay reasonable.

Nov 30, 2009 02:00 PM #34
Rainmaker
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Esko Kiuru
Bethesda, MD

Bryant,

The rating system needs a thorough overhaul. Let's see if Congress has the guts for it.  

Nov 30, 2009 02:07 PM #35
Rainmaker
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Esko Kiuru
Bethesda, MD

Frank,

A house of cards is a pretty accurate description.

Nov 30, 2009 02:08 PM #36
Rainmaker
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Esko Kiuru
Bethesda, MD

Stephanie,

Sometimes rumors turn out to be so true.

Nov 30, 2009 02:09 PM #37
Rainmaker
325,871
Esko Kiuru
Bethesda, MD

Jason,

That's it. The raters really took many investors for a cool ride.

Nov 30, 2009 02:16 PM #38
Rainmaker
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Esko Kiuru
Bethesda, MD

Joe,

There you go.

Nov 30, 2009 02:16 PM #39
Rainmaker
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Esko Kiuru
Bethesda, MD

Perrin,

Controlled greed, if such a thing exists, is okay. The kind we just experienced spells disaster.

Nov 30, 2009 02:18 PM #40
Rainmaker
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Esko Kiuru
Bethesda, MD

Tim,

Although rating MBS was a small slice of the whole pie, it played a key role in creating this mess.

Nov 30, 2009 02:21 PM #41
Rainmaker
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Esko Kiuru
Bethesda, MD

Jay,

You'd think those "sophisticated" investors would've smelled a rat, but somehow most didn't.

Nov 30, 2009 02:23 PM #42
Rainmaker
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Esko Kiuru
Bethesda, MD

Chris,

It's puzzling that regulators allow ratings agencies to operate like this.

Nov 30, 2009 02:26 PM #43
Rainmaker
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Esko Kiuru
Bethesda, MD

Gene,

Thanks for stopping by.

Nov 30, 2009 02:27 PM #44
Rainmaker
325,871
Esko Kiuru
Bethesda, MD

Ryan,

Real estate lawyers are having a field day with mess for a long time.

Nov 30, 2009 02:29 PM #45
Rainmaker
325,871
Esko Kiuru
Bethesda, MD

Greg,

I think we need to look at what went wrong and then fix it, otherwise we'll be back to square one real soon. 

Nov 30, 2009 02:33 PM #46
Rainmaker
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Esko Kiuru
Bethesda, MD

Wayne,

Their role was rather obscure, but very important.

Nov 30, 2009 02:34 PM #47
Rainmaker
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Esko Kiuru
Bethesda, MD

Gary,

Right, this segment of the mortgage industry is ..., let's say technical.

Nov 30, 2009 02:36 PM #48
Rainmaker
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Esko Kiuru
Bethesda, MD

Renee,

Special interests roaming Washington sure have a finger on the pulse and protect their clients no matter what.

Nov 30, 2009 02:41 PM #49
Rainmaker
325,871
Esko Kiuru
Bethesda, MD

John and Lisa,

It's refreshing to see that Ohio is going after them now.

Nov 30, 2009 02:44 PM #50
Rainmaker
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Esko Kiuru
Bethesda, MD

Sybil,

True, pretty much everybody got caught up in the euphoria that the real estate market will keep going up for ever.

Nov 30, 2009 02:46 PM #51
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