Credit Rating Agencies and the Mortgage Crisis

Recently in class we have been discussing a lot about credit rating agencies and the role they play. These companies are responsible for assigning credit ratings for issuers of certain types of debt obligations as well as debt instruments themselves. A credit rating assigned takes into consideration a variety of aspects about the issuer’s credit worthiness, and thus affects the interest rate applied to the particular security being issued. Some of the main credit rating agencies within the U.S. include Moody’s, Standard and Poor’s, and A.M. Best.

With the current crisis going on in the U.S. economy, a great deal of attention has been focused upon the loans given to subprime borrowers for mortgages. Recently many people have been most concerned with who is really responsible for all the mortgage problems in the economy today. Some have argued that mortgage brokers are to blame, for pursuing predatory lending practices. While others have blamed the mortgage problems on the actual home owners who accepted loans they could not afford. Still others have pointed the finger at the SEC for easing lending regulations and investment banks for creating defaulting securities. Though, it seems like the most common answer for who to blame is now the credit rating agencies, who have been irresponsible in giving ratings to borrowers.

I was interested in this topic, so I researched a little more about it and came upon an article by the Business Times Online, titled “Credit Rating Agencies Admit Ranking Many Mortgage-Related Securities Too High.” This article goes into detail about how the CRAs have now accepted some responsibility for the mortgage crisis, and have said that they have assigned ratings on many mortgage-related securities that are far too high. The article also explains that one of the main problems was that many assumptions used in preparing the ratings on mortgage-backed securities did not work because of the extreme economic and financial situation the United States is in. The CRAs are now looking for a new way to create these ratings, since it is evident that the current system is quite inefficient. In fact, the article mentions that recently the three big agencies agreed to work with New York attorney-general to overhaul how they evaluate investments backed by high-risk debt. This is a start to fixing the current problems in this system.

I agree with the article that something needs to be done to make changes to the way the ratings are currently being done by the CRAs. Clearly, many ratings have been too high as seen by the high level of default. I think that they definitely need to look a little bit deeper into the borrowers they are assigning ratings for, and they need to better determine what aspects affect the repayment of the debt. Also, I think another major problem, which was briefly brought up in the article, is the whole idea of this system. The credit ratings agencies are competing for their business and being paid by the debt issuers. This is a major problem, considering it prevents the analysts from putting the investors’ interests first. I think it may be a poor idea to place the blame for the whole mortgage crisis upon one entity, but I do think that it is clear that the credit ratings agencies did play some role in this whole mortgage disaster we currently face.

The Subprime Mortgage Crisis Info

Wikipedia Definition of Credit Rating Agencies

Business Times Online CRA Article