The 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 and real estate market commentator
www.BluefoxToday.com - syndicated mortgage and real estate blog
eskokiuru@gmail.com
My cell: 702-499-1006
Esko -
I have always been of the mind the housing crisis was caused be hard-working Realtors and Mortgage Brokers.
Wall street firms and credit rating agencies were just innocent parties which got caught up in circumstances beyond their control. Poor Wall street.
- Just Kidding. : )
Thanks for the post.
Esko, there is a lot of merit to these lawsuits, but there was so much greed going on that I don't know if these organization would not have still invested in MBS even if the rating were different.
Don't blame Wall Street; corporations were just responding to the demands of consumers who wanted more home than they could afford, with no money down, so they could live beyond their means.
Thank goodness someone has finally stepped up to the plate and filed suit against this unpresidented scam. The notion that every American who has a mortgage will be able to fully pay off that mortgage free and clear in the alloteted time is halfbrained... and these people run our financial system? A++ we package crap and sell it good as gold!
"why Washington mortgage industry regulators are still sitting on the sidelines"
Probably because they are in the same boat with the rest of them. Be still... be silent and maybe no one will notice! I think we have witnessed quite possibly the greatest cash heist in the history of mankind.
I wonder if we will ever get to the bottom of this. If you think for a moment that there are any innocent bystanders, then think again. There is collusion and there is corruption, Realtors, mortgage brokers, and the homeowners are merely pawns in this scam. These high rollers are the masters of deceit; and when they get full control of our government, we are doomed!
I wish folks would just stop pointing the blame. It's done and over. Now focus energy on fixing it.
good post
Tony
Lawsuits to begin now. . ..it will probably drag on the recovery.
Can you take GREED to court?
The problem with the regulators just waking up is that of course they will now over-regulate and strangle the recovery. And a big part of the problem in the first place was Congressional pressure for easier mortgage qualification.
Esko, I believe there will be law suits flying for many years related the crash of the real estate market. Selling A rates MBSs when they were no where close to be being that safe WAS a crime.
This is a subject that still turns my stomach. It was all a house of cards and the very agencies that you think you would be able to rely upon did not do a very good job. From triple-A to bust in a year or so? Not very good work.
I had heard about this a couple years ago. One of the large companies that rhymes with nationwide, but now acquired by a large American Bank, had many packages that were required to be underwritten by S&P and found to be more along the lines of A- securities. Threats were made and the ratings were upgraded based on sheer volume this company was packaging. Of course this was just rumor...but was it?
I agree, the huge unanswered problem with the whole crisis isn't just poor loans with high default rates, the lenders knew what they were doing and they wrote these questionable loans. It was the guys on the back end who took a C loan and rated it A to fool other investors into buying junk and paying a premium for it. That's why this problem was so widespread, why pension plans took a bath, because they thought they were buying a traditional MBS product that for years was a safe investment and instead bought risky paper. the rating companies who enabled that should be censured or they'll do it again
As Pink Floyd appropriately sang, "all in all, it's just another brick in the wall".
Lots of blame to go around. Will anything really be done...probably not. Washington is too inept, the markets are too greedy because investors are demanding more and more... ("yes "greed" in the right circumstances can be good) and we are moving so fast that this is pase'... we will learn a little and promptly forget half....
This fraud was a key piece of the puzzle. These guys need to be prosecuted.
Then they need to go after places like Goldman Sacs who were making big fees by selling this stuff at the same time they were shorting the things because they knew it was all junk.
The same thing is happening at the FDIC. They are telling everyone that the banks are safe and no one should worry. We don't need more regulation. We need regulators who are willing to apply the current laws. Unfortunately, it seems like most have been captured by the people they are supposed to be regulating.
the ratings were a joke, BUT those purchasing them should have been able to see this. they wanted to believe that the pie in the sky ratings were accurate. they knew they weren't and if they didn't they should have never been put in a position to buy this trash in the first place.
Hi Esko -- Scary stuff when one cannot have the slightest faith in the integrity of such a huge industy. Very important post and one that I hope gets front page coverage everywhere.
I know there is alot of talk on recovery but I think the housing mess , mortgages etc is probably half way there is still so much garbage and they way business is done etc etc, but great post
Esko - I suspect that there isn't any part of the mortgage industry that is going to be unscathed when this is all over. We are hearing of mortgage brokers who are being called upon to repurchase loans kicked back from FannieMae to the lenders and back to mortgage brokers - even where the mortgage brokers used lender approved third party underwriters. I suspect that we will see fewer and fewer mortgage brokers standing when this is all over... same with bond rating companies... PMI carriers... as the lawsuits kick in.
Esko - While yes the rating agencies played a big part. I feel that the recent crisis was the culmination of the perfect storm of greed on several fronts. Bad as it was and still is, I hope we move on and don't spend too much time and expense on the past and looking for a specific pound of flesh.
These rating agencies certainly had a hand in this mess. It should be easy to prove that at the very least they were incompetent.
Hi Esko. The average man on the street does not even understand the criteria on which these ratings of any of the three use to make their calls.
Hello Esko! I believe lobbies have chokeholds on everything political and they drive the agenda that is forced down our throats rather than solving our problems! Another excellent post my Vegas Friend!
The rating agencies need to be held accountable for their A+ ratings on this crap that they were rating. They had to know that it was junk but they kept getting so much business and so many fees that they were addicted to the $.
BTW, It is amazing that consumers can still buy a home with only 3.5% down after all that has gone down!
It is my understanding, which is very limited, that the peddlers of these Mortgage Backed Securities never considered what would happen if homes lost value, they were "banking" on the housing values either being stable or going up. When the housing values started to decline, that is when the economy started in the decline.
Joel,
Exactly. Wall Street needs to be spanked hard.
George,
Herd mentality obviously overwhelmed investors, to their own detriment.
Kyle,
That's one way to look at it.
Chris,
They sure pulled off something memorable.
Lloyd,
You make a point that makes the bell ring.
Tony,
If nothing is done now, it'll happen real soon again.
Fernando,
We need to invent a greed court.
Brian,
Hopefully regulators will wake up and stay reasonable.
Bryant,
The rating system needs a thorough overhaul. Let's see if Congress has the guts for it.
Frank,
A house of cards is a pretty accurate description.
Stephanie,
Sometimes rumors turn out to be so true.
Jason,
That's it. The raters really took many investors for a cool ride.
Joe,
There you go.
Perrin,
Controlled greed, if such a thing exists, is okay. The kind we just experienced spells disaster.
Tim,
Although rating MBS was a small slice of the whole pie, it played a key role in creating this mess.
Jay,
You'd think those "sophisticated" investors would've smelled a rat, but somehow most didn't.
Chris,
It's puzzling that regulators allow ratings agencies to operate like this.
Gene,
Thanks for stopping by.
Ryan,
Real estate lawyers are having a field day with mess for a long time.
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.
Wayne,
Their role was rather obscure, but very important.
Gary,
Right, this segment of the mortgage industry is ..., let's say technical.
Renee,
Special interests roaming Washington sure have a finger on the pulse and protect their clients no matter what.
John and Lisa,
It's refreshing to see that Ohio is going after them now.
Sybil,
True, pretty much everybody got caught up in the euphoria that the real estate market will keep going up for ever.