NYS AG IMPOSES CHANGES ON RATING AGENCY PRACTICES FOR RMBS
The New York State Attorney General has reached an agreement with the three major credit rating agencies to change the way the agencies rate residential mortgage backed securities. The agreement requires a new fee-for-service structure whereby an investment bank must compensate a rating agency whether or not it ultimately rates the bonds. The rating agencies will also require that the investment banks make representations and warranties about the underlying loans and disclose due diligence information. The credit rating agencies will disclose the due diligence criteria on their website. The reforms are intended to increase transparency and minimize the conflicts of interest in the current system where the credit rating agencies compete for business.
OUR TAKE: These “reforms” are really aimed at the investment banks that sponsor the RMBS offerings. The NYS Attorney General is using the rating agencies to enforce industry-wide fee and disclosure standards that the rating agencies could not implement without broader government intervention. We suspect that the costs to obtain the ratings will increase but that the new independence will improve the results.