AlyssaKatz.com

Reality-based ratings agencies

In the Washington Post, Ezra Klein takes on the vital question of ratings agency reform. He contends that it’s not enough to restructure the payment system so that investors, not securities issuers, are the ones paying for the ratings – and that this calls for a public utility-type system:

Buyers need to fund the ratings. But since there’s no particular buyer anymore — instead, the information is public — then the public needs to be the purchaser, turning the rating agencies into something akin to public utilities.

A good idea, just one that stops short of the fundamental issue that needs to be tackled whether the ratings agencies are public or private, utilities or corporations, or paid for by investment banks or investors. “The information is public” in theory only – requirements for data and disclosure on mortgages and mortgage-backed securities is pitifully thin. The SEC expanded them in 2005 or 6, adding a helpful lode of detail about stuff like borrowers’ credit ratings, debt-to-income ratios, and other risk factors  but right now there’s simply no way for an investor to fully understand the underwriting of mortgage-backed securities or derivatives, because they don’t have anything close to full information. The securities industry, through the American Securitization Forum, is developing its own disclosure regimen that deliberately keeps public information about what’s in the securities sausage limited.

What’s ultimately needed is a 21st century Home Mortgage Disclosure Act. HMDA, a relic of 1975, gathers extremely basic info at the census tract level, broken down by race and a few characteristics of the loans themselves – are they for a home purchase, refinance, renovation or whatever. Now just think about all the data that could be part of a 2009 HMDA, and how much that sunlight would serve investors and the public alike. Without violating the privacy of borrowers or restraining the business of bankers a public database could include home sales prices, links to images of deeds and other property records, info on patterns and density of high-risk loans, so investors can see what’s in the sausage and watchdogs can be alert to patterns of discriminatory, fraudulent and other bad lending – exactly what HMDA was designed to do in the first place. Whether public or private, the ratings agencies need outside accountability that only public, transparent information can provide.

September 22nd, 2009 | Tags: Ezra Klein, HMDA, ratings agencies
Posted in A Lot More | No Comments »