Matrix Blog

Posts Tagged ‘Sub-Prime’

[SEC] Suntan-Enabled-Countrywide

June 5, 2009 | 12:27 am | |

Ok, so I admit, I do wonder about the “tan” and how Mozilo (not to be confused with Mozilla) was able to maintain it 365/24/7. But more important issues are front and center in his life right now.

Here’s the SEC press release on today’s announcement. (Can you imagine former SEC Chairman Christopher Cox taking such an action?)

Here’s the actual law suit.

Basically the SEC is going after Mozilo for assuring investors that they were a prime loan lender when they were actually pushing very high risk loans. In fact they were the #1 subprime lender.

Former Countrywide Financial Corp. Chief Executive Officer Angelo Mozilo and two other people were accused of fraud by the U.S. Securities and Exchange Commission following an investigation of the firm’s role in the subprime mortgage crisis.

“This is the tale of two companies,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Countrywide portrayed itself as underwriting mainly prime quality mortgages using high underwriting standards. But concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk. Angelo Mozilo privately described one Countrywide product as ‘toxic,’ and said another’s performance was so uncertain that Countrywide was ‘flying blind.'”

This has been brewing for a while.

He has a number of other cases as well, although Countrywide (BofA) is covering his legal expenses.

Mozilo, a defendant in at least 115 other civil cases, already has in place a defense team from Irell & Manella (which is being paid by Countrywide and its insurers). Irell partner David Siegel issued a prepared statement on the SEC charges.

I am getting the feeling that there will be a number of other former executives with big paydays for dubious reasons that are going to get their own press releases. The SEC is trying to get it’s groove back.

Carl W. Tobias, a law professor at University of Richmond, said he expected to see more such cases brought by the S.E.C. “The S.E.C. would like to have back the reputation that many feel it has lost as an aggressive enforcer,” Mr. Tobias said. “I wouldn’t be surprised to see other cases.”

I’m not advocating rampant litigation but the US can’t restore investor confidence if it doesn’t regulate and enforce laws on the books.

This is simply part of the de-leveraging process.

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[FIFO and Bottoming?] Glimmer Is More Popular Than Location These Days

May 6, 2009 | 12:52 am | |

There was a front page above the fold story in the New York Times this morning talking about the Sacramento, California housing market and how it seemed to be stabilizing. California is the poster child for subprime lending and was the subject of a sobering 60 Minutes special with James Grant last year.

Prices there are down by more than 50% from peak but sales activity is rising.

Could this mean that the housing market is stabilizing?

The idea pushed in the story is FIFO (first in first out). Markets first to experience weakness may be the first to improve. I don’t see this is a viable explanation on what to anticipate in other markets. The reasons the south and west fell first is from rampant speculation, largely absent in the midwest and northeast.

Perhaps in that specific location. California has been experiencing heavy sales volume as prices come into alignment with the market.

So I wouldn’t hold your breath after the spring market ends. Seasonality means demand is higher now, buoyed by record low mortgage rates and a slew of foreclosures pressing prices to lower levels – making affordability within sight of many.

In addition, there may be a new wave of mortgages in the near future as a result of the Senate’s politicalization of the housing issue with bankruptcy actions.

Still we can all use some glimmer in our lives. I prefer it over green shoots.

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B of A Goes Jumbo Just In Time, Hides Countrywide, Wants Identity (Mine)

March 24, 2009 | 12:05 am |

One of the biggest issues facing higher priced housing markets as of late, has been the absolute lack of jumbo mortgage financing. The TARP, TALF (and BARF – Bank Asset Relief Fund) only address mortgages within the parameters of Fannie Mae, ie conventional and jumbo conventional financing. In Manhattan that’s about $729k and with an average sales price just under $1.6M, a lot of homeowners are having great difficulty in obtaining mortgages with more than a 50% LTV.

This Bank of America announcement is great news for this sector of the housing market and may spark other interest in the sector.

Kenneth R. Harney’s must-read WaPo column “The Nation’s Housing” covers this announcement this week in his article: A Big Boost for Buyers Seeking Jumbo Loans:

Bank of America, the country’s largest mortgage lender, is rolling out a large program to finance jumbo loans between roughly $730,000 and $1.5 million, with fixed 30-year rates starting in the upper 5 percent range. The loans will be available through the bank’s retail network and also through its Countrywide Home Loans subsidiary. After April 27, Countrywide will be rebranded — shedding the name it has had since 1969 — and morph into Bank of America Home Loans. Bank of America acquired Countrywide, once one of the biggest subprime lenders, last year.

So Countrywide becomes Bank of America Home Loans.

Last week, Landsafe, the appraisal management company arm of Countrywide approached us to be approved as an appraiser. Their quality people have met with us many times but for some reason, the sales function didn’t allow our type of firm to connect because you had to rub elbows with loan reps at each of their offices. Crazy bad.

I believe that has all been changed or is being changed for the better.

However, although we are state certified and likely because of all their problems with appraisal quality, their efforts to right the wrongs effective screen out qualified appraisers. They wanted among other things:

  • our social security numbers
  • credit card numbers?
  • driver’s license #’s
  • date of birth
  • consumer reports containing illness records and medical information

Seemed pretty aggressive to us. What about identity theft concerns?

The irony of this sort of scrutiny is pretty powerful given past practices. Hopefully once things begin to run more smoothly and one hand knows what the other is doing, they’ll reconsider trying to attract qualified appraisers. We’ll wait patiently.

Good grief.

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Silver Lining Found: Affordability As Defined

March 9, 2009 | 11:50 am | |

While we are on the topic of suits, now we need to address the issue of silver linings.

One of the biggest rubs about housing during the run-up in prices was its lack of affordability. This key ingredient incentivized the creation of exotic loan products circa 2003-2004 and the proliferation of subprime and alt-A lending to keep loan volume moving as people dropped out of the hunt.

Yet right now, superficially – housing is the most affordable it has been in 40 years based on the relationship between:

  • personal income
  • housing prices
  • mortgage rates

The NYT’s Floyd Norris writes in his “Housing Market’s Upside: Affordability

In the summer of 2005, when funny-money mortgages were readily available and helping to drive up home prices, the national median sales price of a home was almost eight times as much as the average per capita after-tax income of Americans. But by this January, with incomes up and home prices down sharply, that multiple had fallen to less than five.

That may be little comfort for many homeowners who owe more than their homes are now worth, but it does indicate that home prices have fallen far enough, at least in many areas, to make them affordable.“You have a big debt overhang problem, but you don’t have a house price problem anymore,” said Robert J. Barbera, the chief economist of ITG, an advisory firm.

However, Norris qualifies that personal income stats are flakey, housing prices vary greatly by region and don’t reflect debt and mortgage rates don’t reflect the significantly higher bar for underwriting standards.

Still, it’s encouraging and this is a something to build on. It’s all we have at the moment.

Silly TV alert: Happen to happen onto Morning Joe this morning while surfing – I continue to be amazed how many don’t seem to understand the difference between Banks and Investment Banks. Guest Mike Barnacle had to actually explain to the co-host who didn’t seem to understand the difference. Good grief. Let’s just lump everyone in the same pile and fix ’em the same way.


Bank Failure Is An Option

March 8, 2009 | 11:30 pm |

Watch CBS Videos Online

60 Minutes had a good segment this Sunday called Your Bank Has Failed: What Happens Next? which was perfect timing because a number of people seem to be worried about their own banks failing.

I bank at one of the national firms in the headlines and, while the thought has crossed my mind, I still place a lot of faith in FDIC’s handling of the problem. Of course, the fact that FDIC could run out of money is a growing concern. Let’s hope our the message from elected officials doesn’t weaken confidence at a time of growing bank failures.

The clip discusses the too big to fail concept. In most cases, the failure of a small bank has limited if any impact on the depositors in those institutions, but it can wipe out investors in those institutions. Sheila Bair, FDIC chairman and one of the consistent voices of competency in Washington, suggested that lawmakers may consider some sort of cap on size – giving some definitions toward the “too big to fail” concept.

The larger exposure to mortgages over the past decade by most lenders in search of larger profits is a key factor here aside from the recessionary environment.

UPDATE – something I shared last week but thought I’d insert again because it was so good. Think banking, bailouts and “loser mortgagees.” Good grief.

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[Time to Blame] Because It Feels Good

February 14, 2009 | 12:02 pm | |

Time magazine is starting to kick some online posterior these days reversing a slow erosion into irrelevance. I think it started with Justin Fox of Curious Capital and their expansion online has been worth following. (No, I am not a shareholder).

The financial crisis we are enduring is systemic and there is no one specifically to blame because nearly everyone is to blame, including my 2 cats, the mailbox and my old ipod. Rather than individuals, I think its better to look at the problems by industry and agency.

Still, it feels good to point the finger.

Here’s my take on it as ranked by overall impact. Nothing scientific here.

  1. Rating Agencies
  2. Investment Banks [Tie]
  3. Subprime Lenders [Tie]
  4. SEC
  5. American Consumer
  6. Investors of CDOs
  7. Bush Administration [Tie]
  8. US Treasury [Tie]
  9. Congress [Tie]
  10. Fannie Mae/Freddie Mac
  11. Commercial Banks/Mortgage Banks
  12. Federal Reserve
  13. Mortgage Brokers [Tie]
  14. Real Estate Appraisers [Tie]
  15. Clinton Administration
  16. FDIC, OTS, OCC
  17. Real Estate Brokers [Tie]
  18. Developers [Tie]
  19. Big Media
  20. Blogosphere

Did I miss anyone?

In their 25 People to Blame for the Financial Crisis piece, Time readers can vote for their favorites.

To vote for your favorites to blame as listed by Time.

To see the rankings from the Time survey.

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TED’s Excellent Adventure

February 13, 2009 | 3:23 pm | |

Link to Bloomberg Chart

Ok, so this is my second Bill & Ted reference this week, but hey, Keanu Reeves starred, Matrix, etc.

I was having lunch with a good friend (other than the grief I regularly get about my bright shirt colors) the other day and he suggested I follow the TED spread more closely. While I have followed it, I’ve not been as fanatical about as many economists are. Perhaps I should be since, like the Fed’s Senior Loan Office survey, TED provides useful insight into the lending environment beyond mortgage rates.

I watched the CNBC special last night House of Cards, which was very good – not too much I hadn’t heard before but it did provide more clarity to the sequence of events and expanded my understanding of the roles Fannie/Freddie, Greenspan, CDOs and the rating agencies played in the risk/reward disconnect.

I also learned that the word Credit is derived from the Latin for Trust.

The TED spread (Treasury Eurodollar) for the uninitiated is the rate spread between treasury bills and and LIBOR.

Treasury bills are thought to represent risk free lending because there is the assumption that the US government will stand behind them. LIBOR represents the rate at which banks will lend to each other.

the difference in the two rates represents the “risk premium” of lending to a bank instead of to the U.S. government.

When the TED spread is low, banks are likely in good shape because banks feel nearly as confident lending to each other as if it were backed US government (The US has recently proved we’ll back pretty much back anything).

The spread is usually below 100 basis points (“1” on the chart). It reached a recent low of 20 basis points in early 2007, which in my view, shows a disconnect in the pricing risk since the subprime mortgage boom began to unravel in early 2006.

The spread spiked in in mid 2007 at the onset of the credit crunch (that was a summer to remember) and later spiked to 460 on October 10, 2008 as the wheels came off the financial system and became the new milestone or “tipping point” for the new housing market.

The spread has been contracting which is perhaps a sign that banks are starting to feel less panicked about each other. I think lending conditions will improve over the next few years, but there is a long way to go as measured by years rather than quarters.

Note: Another TED worth noting. A great resource for the intersection of Technology, Entertainment and Design.

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[100% US LTV] Why Housing Matters Within the Solution

February 11, 2009 | 11:46 am | |

In Q1 08 there was $22T in US residential real estate value and $15T in debt per the Fed (68% LTV). Based on CSI decline trends this year, its probably more like $18T in value now with a 83% LTV. If the prognosticators are accurate and we are halfway through the decline in housing values, it approach 100% LTV in the next two years.

Result: refi wiggle room, more vulnerability to resets (despite lower rates), higher probability of foreclosure and bankruptcy.

Translation: Bad.

There is a fascinating paper published by the San Francisco fed by John Krainer, a senior economist there that sheds more light on the linkage between mortgage lending and the stability of the banking system. Conventional (no pun intended) wisdom is the exclusive domain (no pun intended) of subprime and shoddy Alt-A and prime lending. Of course this is a significant component, but it is also about exposure to and dependence on mortgage lending in its relation to other loan products.

Krainer says

Over the past several decades, the commercial bank share of total real estate lending has slowly declined as other lenders have entered the market. At the same time, however, the percentage of total bank assets exposed to real estate has increased for banks of all sizes (see Figure 1). In the mid-1980s, for most banks, about 20% of total bank assets were exposed to real estate, and today the exposure is about 50% for small banks (under $500 million in year 2000-level dollars) and medium-sized banks ($500 million to $1 billion in 2000-level dollars) and just under 40% for large institutions. This basic trend is even more pronounced when considering real estate loans as a share of the total loan portfolio: banks now devote about three-quarters of their total loan portfolios to real estate lending.

The evidence suggests that spillovers of real estate shocks into bank performance are strongest for those types of loans where the collateral is some type of real estate. Spillover effects are strongest for residential loans and construction loans, followed by nonresidential loans. Importantly, all measured effects appear to be much stronger in the 1990s than in the 2000-2007 period. Given that we are currently in a period of declining house prices, it may be reasonable to assume that loan performance will behave more like the observable relationships from the 1990s.

The linkage between mortgage defaults and bank performance is widely understood. Small and mid sized banks were much more aggressive in residential lending since 1980. My guess is that the proliferation of mortgage backed securities in the early 1980s leveled the playing field allowing small banks to grow rapidly this way (remember Countrywide?).

With most of the large banks applying for TARP money, it makes me worry how many small banks didn’t have the legal know how to react as quickly to get on the receiving line of the bailout or more importantly, were a lower priority by the former administration’s Treasury department.

I haven’t digested the whole thing yet, but here is a speech by Fed Governor Elizabeth A. Duke at the Global Association of Risk Professionals’ Risk Management Convention in New York today: Stabilizing the Housing Market: Next Steps.

UPDATE: In response to the 24-7 whining and gloom/doom by many economists (and an appraiser I know), consumers should say: “Well, then what good are you if you can’t tell me what I should do”?


[Housing RX] It’s The Principal Of It

February 4, 2009 | 12:49 am |

A lot can be said for getting to the bottom of things by not propping them up. It’s looking more and more like toxic mortgages have to be dealt with before things begin to improve on the lending so that liquidity will return:

According to new research, loan modifications without write-downs will not lead to the end to the credit crisis. There has been a tremendous amount of negative press about modifications because in many cases, the payments are not much less, with the additional fees and principal moved to the end of the term.

In a fascinating research paper by economists Patrick Bajari, Sean Chu and Minjung Park called Quantifying the triggers of subprime mortgage defaults that explores what drives borrowers to default on their mortgage.

First, default amounts to the exercise of a put option that limits the downside risk when the value of a house falls below the value of the mortgage. Thus, one strand of research has focused on how net equity or home prices affect default rates. Other studies have examined the importance of financial frictions; households may be liquidity-constrained and temporarily unable to pay, especially if they have low credit quality.

The two reasons are equal in their impact on default rates. Here’s their influence on default rates:

Based on the importance of illiquidity as a driver of default, the observed deterioration in borrower pool quality is consistent with the notion that lenders loosened their underwriting standards over time, perhaps due to flaws in the securitisation process. Because lenders do not hold mortgages that they have securitised, they do not bear the consequences of risky mortgages at the point in time when they go bad, even as they continue to generate income by originating such loans. This agency problem, coupled with the general underestimation of default risks by financial markets at the height of housing boom, gave primary lenders an incentive to lower their lending standards. Thus, a key policy implication is that future waves of default can be made less likely by measures that reduce originator moral hazard.

Write downs in principal, ie mark to market, will need to enter the recovery equation soon.

Because we find empirical importance for both illiquidity and net equity as drivers of default, this suggests that effectively mitigating foreclosures would require either some combination of policies targeting each cause, or a single instrument that targets both. For example, loan modifications that merely increase payment affordability by extending loan lengths would not be very effective as a standalone measure, as they would leave borrowers’ equity positions unchanged. On the other hand, write-downs on loan principal amounts would address both causes simultaneously, with the reduction in loan size serving both to increase the borrower’s net equity as well as reduce monthly payments.


[Re-Writing Housing] Painting A Rosy Economy, Because Someone Has To

January 19, 2009 | 12:42 am | |

One of the parting gifts of the current administration is a rosy, upbeat assessment of the 2009 economy.

The Bush administration said the U.S. economy should emerge from its slump in the second half of the year — an optimistic forecast released days before President-elect Barack Obama inherits a recession and mammoth budget deficit.

“The actions taken by my administration in response to the financial crisis have laid the groundwork for a return to economic growth and job creation, and they are beginning to show some early results,” President George W. Bush said in a letter to Congress that accompanied the annual Economic Report of the President.

Not to delve too much into politics, but thats an incredibly disingenuous statement, isn’t it? It almost feels as though the outgoing administration is trying to accomplish two things:

  • lay claim for the recovery when it happens
  • set expectations higher than reasonable for the incoming administration

This is consistent with the missing ingredient in the current financial crisis: trust.

The just released Economic Report of the President provides an assessment of 2008 and the next few years. Of course, this report is being completed by the same organization and administration that completely missed the credit crunch. Do I sound cynical and bitter?

The NYT Economix blog, extracts a few salient data points.

The most telling chart for me was the tightening of lending standards. Its not about mortgage rates, its about underwriting.

Here are some highlights of the report in reference to housing – its a good overview.

In the summer of 2008, the disruptions in credit markets that began in 2007 worsened to the point that the global financial system was in crisis.
The magnitude of the crisis required an unprecedented response on the part of the Government to limit the extent of damage to the economy and restore stability to the financial system. Chapter 2 reviews the origins of the crisis, its consequences, the Government’s response, and discusses several policy challenges going forward. The key points of Chapter 2 are:

  • The roots of the current global financial crisis began in the late 1990s.
    A rapid increase in saving by developing countries (sometimes called the “global saving glut”) resulted in a large influx of capital to the United States and other industrialized countries, driving down the return on safe assets. The relatively low yield on safe assets likely encouraged inves- tors to look for higher yields from riskier assets, whose yields also went down. What turned out to be an underpricing of risk across a number of markets (housing, commercial real estate, and leveraged buyouts, among others) in the United States and abroad, and an uncertainty about how this risk was distributed throughout the global financial system, set the stage for subsequent financial distress.
  • The influx of inexpensive capital helped finance a housing boom. House
    prices appreciated rapidly earlier in this decade, and building increased to well-above historic levels. Eventually, house prices began to decline with this glut in housing supply.
  • Considerable innovations in housing finance—the growth of subprime
    mortgages and the expansion of the market for assets backed by mortgages—helped fuel the housing boom. Those innovations were often beneficial, helping to make home ownership more affordable and accessible, but excesses set the stage for later losses.
  • The declining value of mortgage-related assets has had a disproportionate
    effect on the financial sector because a large fraction of mortgage-related assets are held by banks, investment banks, and other highly levered financial institutions. The combination of leverage (the use of borrowed funds) and, in particular, a reliance on short-term funding made these institutions (both in the United States and abroad) vulnerable to large mortgage losses.
  • Vulnerable institutions failed, and others nearly failed. The remaining
    institutions pulled back from extending credit to each other, and inter- bank lending rates increased to unprecedented levels. The effects of the crisis were most visible in the financial sector, but the impact and consequences of the crisis are being felt by households, businesses, and governments throughout the world.
  • The U.S. Government has undertaken a historic effort to address the
    underlying problems behind the freeze in the credit markets. These problems, the subject of much of this chapter, are a sudden increase in the desire for liquidity, a massive reassessment of risk, and a solvency crisis for many systemically important institutions. The Government has worked to preserve the stability of the overall financial system by preventing the disorderly failures of important financial institutions; taken unprecedented action to boost liquidity in short-term funding markets; provided substantial new protections for consumers, businesses, and investors; and cooperated closely with its international partners.
  • Looking forward, the global financial crisis presents several additional
    challenges for the U.S. Government. Among them are the need to modernize financial regulation, unwind temporary programs in an orderly fashion, and develop long-term solutions for the government- sponsored enterprises (privately-owned, publicly-chartered entities) Fannie Mae and Freddie Mac.


[Potterville Rocks!] Lessons Learned From “It’s A Wonderful Life”

December 23, 2008 | 12:09 pm | |

It’s funny how the rapidly changing economic scene changes our view on even the most basic things. A few years ago, it would be hard to imagine anyone seeing Frank Capra’s It’s a Wonderful Life as anything more than a feelgood holiday classic movie. It’s always been a favorite of mine to watch this time of year.

Here’s a recessionary take on current lending as it relates to Potter v. Bailey.

New York Times: Wonderful? Sorry, George, It’s a Pitiful, Dreadful Life

Here’s the thing about Pottersville that struck me when I was 15: It looks like much more fun than stultifying Bedford Falls — the women are hot, the music swings, and the fun times go on all night. If anything, Pottersville captures just the type of excitement George had long been seeking.

And what about that banking issue? When he returns to the “real” Bedford Falls, George is saved by his friends, who open their wallets to cover an $8,000 shortfall at his savings and loan brought about when the evil Mr. Potter snatched a deposit mislaid by George’s idiot uncle, Billy (Thomas Mitchell).

But isn’t George still liable for the missing funds, even if he has made restitution? I mean, if someone robs a bank, and then gives the money back, that person still robbed the bank, right?

I checked my theory with Frank J. Clark, the district attorney for Erie County upstate, where, as far as I can tell, the fictional Bedford Falls is set. He thought it over, and then agreed: George would still face prosecution and possible prison time.

“In terms of the theft, sure, you take the money and put it back, you still committed the larceny,” he said. “By giving the money back, you have mitigated in large measure what the sentence might be, but you are still technically guilty of the offense.”

Conde Nast Portfolio: George Bailey, Subprime Lender

We’re not saying that Bailey versus Potter is a perfect allegory for today’s credit crunch; Angelo Mozilo and his predatory buddies are no latter-day George Baileys, “starry-eyed dreamers” giving up their own riches to give the Ernie Bishops of the world a chance at the American Dream.

And the majority of the bad loans that have crippled our credit markets were not made to folks like Ernie Bishop, working tirelessly to put a roof over their families’ heads. A fair few of those loans enabled bad real estate investments by people who had no business buying or building homes as big as they did.

But consider this: Perhaps Mr. Potter wasn’t just a heartless Scrooge. Perhaps Mr. Potter, in the absence of sufficient regulatory oversight, was the one voice of sanity keeping the good people of Bedford Falls from over-leveraging themselves.

Salon: All hail Pottersville! This article is from 2001, also written during a recession.

But even a master sometimes flubs a brushstroke, and there is a glaring flaw in Capra’s great canvas.

I refer, of course, to Pottersville.

In Capra’s Tale of Two Cities, Pottersville is the Bad Place. It’s the demonic foil to Bedford Falls, the sweet, Norman Rockwell-like town in which George grows up. Named after the evil Mr. Potter, Pottersville is the setting for George’s brief, nightmarish trip through a world in which he never existed. In that alternative universe, Potter has triumphed, and we are intended to shudder in horror at the sinful city he has spawned — a kind of combo pack of Sodom, Gomorrah, Times Square in 1972, Tokyo’s hostess district, San Francisco’s Barbary Coast ca. 1884 and one of those demon-infested burgs dimly visible in the background of a Hieronymus Bosch painting.

There’s just one problem: Pottersville rocks!

Clearly, we see things the way we want to see them and right now, it’s probably not helping too much. Conservative lending practices continue to damage the very collateral they are intended to protect. Consumers won’t buy because they are worried about their jobs, which in turn causes more businesses to fail.

The solution?

Just watch the movie as intended and have a wonderful life holiday.

I’ll be back next week.


[Don’t Look Back In Anger?] A Rating Agency Expands Housing Metrics

December 17, 2008 | 12:00 am |

The US consumer doesn’t seem to want to fight like Oasis, although Oasis ends up making better more informed music…

Here’s a strange press release by Fitch, one of the big three rating agencies along with Moody’s and S&P.

Fitch Ratings has formalized the expanded housing-related metrics used in its public sector rating process and will continue to refine these data as market conditions warrant.

It costs $275 to get to see it.

Ok, so we are getting insight from one of the big three , although Fitch is believed to be the most conservative of the three. The ratings agencies sharply downgraded billions of highly rated mortgage-backed bonds just after the credit crunch began in July 2007. I seem to recall that their models didn’t have the right data.

Fitch believes the housing downturn will be more prolonged and acute in regions that experienced the most dramatic home price appreciation and new residential development since 2000 and in regions with high exposure to sub-prime and option ARMs mortgages.

What about credibility?

The new rules by SEC to address conflict of interest could be a start.

The three firms that dominate the $5 billion-a-year industry — Standard & Poor’s, Moody’s Investors Service and Fitch Ratings — have been widely criticized for failing to identify risks in subprime mortgage investments, whose collapse helped set off the global financial crisis.

The rating agencies had to downgrade thousands of securities backed by mortgages as home-loan delinquencies have soared and the value of those investments plummeted. The downgrades have contributed to hundreds of billions in losses and writedowns at major banks and investment firms.

The agencies are crucial financial gatekeepers, issuing ratings on the creditworthiness of public companies and securities. Their grades can be key factors in determining a company’s ability to raise or borrow money, and at what cost which securities will be purchased by banks, mutual funds, state pension funds or local governments.

These agencies need to do a lot of credibility-building going forward. I can’t help but wonder why these agencies aren’t receiving more scrutiny. How will investor confidence be restored when the ratings they relied on were inadequate?

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