Professional Home Staging and Photography Blog: MBS, or mortgage-backed securities, rating agencies under renewed squeeze

MBS, or mortgage-backed securities, rating agencies under renewed squeeze

MBS rating agencies under renewed squeezeThe 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.



Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst - syndicated mortgage, housing and property management blog
My cell: 702-499-1006

Comment balloon 50 commentsEsko Kiuru • November 28 2009 01:35PM


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.

Posted by Joel Prince, Hixson/Soddy Real Estate Broker (The Principle Group, Inc) about 9 years ago

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.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) about 9 years ago

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.

Posted by Aaron Vaughn | Builder | Investor, If the deal makes sense, the cash will follow. (Conifer Homes) about 9 years ago

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.

Posted by Chris Brunner, GreatFX Printing (GreatFX Printing) about 9 years ago

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! 

Posted by C. Lloyd McKenzie, Living Albuquerque about 9 years ago

I wish folks would just stop pointing the blame. It's done and over. Now focus energy on fixing it.

good post


Posted by Tony Grego, 317-663-4173 #1 Trade Association for Alternative Inv (REISA - 317-663-4173) about 9 years ago

Lawsuits to begin now. . will probably drag on the recovery. 

Can you take GREED to court? 

Posted by Fernando Herboso - Broker for Maxus Realty Group, 301-246-0001 Serving Maryland, DC and Northern VA (Maxus Realty Group - Broker 301-246-0001) about 9 years ago

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.

Posted by Brian Schulman, Lancaster County PA RealEstate Expert 717-951-5552 (Coldwell Banker Residential Brokerage, Lancaster PA) about 9 years ago

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.

Posted by Bryant Tutas, Selling Florida one home at a time (Tutas Towne Realty, Inc and Garden Views Realty, LLC) about 9 years ago

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.

Posted by Frank Castaldini, Realtor - Homes for Sale in San Francisco (Compass) about 9 years ago

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?

Posted by Stephanie Reynolds, East County San Diego Homes 619-838-4408 (Integrity First Financial Group, Inc. ) about 9 years ago

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

Posted by Jason Burkholder, Sales Manager, Assoc. Broker, Realtor, e-Pro (Weichert, Realtors - Engle and Hambright) about 9 years ago

As Pink Floyd appropriately sang, "all in all, it's just another brick in the wall".

Posted by Joe Pryor, REALTOR® - Oklahoma Investment Properties (The Virtual Real Estate Team) about 9 years ago

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....

Posted by J Perrin Cornell, Broker, ABR, VAMRES (Century 21 Exclusively, Wenatchee, WA) about 9 years ago

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.

Posted by Tim Maitski, Truth, Excellence and a Good Deal (Atlanta Communities Real Estate Brokerage) about 9 years ago

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.

Posted by Jay Beckingham, Seniors ROCK! ( American Advisors Group...AAG) about 9 years ago

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.

Posted by Chris Olsen, Broker Owner Cleveland Ohio Real Estate (Olsen Ziegler Realty) about 9 years ago

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

Posted by Gene perez (Greater Mortgage Solutions & Valley Hills Realty ) about 9 years ago

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.

Posted by Ryan Shaughnessy, Broker/Attorney - Your Lafayette Square Real Estate Partner (PREA Signature Realty - about 9 years ago

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.

Posted by Greg Miller, Florida Home Loans - Conventional,FHA,USDA,VA (Ruoff Home Mortgage ) about 9 years ago

These rating agencies certainly had a hand in this mess. It should be easy to prove that at the very least they were incompetent.

Posted by Wayne B. Pruner, Tigard Oregon Homes for Sale, Realtor, GRI (Oregon First) about 9 years ago

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.

Posted by Gary Woltal, Assoc. Broker Realtor SFR Dallas Ft. Worth (Keller Williams Realty) about 9 years ago

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!

Posted by Renée Donohue~Home Photography, Western Michigan Real Estate Photographer (Savvy Home Pix) about 9 years ago

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!

Posted by John and Lisa Marker (RE/MAX Dream Properties) about 9 years ago

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.

Posted by Sybil Campbell, REALTOR® ABR, SFR, SRES Williamsburg, Virginia (Long and Foster REALTORS® 5234 Monticello Ave Williamsburg, Virginia) about 9 years ago


Exactly. Wall Street needs to be spanked hard.

Posted by Esko Kiuru about 9 years ago


Herd mentality obviously overwhelmed investors, to their own detriment. 

Posted by Esko Kiuru about 9 years ago


That's one way to look at it.

Posted by Esko Kiuru about 9 years ago


They sure pulled off something memorable.

Posted by Esko Kiuru about 9 years ago


You make a point that makes the bell ring.

Posted by Esko Kiuru about 9 years ago


If nothing is done now, it'll happen real soon again.

Posted by Esko Kiuru about 9 years ago


We need to invent a greed court.

Posted by Esko Kiuru about 9 years ago


Hopefully regulators will wake up and stay reasonable.

Posted by Esko Kiuru about 9 years ago


The rating system needs a thorough overhaul. Let's see if Congress has the guts for it.  

Posted by Esko Kiuru about 9 years ago


A house of cards is a pretty accurate description.

Posted by Esko Kiuru about 9 years ago


Sometimes rumors turn out to be so true.

Posted by Esko Kiuru about 9 years ago


That's it. The raters really took many investors for a cool ride.

Posted by Esko Kiuru about 9 years ago


There you go.

Posted by Esko Kiuru about 9 years ago


Controlled greed, if such a thing exists, is okay. The kind we just experienced spells disaster.

Posted by Esko Kiuru about 9 years ago


Although rating MBS was a small slice of the whole pie, it played a key role in creating this mess.

Posted by Esko Kiuru about 9 years ago


You'd think those "sophisticated" investors would've smelled a rat, but somehow most didn't.

Posted by Esko Kiuru about 9 years ago


It's puzzling that regulators allow ratings agencies to operate like this.

Posted by Esko Kiuru about 9 years ago


Thanks for stopping by.

Posted by Esko Kiuru about 9 years ago


Real estate lawyers are having a field day with mess for a long time.

Posted by Esko Kiuru about 9 years ago


I think we need to look at what went wrong and then fix it, otherwise we'll be back to square one real soon. 

Posted by Esko Kiuru about 9 years ago


Their role was rather obscure, but very important.

Posted by Esko Kiuru about 9 years ago


Right, this segment of the mortgage industry is ..., let's say technical.

Posted by Esko Kiuru about 9 years ago


Special interests roaming Washington sure have a finger on the pulse and protect their clients no matter what.

Posted by Esko Kiuru about 9 years ago

John and Lisa,

It's refreshing to see that Ohio is going after them now.

Posted by Esko Kiuru about 9 years ago


True, pretty much everybody got caught up in the euphoria that the real estate market will keep going up for ever.

Posted by Esko Kiuru about 9 years ago