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Investments

Smaller RMBS rating agencies shine in recent deals

S&P, Moody's, Fitch used to dominate private-label mortgage bonds. Not anymore.

October 18, 2013
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Private-label residential mortgage-backed securitization is a sector that continues to claw its way out of the depth of the housing meltdown, attempting to reboot its presence in the industry.

Shellpoint Partners is one of the recent issuers to enter the space, requesting pre-ratings for its second deal of the year Thursday.

While the deal is expected to receive ‘AAA’ rating, as a regular investments reporter, it’s hard to overlook that the top three credit rating agencies were not asked to rate the deal — so far, only DBRS, Standard & Poor's and Kroll Bond Ratings published info on Shellpoint.

After reaching out to Fitch Ratings and Moody’s Investors Service, both confirmed to us that they were not asked to rate the deal.

So naturally, I had to figure out if this dramatic shift in the investment space really matters to investors.

Institutional investors, such a banking institutions and insurance companies, won’t even touch the bonds in a deal if at least one of the big three has issued credit ratings on the transaction.

The big three hold a standard that the newer agencies do not in the industry: experience.

I’m not talking about experience in understanding the market because many of the staff members at the other credit rating agencies have seniority far beyond those at the big three. When discussing experience, I’m referring to historical market credibility.

Fitch, S&P and Moody’s are household names to investors in the RMBS space so these institutions’ opinions are extremely valued.

On the reverse, the market is starting to see a growing pool of more boutique investors completely disregard all credit rating agencies and their pre-rated reports in favor of in-house due diligence.

Today, many investors issue their own prepayment reports, break down the mortgage bonds within a transaction and draw their own conclusions as to whether the deal will draw enough yields. So for them who's rating what doesn't have a meaningful impact.

Still it's nice the market share is being spread around more than it used to be.