Two House Committee on Financial Services
hearings Wednesday focused on overhauling financial products at a time when mortgage lenders and credit-rating agencies (CRAs) that assign ratings to securitized mortgages face criticism over their roles in the housing market collapse.
Lenders often face criticism for marketing and selling unsafe and unsound mortgage products to borrowers that did not fully understand the terms and risks. When the unsuitable mortgages were packaged into securities, CRAs assigned ratings to them based on expected performance.
The mortgages failed to perform as the industry expected, and the residential mortgage-backed securities (RMBS) collateralized by those loans faced sweeping downgrades. The borrowers lost homes in the transaction, and investors lost money — and confidence.
The House hearings represent the latest move by lawmakers to consider legislation that would weave stricter regulation of the securitization market and sweeping reform of the financial services sector.
The full Committee early Wednesday heard testimony from banking industry professionals on the proposed Consumer Financial Protection Agency (CFPA), part of the Administration's proposals for sweeping financial regulatory reform
Despite a broad sense of support for the protection of consumer interests among the witnesses, American Bankers Association
(ABA) president and CEO Edward Yingling urged lawmakers to consider community banks that did not contribute to the causes of the financial crisis. Imposing stricter regulation of community bank business and, potentially, the types of products those banks can offer, would inhibit mortgage lending at a time when credit is already tight.
Yingling supported the creation of risk oversight agency, a strong resolution system for financial firms and more robust regulation of derivatives, hedge funds and mortgage brokers. He supported reform in the need for a more direct focus by federal regulators on consumer issues and the need for more enforcement on non-banks.
He also called for major change to create additional enforcement of banks and credit unions and to increase consumer regulatory powers, according to his prepared remarks.
Industry players on the securitization side of the mortgage market had their say Wednesday afternoon as a capital markets subcommittee heard testimony regarding the reforming of CRAs.
The CRA hearing comes at a time when the House is considering legislation by Rep. Paul Kanjorski (D-Pa.). The Accountability and Transparency in Ratings Agency Act
would enforce among other regulations a "collective liability" of the rating agencies to provide to one another information forming the basis of a rating action.
Raymond McDaniel, chairman and CEO of Moody's Corp.
, summed up the testimony of the CRAs present at the hearing when he said Moody's welcomes reform efforts "likely to reinforce high quality ratings and improve market transparency without intruding on the independence of rating opinion content."
Some of the legislation's proposals not only fail to address the fundamental problems, he added in prepared remarks, but may also have the opposite effect and reduce transparency and the availability of diverse, independent opinions.
Stephen Joynt, president and CEO of Fitch Inc.
, parent company of Fitch Ratings
, presented prepared remarks opposing the legislation's provision for "collective liability."
"Much of the information is our own (reflecting our own proprietary intellectual property) or from third-party information vendors with whom we have contracted and do not have redistribution agreements," Joynt said. "We cannot turn that over to every other agency. The idea that we should be responsible for verifying other NRSROs’ information and be liable for the actions of another rating agency even if we did not rate the bond is very problematic."
Robert Dobilas, president and CEO of Realpoint
, a rating agency, indicated his concern over the proposal to make all Nationally Recognized Statistical Rating Organizations (NRSROs) "jointly liable" for a civil judgment if the agency facing the suit cannot satisfy the judgment.
"This is an unprecedented concept with respect to the inter-relationship of competing companies and it is particularly inappropriate for smaller companies like Realpoint to be guarantors for our multi-billion dollar competitors," Dobilas said in prepared testimony. "A related proposal essentially would require every agency to review and approve every other NRSRO’s work. To do so, each agency would need to be an expert in every field and every methodology."
The commercial mortgage sector, which is experiencing a credit crisis of its own, would also be affected by the CRA reform legislation. And market participants that believe proposed legislation would hamper the goal of the securitized credit markets -- to provide liquidity for private lending -- are speaking up.
The Commercial Mortgage Securities Association
(CMSA) issued a statement opposing a proposal to require CRAs to be differentiated for certain types of financial products. Differentiation, or the use of "symbology" in ratings, is overly simplistic and provides little value or information about the credit ratings, CMSA said.
"In fact, a broad coalition of market participants – including issuers, investors, and borrowers seeking access to credit – remain overwhelming opposed to differentiation because it will only serve to increase confusion and implementation costs, while decreasing confidence and certainty regarding ratings," CMSA said in the statement. "Such effects would, in turn, create market volatility and undermine investor confidence and liquidity, which could exacerbate the current constraints on borrowers’ access to capital."
Write to Diana Golobay