Radian Group Inc. recently asked Fitch ratings to “immediately” withdraw all of its ratings of the company after the rating agency downgraded the mortgage insurer’s financial strength last week. Radian characterized the ratings drop as “inconsistent” and said the downgrades by Fitch created “unmerited uncertainty” regarding the insurer’s capital strength. The company said it intended to operate using the ratings provided by Standard and Poor’s and Moody’s Investors Service — neither of which downgraded the company and both of which Radian said it was “pleased” with. Radian also said that Fitch’s ratings model was different than the other two rating agencies, a difference that it felt led to an uneccessary downgrade. Fitch fired back its own missive in the press late last week, saying that while Radian has a right to request withdrawal, such a decision is “ultimately left to Fitch.” From Fitch’s press release:
Fitch believes the rating actions it has taken on Radian Asset are based on its independent views of Radian Asset’s financial condition, including not only Radian Asset’s performance on Fitch’s capital model Matrix, but also numerous qualitative factors with respect to Radian Asset’s business profile and franchise value. Further, based on the high level of investor interest in both the mortgage insurance and financial guaranty industries, Fitch does not plan to withdraw the ratings at the present time, but will instead monitor investor interest and make a decision with respect to Radian’s request at a further date, based on market feedback. That said, at some point if Fitch believes it no longer has access to adequate public and non-public information to credibly maintain the ratings, Fitch will withdraw the ratings of the company regardless of investor interest.
It’s clear that Radian has no intention of working with Fitch — at least from what I’ve read in the company’s own press statement — so it seems likely at this point that Fitch will have no choice but to withdraw the rating at some point. The row between rating agency and rating subject here highlights the conflict of interest that often exists in the ratings game; outfits like Radian can choose to work with the agency it feels has the “more consistent” model for its own business interests. (Mainly, that interest is making money.) Whether or not Radian’s assertions have merit — they may or may not — isn’t the point. And if Fitch’s scoring model is dramatically more conservative than any other rating agency’s, then Fitch’s ratings across the entire mortgage insurance universe should also be characterisitically and uniformly more conservative. It shouldn’t matter as much as Radian seems to think it does. What’s taking place here is, in my eyes, no different than what Moody’s claims it has been facing in the CMBS market, where its comparatively more conservative rating criteria has had everyone running elsewhere to avoid eating up margins with overcollateralization that other agencies didn’t require.