Bloomberg News

Fitch to Release Mortgage Models as Ranieri’s Lender Complains

January 24, 2012

Jan. 24 (Bloomberg) -- Fitch Ratings is planning to share its grading model for U.S. home-loan bonds with issuers and investors as industry pioneer Lewis Ranieri’s lender complains that credit-ranking firms are hindering the market’s recovery.

Fitch knows that releasing its model publicly to be more transparent may allow issuers to exploit flaws in its analysis, so the firm will address this risk by making more “qualitative” assessments than before the financial crisis, said Grant Bailey, a managing director at the firm.

“It’s something we’re conscious of,” Bailey said yesterday during a panel discussion at the American Securitization Forum’s annual conference in Las Vegas.

Issuance of bonds backed by new U.S. home loans without government backing has slumped to less than $1.5 billion since mid-2008, after peaking at about $1.2 trillion in each of 2005 and 2006. The boom in sales, fueled in part by inflated ratings, helped create a housing bubble. That sparked the worst financial meltdown since the Great Depression, leaving government-backed lending financing about 90 percent of new residential loans.

Saul Sanders, co-chief executive officer of Shellpoint Partners LLC, a lender owned partly by Ranieri Partners, said yesterday that rating companies are being too tough and unpredictable, stifling the private mortgage-bond market.

Ranieri, chairman of Uniondale, New York-based Ranieri Partners, helped create the mortgage-securities market in the 1980s at Salomon Brothers Inc., where he was vice chairman.

Rating firms are demanding more protection for investors against losses even amid safer lending and depressed property prices, Sanders said. When his firm recently showed a pool of loans to six different rating entities, the so-called credit enhancement they said they might demand varied by 80 percent, he said.

Opaque ‘New Paradigm’

“It’s very difficult from the origination side to understand what the new paradigm is,” Sanders said during a separate panel discussion.

Because issuers aren’t sure what grades potential deals will get, lenders don’t know exactly what to charge on loans intended for securitizations, said Credit Suisse Group AG’s Peter Sack. While that confusion is impeding the private mortgage securitization market’s recovery, it is not the biggest constraint. Lenders are instead choosing to sell loans more profitably through government-supported programs or to banks, he said.

Securitization “is not the most economical thing to do,” said Sack, co-head of real estate and mortgage finance at Credit Suisse, speaking on a panel with Fitch’s Bailey.

--Editors: John Parry, Mitchell Martin

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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