Tuesday, July 22, 2008

NY AG Reaches Settlement With Credit Agencies In Ongoing Mortgage Industry Investigation

In connection with a New York Attorney General investigation(1) into all aspects of the mortgage industry for more than a year, including lenders, securitizers, due diligence providers, and credit rating agencies, a June 5, 2008(2) press release announced:
  • Attorney General Andrew M. Cuomo [...] announced that he has reached landmark agreements with the nation’s three principal credit rating agencies that will fundamentally reform the Residential Mortgage-Backed Securities (“RMBS”) market. The agreements with Standard & Poor’s (“S&P”) Moody’s Investors Service, Inc. (“Moody’s”), and Fitch, Inc. (“Fitch”) will dramatically increase the independence of the ratings agencies, ensure that crucial loan data is provided to the agencies before they rate loan pools, and increase transparency in the RMBS market.

  • Under the agreements with Attorney General Cuomo, the credit rating agencies will fundamentally alter how they are compensated by investment banks for providing ratings on loan pools. In addition, the ratings firms will all now require for the first time that investment banks provide due diligence data on loan pools for review prior to the issuance of ratings. This will ensure that significant data, which was not previously disclosed to the rating agencies, will be received and reviewed by them before any bonds are rated.

For more, see AG Cuomo Announces Landmark Reform Agreements With The Nation's Three Credit Rating Agencies (Standard & Poor’s, Moody’s, and Fitch Agree to Change Fee Structures, Obtain Due Diligence Information for the First Time, and Create Due Diligence and Lender Standards for Residential Mortgage-Backed Securities).

(1) On March 3, 2008, Attorney General Cuomo entered into agreements with the Office of Federal Housing Enterprise Oversight and the two largest securitizers of home loans in the United States -- Fannie Mae and Freddie Mac -- requiring them to buy loans from banks that meet new standards designed to ensure independent and reliable appraisals.

In addition, AG Cuomo has sued First American and eAppraiseIT for allegedly colluding with the largest savings and loan in the country to inflate the appraisal values of homes, and allegedly otherwise allowing the savings and loan to strong-arm them into a system designed to rip off homeowners and investors alike, according to this NY AG Press Release, and this NY AG civil lawsuit.

NY AG prosecutors have also sent subpoenas to Wall Street firms seeking information related to the packaging and selling of debt tied to high-risk mortgages, and has reportedly given one firm immunity from prosecution in return for help in learning whether debt-rating firms and investors got enough information about the loans being sold.

(2) I recognize that a seven week-old story may be a bit stale, but it's news to me - better late than never.