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August 17, 2011

Let’s Start A Ratings Agency! Small Banks Exiting Mortgages.

August 17, 2011

Let’s Start A Ratings Agency! Small Banks Exiting Mortgages.

Now is a good time to start a rating agency – you’d have none of those messy legacy issues (“You guys blew it five years ago by giving bad pools of residential loans AAA ratings.”) Many wonder when the large rating agencies will pay the price for previous mistakes, and Congress has made noise about holding them accountable. But it may just be noise: The Dodd-Frank financial reform act was thought by many to reduce the influence of ratings houses by deleting references to them in the federal laws governing bank and pension investments. But the task is huge, and rating agencies are not cooperating. So while the SEC has proposed new rules that would require ratings houses (or Nationally Recognized Statistical Rating Organizations as they are called) to submit more documentation of how they arrive at their conclusions on collateralized loan obligations, for example, it wouldn’t require them to reveal all of the data, in real time, on the derivatives they monitor.

For newer rating agencies, such as A.M. Best, Kroll, Rapid Ratings, Japan Credit Rating Agency, and Egan-Jones, a 2006 law required firms to have three years’ experience with a particular product before applying for NRSRO status. The rules adopted and being considered by the SEC focus on changing the behavior of the ratings houses, without changing the underlying market for the data that drive securities prices. SEC-licensed NRSROs will have to supply information on how they rate securities, who does the rating and whether they subsequently take a job with a securities underwriter, for example. They won’t have to share the underlying data they use to change a rating, however, which investors and rival analysts could use to determine more than just the default risk on a security.

Small banks can still originate mortgages, but many may stop due to compliance overload. Larger banks, on the other hand, seem to be interested in shedding assets.

Flagstar Bancorp sold 22 retail branches in Indiana to First Financial Bancorp for $23 million more than the deposits held by the banks. The deal should close in December, and according to Flagstar’s CEO it will allow Flagstar to focus on markets with greater potential for growth such as its home state of Michigan. Moving up the food chain, Bank of America is in exclusive talks to sell the bulk of Merrill Lynch’s real estate investments to Blackstone for up to $1 billion in order to help BofA clear up its balance sheet and bolster capital ratios. (BofA sold its Canadian credit card business to TD Bank, and is also peddling its UK and Irish card units.)

The Financial Times reports that the sale would include unwanted property investments in Europe, the US and South America, and is part of the bank’s wider efforts to dispose of non-core assets. “BofA is one of the last of the big investment banks to have pulled the plug on private equity real estate investment, with others such as Citigroup and Credit Suisse already disposing most positions in the sector…US banks are rejigging their balance sheets to comply with the so-called Volcker rule, which restricts how banks can invest their own capital, as well as reducing exposure to assets such as private equity, against which banks will be forced to hold more capital under new Basel III regulatory rules.”

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