Here’s a strange press release by Fitch, one of the big three rating agencies along with Moody’s and S&P.
Fitch Ratings has formalized the expanded housing-related metrics used in its public sector rating process and will continue to refine these data as market conditions warrant.
Ok, so we are getting insight from one of the big three , although Fitch is believed to be the most conservative of the three. The ratings agencies sharply downgraded billions of highly rated mortgage-backed bonds just after the credit crunch began in July 2007. I seem to recall that their models didn’t have the right data.
Fitch believes the housing downturn will be more prolonged and acute in regions that experienced the most dramatic home price appreciation and new residential development since 2000 and in regions with high exposure to sub-prime and option ARMs mortgages.
What about credibility?
The new rules by SEC to address conflict of interest could be a start.
The three firms that dominate the $5 billion-a-year industry — Standard & Poor’s, Moody’s Investors Service and Fitch Ratings — have been widely criticized for failing to identify risks in subprime mortgage investments, whose collapse helped set off the global financial crisis.
The rating agencies had to downgrade thousands of securities backed by mortgages as home-loan delinquencies have soared and the value of those investments plummeted. The downgrades have contributed to hundreds of billions in losses and writedowns at major banks and investment firms.
The agencies are crucial financial gatekeepers, issuing ratings on the creditworthiness of public companies and securities. Their grades can be key factors in determining a company’s ability to raise or borrow money, and at what cost which securities will be purchased by banks, mutual funds, state pension funds or local governments.
These agencies need to do a lot of credibility-building going forward. I can’t help but wonder why these agencies aren’t receiving more scrutiny. How will investor confidence be restored when the ratings they relied on were inadequate?